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    Is The Future of Advertising In Entertainment And Social Networks?

    A while ago, a friend of mine who works in a 4A ad agency in Beijing said to me: “You think we’re all dinosaurs, don’t you, and that Google is going to own the whole advertising scene?”

    I’m glad he challenged me, because he forced me to think things through on a deeper level as to what my prognosis on the ad industry is going to look like. I’ll try to outline those thoughts here.

    First of all, advertising has been divided into roughly two camps; the “Google is going to own the industry” camp, and a more traditional advertising camp, which says that traditional advertising (TV, radio, print) are going to survive and prosper, albeit in a very different form. I must confess that for a long time I have leaned in favor of the former, or Google camp.

    But having thought things through on a deeper level, I think that it might not be so simple. Here’s why.

    Ad agencies were born in the 19th century; they did a simple job, they bought media inventory at wholesale rates from newspapers, and then sold them at retail prices to advertisers. Later on, as they developed, they also sold creative services to their clients as an extra value-added, generating more income. This is how the “mass market” arose; manufacturing had risen, and products needed to be sold to the masses.

    The business model is simple: buy media inventory at wholesale rates, integrate them into media plans to sell to advertisers at retail rates, and charge them extra for creative services. Since media is controlled by a publishing group, or television or radio group, and is published at regular intervals, the media business is a lot like the airlines business. Airlines fly according to set schedules, and the more butts in the seats, the more profitable that flight is going to be. Media is a lot like that; media inventory are the seats, and advertisers are the butts (no pun intended).

    The advertising industry is based on a version of information arbitrage; it knows better than publishers who the advertisers are and what they are willing to pay, and it knows better than advertisers the best ways to reach their audiences. Over time, a whole business ecosystem has formed, including media research and marketing, with their own businesses and terminology. This business ecosystem is deeply entrenched in larger company’s marketing departments, providing them with market information.

    Where online media is different is that Google’s Adwords/Adsense model disrupted the whole model. When it comes to search advertising (ads placed on search results pages), Google owns the page (media) where ads are placed. But when it comes to overlaying ads on third-party websites, Google (and the other ad publishing networks) do not own the page. Instead, they pay a portion of the money generated by each ad click to the content publisher. So who determines the targeting of the ad campaign? What is the definition of media inventory? Sometimes it is a large 4A ad agency working for its advertising client, but it could just as easily be a man sitting in his living room in Shanghai targeting his customers with a Google Adwords campaign.

    Google has empowered advertisers with the tools to reach their advertisers directly online, without any need for a third-party advertising agency, if that is indeed what the advertiser chooses to do. Furthermore, he/she can set the budget and tweak the campaign according to his needs.

    Even more interesting: Google does not have to buy media inventory. It just charges a commission per click.

    This has worked very well in an online world, where Google does not have to own the media inventory it runs its ads on. But does it work in traditional media (TV, radio and print) where reach and frequency are the main metrics? Not as well. This is because these are all backed by large media organizations owned by corporations, or in China’s case, by the government through large state-owned media organizations.

    No pay-per-click model would work for them. And I’m sure that they would not go for a model where a third-party paid them a commission determined according to how many sales were made. Their problem: their audiences are eroding as more means of delivery become available (webcasting for television, podcasting for radio and more print content moving to the web). It will be interesting to find out if electronic paper will support overlaid ads. This will be a major factor in determining whether the future of print will be more like the Internet or paper.

    A common criticism of advertising is that it is unaccountable; there is no way to know which ads directly lead to sales. The only media where it is possible to establish a direct connection between advertising and sales are direct mail advertising and its online younger brother, email advertising (spam). Now Google is trying to establish a direct relationship with scripts which monitor user behavior directly through the checkout process online.

    A common marketing rule of thumb is that a person has to hear about a product seven times before he/she makes a purchase. What’s changing now is where they are hearing it from; now the referrals come more from Google Reader and Facebook than television. Social networks are taking more and more of my time. There is no way to establish to establish a direct connection all the time; any advertiser who claimed that they could determine which impression resulted in a sale would be a liar. The promise of Google and online advertising is that eventually it will become possible to trace a direct cause and effect relationship between ads and sales; this forms a threat to the business ecosystem of online advertising.

    So far, advertising can measure reach and frequency, but it cannot measure purchasing intent. To reach a higher level of personalization, advertisers (especially of big-ticket items) need to know where each potential customer is in the sales cycle.

    More and more, for niche products/services especially advertising is about balancing quantity (reach and frequency) with quality (clicks and other metrics which lead to sales).

    If Google goes into traditional advertising, it will have to buy media inventory to sell to its clients for offline campaigns. If it does this, its cost of doing business will go up considerably, cutting into its earnings.

    This is why I see Google’s possible foray into the traditional ad agency business as a defensive move, not an offensive move. Online advertising revenues are reaching saturation, and Google has to show its investors that it’s doing something. The real challenge to Google’s ad revenue model will come from Facebook, which has probably already eroded search engine advertising revenue. This is why the real battle will be between Google and Facebook for ad revenue.The age of the “mass market” is over; now we are well on the way to making sales the old-fashioned way:one-by-one.

    Both traditional advertising and online advertising are playing out a classic game of “crossing the chasm”. For traditional advertisers, the challenge is how to build a new business ecosystem for online advertising; for online advertisers, led by Google and Facebook, it is how to learn the terminology and and be accepted by the traditional advertising business ecosystem.

    Then of course, media publishers might decide to sell their advertising space in online exchanges or auctions, instead of just selling wholesale. CCTV (China Central TV) already does this; it will be interesting to see if others follow suit. If they think that they can get more revenue by adopting a more efficient buy/sell mechanism, then they will do it.

    This raises the question of why Google and the 4A agencies are trying to build their own exchange networks? Instead, why don’t they build a new business ecosystem which media inventory owners and ad buyers could simply plug into using standard APIs? Wouldn’t that make things so much more efficient? Why doesn’t WPP or Publicis buy Facebook? Buy the network. Then why not charge both buyers and seller a service fee plus commission for the wider exposure and ad targeting the network brings? It could be argued that this is already what Google Adwords/Adsense already provide, but it does not yet provide a wholesale backend solution for plugging in large amounts of inventory.

    For all its strengths, Google is not a user-generated network; Facebook is. It is already selling advertising space, and it is in a better position than Google to create a whole new online metrics for advertising because it owns the network.

    At the end of the day, advertising is largely a numbers game, except for the creative part. And then the creative is just to support reaching the right target audience and increasingly now, getting them to convert to buyers.While Facebook now has only 50M profiles, it is growing exponentially.

    So, to my friend, I would say that we’re all dinosaurs basking in the glory of our late Cretaceous period just before the asteroid strike, and the world is changing faster and faster. The main question is how human and computer work will be allocated; this is a question which meets in a very intriguing way in the advertising industry.

    If this period in advertising was Chinese history, we would call this the Warring States period. The question is whether the ad agency will still be recognizable in 10-20 years’ time? I would say that it is; as long as there are people who spend a portion of their lives reading and absorbing content both online and offline, and if agencies remodel themselves into generalist marketing organizations equally comfortable with both online and offline, there is room for agencies, both large and small.

    And what will ads look like? I don’t know, but if more look like Fight for Kisses, I’ll be pleased.

    I found out about this very entertaining video commercial from a blog I read on Google Reader. Enjoy.




    15 Responses to “Is The Future of Advertising In Entertainment And Social Networks?”

    1. [...] undisclosed@findtechblogs.com (sunbelt) wrote an interesting post today onHere’s a quick excerpt… it knows better than publishers who the advertisers are and what they are willing to pay, and it knows better than advertisers the best ways to reach their audiences. Over time, a whole business ecosystem has formed, including media … [...]

    2. dave says:

      Facebook? Myspace is much bigger than facebook, at least for now.

    3. [...] unknown wrote an interesting post today onHere’s a quick excerptFirst of all, advertising has been divided into roughly two camps; the “Google is going to own the industry” camp, and a more traditional advertising camp, which says that traditional advertising (TV, radio, print) are going to survive … [...]

    4. [...] )|(Ñдай! wrote an interesting post today onHere’s a quick excerptA while ago, a friend of mine who works in a 4A ad agency in Beijing said to me: “You think we’re all dinosaurs, don’t you, and that Google is going to own the whole advertising scene?” I’m glad he challenged me, because he forced me … [...]

    5. SEO in China says:

      Nice article. I think both traditional advertising and new media should complement each other. Traditional advertising can’t be ignored especially in China where internet penetration and also the percentage of prospects that are actually able to purchase online are very low. As a search marketing firm we always make our clients understand that Google or Baidu can’t replace traditional ads altogether but can just fit in nicely in their overall marketing mix :-)
      Patrick
      Sinovantage International
      Shanghai

    6. [...] Paul Denlinger: Is The Future of Advertising In Entertainment And Social Networks? – Great post analyzing the future of advertising, the Google/agency divide, and how it all applies to China [...]

    7. [...] Jimmy T wrote an interesting post today onHere’s a quick excerpt [...]

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    9. [...] know that I have spent quite some time thinking about how the Internet and online advertising will affect the whole overall advertising industry. A recent post on Ogilvy China Digital Watch [...]

    10. [...] know that I have spent quite some time thinking about how the Internet and online advertising will affect the whole overall advertising industry. A recent post on Ogilvy China Digital Watch [...]

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