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I recently watched the PBS documentary, art and copy. it’s a feature about advertising focusing mostly on the big agencies and agency personalities. absolutely fascinating. partly because these are big personalities but mostly because the campaigns featured are ones almost all of us know well and probably love.

there’s a stat at the end… 186000 employees at ad agencies worldwide. 26000 agencies. but 4 holding companies produce 80% of the advertising spend.

what that implies there just isn’t that much advertising that gets big, mass consumer popularity (and likely nor does the products behind the advertising).

so the questions for me:

is most advertising unappealing? just noise?

do people only have so much attention to give? the populace can’t support more than a few campaigns getting big?

are most folks in advertising biz just not very good?

is the ad biz really about unglamorous, small campaigns that work for small companies?

is the old ad model going to last? more and more big brands didn’t need an agency and an ad budget at all to go big (google, facebook, twitter, crocs…)

when should a biz use a big traditional campaign?

I don’t question whether a well capitalized, well executed branding campaign works. they do. I think it’s hard to get all the right things to make it happen and only those with the deepest pockets, best products and most aggressive teams will ever have a shot.

I think that’s why other advertising approaches are more appropriate for most businesses and growing in spend online advertising, for the most part, isn’t artful. it’s math. it’s about getting frequency and follow up and flow just right. science based advertising works better for the majority of products and services where there’s little differentiation or brand value between competitors. price and location (at time of purchase) are the keys, not artful impact.

also worth noting is that the current context in which online is viewed doesn’t lend itself well to bigger more potent messages like tv or radio. I think some of that has to do with the fact that tv and radio are more passive consumption around visuals and sound of people rather than text about the world. and tv and radio are usually consumed with others generating more shared experiences. the built in fragmented personalization of the web means known of us ever have the same basic experience.

I’ve worked on a lot of online campaigns that tried to do the big budget big branding thing. no shortage of good ideas and mostly good execution. the consumers just never respond.

there are no best way to do it.

one thing I think the folks in the documentary have in common with the successful math based online advertisers and agencies is a willingness to try and be wrong. too many folks think there’s a best way to do it and that you can know that a priori. you can’t.

as one of the agency celebrates. fail harder.

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Across all mediums, advertising $$$ is off 2.8%.

Of course, this is in line with the overall economy so it’s not totally surprising.  Advertising typically lags because the budgets go in so early into the spending season.

A recession in ad spending that goes well into 2009 is going to crush many an Internet company, more than a few agencies, and a lot of traditional media companies.  Oh, by crush, I mean put them out of business for good.

Unless you work on the ground in the advertising world it’s hard to understand just how devestating the recession is especially when consumption of media will always be going up.  That means there will always be more supply of advertising impressions and the cost of media businesses are NOT coming down.  With the ad spend so far down, the prices on this oversupply of inventory is highly depressed further adding pressure to a broken model.

Many people ask me what I think then is going to work with media companies… well, I’ve said it before… media companies have to SELL SOMETHING REAL, not just ads.  Not just an impression.  Sell DVDs, sell shoes, sell licenses, sell special events… anything.  The ad rates simply will not cover the costs of running these media companies.

Oh, and if we thought 08 numbers were bad, just wait for q1 2009 when we will see the real effect of ad budget cuts.

Yes, I’m being a bit DoomsDayish.  Because there’s not a lot of runway left for folks and if they aren’t finding a strategy to cope by now, game over.

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This is a pretty useful data dump from Google’s CEO

Economic situation pretty dire. Combination of what we’ve seen does not appear to have a bottom. People are using the Internet more. Obviously will affect online ad market because our systems are so tightly tuned. It will eventually be reflected in CPC, CPM. We are not immune to this. We may be better positioned from ad perspective, but ultimately the real pain felt by companies worldwide will sometime translate to our world

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Someone did the work I wanted to… well, sorta wanted to…

Here’s a decent set of data about one of the latest internet ‘memes’, 25 Things.

Still, viral marketers might take note of the patterns that “25 Random Things About Me” obeyed. The best hope for someone looking to start a grass-roots craze is to introduce a wide variety of schemes into the wild and pray like hell that one of them evolves into a virulent meme. If evolution is any guide, however, there’s no predicting what succeeds and what doesn’t. Just look at the platypus.

A decent non-conclusion, and probably accurate.

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Ah, TechCrunch.  You whipped out the old Excel and made the industry famous Up And To The Right Chart.

There is no strong conclusion to draw from this very limited data set.  The only piece of interesting data is:  of the big 4 media companies presented here only Google has any sustained growth and makes up the majority of 4th quarter growth.

The Industry is NOT doing well at all.  Time Warner and News Corp had major losses, and they have huge stakes in the internet.  Yahoo, MSN, AOL all suffered major losses.  Mid-tier Smaller publishers are getting crushed, and you won’t see that in any of this data or any emarketer reports.

If companies in the media industry want to actually survive, get real.  The existing ad model stinks and this recession just nailed the coffin shut.  Don’t take my word for it, run your own analysis. (Just for fun, go look at the ads running on Yahoo, MSN, Facebook, MySpace, Video game sites… let me know if you see a direct sold campaign.  Let me know if you find a non adnetwork ad tag…) Hurry and do it, because this is one short runway and there ain’t no Hudson river nearby.

The biggest advertisers in the game (financial services, computer companies, and auto makers) all took huge hits and continue to falter.  The ad budgets have been slashed and they aren’t moving product.  With that mix, media companies can’t do anything about their ad revenue streams if they don’t find other ways of making money.

No, I’m not doom and gloom.  This is all about reinvention and change and exploration.  The old model stinks and now we get to find out what to do next that is better for the user and the advertiser.  This is good.  It is also painful. It is not Up and To The Right, despite the fact that excel seems to only spit out charts of that type.

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Failure to understand how users and money flow through the Internet costs media and etailers a lot of money every day.  There are huge misconceptions about where the “value” actually lives for user data, advertising performance and profit margins on all this high tech.

The following figures attempt to disambiguate some of the confusion.  The summarized conclusions come from a variety of data sources and real life experiences analyzing financial statements, traffic reports, advertiser analysis and experimentation.  Specifically one could get someone exact figures by combining comScore, Quantcast, Compete, Google Analytics, TNS, @Plan, SEC Filings, internal reports, revenue statements and DART forecasting as I have done several times.

This post is meant to be a demonstration of the core concepts, not a statistical treatise on the topic.

If you hate reading too much, skip to the end for a somewhat realistic example of how traffic flows.

Traffic on the Internet roughly splits 7 segments.  (as shown in the figures below).  These segments are defined by where the sit in the user experience by amount of consumptive behavior (clicks, reading, sharing, watching). How the user gets from segment to segment is not completely linear in actuality, but when you coagulate a users behavior you’ll roughly see a funnel in terms of time spent, pageviews and ad impressions.

Traffic Funnel

Traffic Funnel

The segments can be characterized also by their ad performance, ad targeting (how specific is the user in their activity), and their audience coverage (how much of the particular audience segment does a type of site/service reach)

Funnel Traffic Segments

Funnel Traffic Segments

Each segment has a different cost profile.  Here I look at labor costs to maintain and capital expenses to build and power.

Where's the Cost?

Where's the Cost?

As you can guess, each traffic segment has a different profit profile too.  This is largely the result of combining the advertising/revenue performance with the cost profile.  Certain Internet services simply do not have a strong profit opportunity because they borrow old models and/or cost more than the market is willing to pay. (Perhaps that will stabilize one day, but I think software tools and low cost hardware disrupt the demand curve A LOT because users can often supply their own demands once the cost gets too high, hence why TOOLS are the most profitable segment.)

Profit Margins by Segment

Profit Margins by Segment

Make no mistake about what I’m presenting here.  The profit online is all in retailing, portals/search and tools/utilities.  The stuff in the middle of the funnel is highly susceptible to competitive displacement and has very little intellectual property protection.  You can verify this conclusion by reviewing revenue statements and SEC filings for the big tech and internet companies.

The advent of citizen journalism and self publishing flattened the media market.  Owning a printing press was once “high tech” and a capital investment barrier.  Owning the right location on the main street was once a logistical barrier.  High speed computers and difficult programming languages was once a technical barrier.  Those 3 feature are gone.  Media is now, well, almost purely a creative barrier.  There’s a huge pool of creative talent constantly struggling against each other.  Creativity is worth a lot once it rises above everything else.  That happens so rarely to make it a bad investment.  Every minute more and more people enter the creative market (how many blog posts per hour? how many videos go up each day?… a lot.)

organizing, sifting, filtering, distributing, aggregating… that’s the sweet spot.  There is a technical hurdle, but the investment is worth it as there will never be less of a need to filter, sift, find, distribute.

This week we had a beautiful illustration of these concepts with the Presdential Inauguration.

Most of the US users watched the Inauguration, most on TV, a lot with online video streams and 2 million in person.  During and Immediately following the inauguration the Internet lit up with content creation and massive usage.  The portals and search engines featured as many new links and breaking stories to the news coverage.

The social networks shot pictures, tweets and status updates around, occassionally referencing links to the confirmation gaff, benediction speech text, and satelite pictures from DC.

Micro bloggers summarized everything as fast as they could, while the search engines and utilities sucked in that content.  The original content creators probably released a previously composed story and put that live.

Mainstream users shut down their video streams and took to the portals and search engine, seeking more info on what just happened or insight into a specific moment.  Most times they ended up at CNN or NYTimes.  Many times, but less frequently, they hit a blog that had some recent content.  Most users probably ran into a wikipedia reference link or youtube video.

Some users ended up on amazon to buy Obama’s books or some inauguration swag.  Finally as the day concluded and original content creators finally had enough time to craft something, users might find themselves falling asleep to a good OpEd on the history of the day or an interview with the Michelle Obama dress designers.

By 3 days later the amount of content available on the inauguration is 1000x greater than within the first 10 minutes.  Original content creators are hopelessly buried amongst the blog posts, tweets, continuosly AP feed CNN articles and YouTube embeds.  The bloggers are buried by other bloggers.  The news stories give way to other news stories.

The utilities that sort, sift, filter and monetize on it all just got a 1000x better experience and continue to catch the huge volume of user investigation and digging.  The own the head, the trunk and that dreaded long tail and collect user targeting data all along the way.

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Yay! A useful post on techcrunch!

As a friend of mine said:

Consumer magazines, on the other hand, sold for only 1.5 times revenues and 8 times EBITDA.
worked

That’s a bigger stat than it might appear.

But we already knew that.

What isn’t so obvious in all this madness is that digital properties are far harder to defend than well established offline.  Sure the world has changed, but no acquiring company should ignore defensibility as people go digital.  Though the multiples are high now eventually very real difficulty of maintaining audience for the long term will start to bring these multiples down.

For instance, CNET is not a good buy at that valuation.  They are built mostly on SEO and some older properties.  {traffic profile} They will be hit badly by this ad recession AND they have very little staked out in social media (they have some minor efforts).  It’s certainly a beachhead for CBS, but the SEO game will collapse eventually – it already is for a lot of people.

Think about that insane investment!  1.8 billion for maybe 10-12 million UUs.  I’ve spent probably 10 million of investor/corporate money in 3 years and generated upwards of 20 million UUs across various properties which reeled in 35 million or more in revenue (at a 21x multiple this would be 735 million valuation).  I’m not saying that i’m worth more or have found a magic formula.  What I am saying is that 1.8 billion could have been spent far more strategically.  i.e. a bunch of micro acquisitions that have huge upside.

Getty Images wasn’t a great acquisition either at that price.  I mean with citizen journalism, exclusives on photography are just not going to matter as much.  Getty has some nice services, but it isn’t a growth company at all.

Sometimes the mass of these media operations gets in the way of good financial sense.  That’s the one bad part of old media going digital.  They haven’t learned from Google, Yahoo, WordPress.com… you just don’t need the same resources when the computers and users take over.  Old media has been acquiring with their pre 2009 excess money and their fear of extinction.  Unfortunately, there’s a lot of lame M and A out there which isn’t going to help old media much.

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LinkedIn has been a long time darling in blog discussions, VC conversations and strategery sessions.

Techcrunch brings us news of their latest shuffling of the exec deck.

It’s one of these media ventures that seems like such a great idea but really isn’t.  It has no growth potential left and is a media product that grabs user bases that really aren’t worth that much to advertisers or big exec firms – for example… the unemployed middle-aged, middle management white guys.

Now, don’t get me wrong.  I like LinkedIn as a place to hosted my resume and occassionally link to people.  Unfortunately, I think that’s just about what everyone uses it for, excluding marketers and recruiters.

This isn’t so unusual.  Almost all other online job boards, professional networking and recruitment sites go the same way.

Site gets announced

Some people join

It catches fire and everyone puts their data in

The recruiters swarm

People get annoyed, bored, or don’t land that dream job and most accounts/profiles age

Network/Site starts blasting out emails and alerts about people looking for you, jobs waiting for you

That powers the site for years

Revenue grows slightly but never breaks out

Next site crops up and chips away at existing sites margins

LinkedIn’s traffic has fallen off.  It basically has found the 16 million people looking for jobs it can offer them.

People not in the market don’t update their profiles.  The folks most likely to power big network connection growth, don’t need a networking site. Folks who want a bitching resume just go off and build one at their domain or facebook page.

Put all of this together and LinkedIn is another Monster.com.  It’s big, has users, might add a bell or whistle but has no place to go.   It’s fate is set and completely determined but what it actually is – a job board.  It’s only hope to grow is to somehow magically get people more jobs than any of the other methods. It won’t die as people always need networking and jobs.

I predict some old skool news media company will buy it one day and squeeze it for revenue.  It’s a safe haven for the weary Internet exec.

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You probably already heard the news, the Trib is in Chapter 11.

This comes on the heels of the news that newspapers lost 18% in Q3, the worst drop on record.  You probably heard that too.

These numbers and their related news seem so benign when we’ve spent the last 3 months talking about hundreds of billions and trillions of dollars.  While the financial and auto companies falter quickly, the advertising based business parasites who live off those big advertising clients are following into the grave.

Interactive companies will survive, print media, probably not.  Will it completely fail?  No.  Print will become basic arbitrage plays.  Bottom of the barrel, low profit margin businesses.  They live off the laggard customers who by choice or circumstance stay in the old way of doing things.  This has been the fate of many industry segments that once were the king but never quite die off.  (Think of Amtrak, dial up ISPs, land line phones, most radio networks, music stores,

Having trouble believing it’s happening?

Consider these stories:

TV Guide magazine sold for 1 dollar, only 9 years ago it was worth 9.2 billion.

Maxim Magazine, once king of men’s magazine, had $28 million in EBITA in 2007, and this year was only $8 million

PC Magazine, a 27 year old publication, put a stake in print last month,admitting 2009 in print would have been at a loss

… Christian Science Monitor all digital, Men’s Vogue Folded into Vogue… and so on.

Print Yellow Pages are heading the same way.

This probably isn’t news to anyone reading this blog.  Perhaps the numbers are surprising or the speed at which it is happening makes you wonder.

Many consultants and veterans want to paint a rosy picture and claim there are opportunities and silver linings (usually because they depend on this delusion to pay their own bills).  There is no stop gap solution for straight print companies nor anyone that maintains homages to that glorious past.

These businesses aren’t just losing ground with readers, they aren’t making money any more – not just making less money, they are LOSING money.  There’s no vintage business here.  No retro glory days thing.  No way to suck it dry before it dies.

Why?  There’s no money to support this old ecology.  New media makes WAY LESS profit than print and print no longer provides an on ramp for digital users.  You aren’t trading ad dollar for ad dollar, reader for user.  I’ve talked about it before.  The issue is that new media has data behind it and the data destroys a lot of the promised pitches of the past.  The biggest failed promise was that “impressions” equal sales.  They don’t.  They didn’t in print and they don’t online.

Clicks and transactions.  That’s what people are counting and most sites produce less than a .5% Click Through Rate on those impressions.  It’s not uplifting and media buyers can’t stand to see their budgets flushing down the drain with non-transactional impressions.

The other promise that fails under data analysis is demographics/audience composition.  Magazines used to get to claim they were “women’s” or “men’s” and 18-34 year olds (people with money! and time!) and agencies and advertisers sort of believe them (there was no data to refute!).  Now you have data that says a “women’s site” is luckily to be 65% women.  No advertiser who sells a woman’s only product wants to blow cash on 35% male audience.  So they don’t.  They lower the price they are willing to pay or force you to cut the inventory way down.

There are 1400 or so magazines and maybe a couple of 100 newspapers.  There are 20,000 websites (at least) that are taking ad dollars from those advertisers who used to spend their money in newspapers.  There are at least 30 large classified sites, 100s of travel sites, 1000s of local information sites that take all the other print revenue.  Point is, the average campaign size for any online publisher is MUCH LOWER than for the print equivalents.  There’s an obvious spreading of the wealth.

And to put it all together… writing, filming, and creating good content is not any cheaper.  (and no, user generated content doesn’t count yet because it’s quality still sucks for the most part).

Spreading less high margin wealth means the old model is dead.  It died a long time ago, we’re just rolling in the bodies now.

Well, dude, what’s the answer?  how do we save it?

We don’t. We can’t.

Think about it.  Look at the election coverage.  Did you read a paper to get results? get your facts? listen to the candidates? get a verified opinion?

Probably not.

Did campaigns blow a wad of money on print ads? no.

The election killed whatever life was left in print.  CNN’s coverage literally choked its last breath.  Obama’s campaign made sure that you’re going to go direct to the source online.

So what should old skool media companies do?

Other stuff.  Maintaining any substantial competence in print operations or print audience development is a waste.  Get programmers and interactive designers on staff now.

Sponsor open source projects.

Buy some cheap blogs.

Experiment with mashups.

Copy CNN.

Try everything you can.  The whole bit is in transition.

Buy transactional businesses.

Learn about Video Games and Social Networks and Second Life.

Hell, I don’t know, and no one else does.

Just get crackin.

or hop on board an Amtrak train with your local paper with your am radio (they need all the customers they can get).

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We went ahead and did it.  You can now enter to have your start up built for $100.

What is $100 Start Up?

Simple, we have assembled a team of experienced industry experts with expertise in programming, user interface, traffic generation and art, who like to build cool stuff. We put our heads together and launched 100dollarstartup.com as a way to allow big ideas get off the ground without the need for big financial backers and big business infrastructure.

With 50 years combined experience in the industry (whatever that means to you!), we have seen ideas come and go and, oftentimes, good ideas fail due to poor execution, bad management or “too many cooks in the kitchen.”

We created the $100 start-up to help you avoid these pitfalls.

The concept is simple. Write your idea down, submit it to our team and pay 100 bucks. Our team will review all the submissions and we will choose ONE idea every 90 days to build. At the end of those 90 days your project is launched and is yours to keep.

If nothing else, it will give you something MORE than a powerpoint presentation, a word document or a drawing on a napkin to take to market.

Check out the site for more information and get submitting.  Sure, it’s a gimmick, but it’s highly practical if you think about the kind of work and dev shop we run.  Pool the best ideas and limit the risk to the entire pool……

We welcome your comments on this blog or the 100dollarstartup.com site.

~R

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