April 23rd, 2006

What If Media 2.0 Is Less Profitable Than Media 1.0?

by

The advent of web-based e-commerce fundamentally lowered the costs of doing business, increasing the scalability (and in many cases the viability) of thousands of small businesses. The introduction of micro-marketing through Google AdWords gave a huge jolt to this trend, making marketing scalable and profitable for these same small businesses. Two companies — Google and eBay — have been the principal beneficiaries of this trend.

As consumers spend more and more of their media time online, ad dollars have been pouring into online media — the assumption has been that the billions of dollars that large companies spend on mass media advertising and marketing (i.e. TV ads) will ultimately follow the small company dollars online. If this assumption is correct, websites with the greatest command of online consumer attention, e.g. MySpace, will be the beneficiaries of this 1-to-1 transfer of marketing and advertising dollars to digital media.

But what if there’s a fatal flaw in this assumption? What if the transfer of marketing and advertising dollars online is not 1-to-1? What if the Internet has fundamentally lowered the marketing and advertising costs for big companies as it has for small companies? What if large companies can achieve the same sales objectives for a fraction of the cost of traditional mass media advertising?

All marketers know intuitively that mass media advertising is wildly inefficient — there’s the obsessively repeated Wanamaker quote about knowing that half of all advertising is wasted but not knowing which half. But the Internet may be doing more than make advertising more efficient and measureable, i.e. reducing wasted dollars — it may be fundamentally lowering its unit costs.

Let’s take my favorite example — MySpace. There’s an article in the Times today about MySpace’s struggle to monetize it’s ever-ballooning asset. According to comScore Media Metrix, MySpace had 28 billion page views in March 2006. Annualized, that’s 366 billion page views. Yet Richard Greenfield of Pali Capital estimates that MySpace’s revenue this year will only be $200 million.

Do the math — that’s a CPM of $0.06 $0.55!

Now consider one of MySpace’s key strategies for monetizing its vast network:

To expand ad sales, especially to big brands, Mr. Levinsohn plans to supplement the MySpace staff with a second sales force linked to the Fox TV sales department. He wants to expand one of Mr. DeWolfe’s advertising ideas — turning advertisers into members of the MySpace community, with their own profiles, like the teenagers’ — so that the young people who often spend hours each day on MySpace can become “friends” with movies, cellphone companies and even deodorants. Young people can link to the profiles set up for these goods and services, as they would to real friends, and these commercial “friends” can even send them messages — ads, really, but of a whole new kind.

Rumor has it that MySpace is currently charging $35,000 for these “advertising spaces” — from a comment by Pete Cashmore on one of my previous MySpace posts:

Well, MySpace was successful because it *refrained* from interfering with the community – heavy-handedness may actually harm it. But I agree with you that the monetization methods are totally unoriginal and very much a 1.0 approach. They’re trying to charge companies $35,000 to set up a profile, but there’s nothing to stop you doing that for free. However, I think there may be profitable ways to leverage the community itself (ie. not banner ads).

But what happens if big company brands realize that they no longer need a media middleman to connect with consumers? Why, for example, does a brand need to set up a page on MySpace in order for MySpace users to link to that brand’s online presence? If a brand succeeds in creating compelling and entertaining content that speaks directly to consumers and creates immediate value for them, why not just set that up “for free” on their own site and use the viral power of social networks to spread the word?

As Pete said, “there may be profitable ways to leverage the community itself” — but what if those profits go directly to brands and not to the owners of the network where the community exists?

Even for Google, the implications are great — big brands my spend more on search marketing than small companies, but that delta may be far less than in the world of traditional media, where big brands spent billions and many small companies couldn’t afford access to mass media advertising.

Now, I’m not suggesting that there’s no money to be made in 2.0 — I’m speculating that for media companies, it’s a whole lot less than what they enjoyed with 1.0.

I’m speculating that in a 2.0 future, total spending on marketing and advertising will shrink as marketing 2.0 proves to be far more cost efficient than marketing 1.0 — and big advertisers start pocketing that half of their advertising costs that were previously wasted.

UPDATE:

Umair takes issue with my MySpace example:

Now, the MySpace example is also flawed. Scott is using CPM to value MySpace. MySpace’s success is predicated on shifting the industry away from the flawed assumptions and logic of CPM, much like Google has done. MySpace’s challenge is to do the same thing for branding – to create a hyperefficient form of interaction, much like it’s already done with sponsored profiles.

CPM will continue to be the principal metric so long as everyone is focused on measuring the scale of MySpace in 1.0 terms — virtually every mention of MySpace comes with an obligatory reference to the total number of MySpace users and the total number of MySpace page views, along with a comparison to Yahoo’s scale.

But in 2.0 terms, the value of MySpace is in the network effect, i.e. the interaction among users and their ability to propogate information, including brand messages. But it’s very 1.0 to assume that the owner of the network platform is in the position to monetize this value — brands may discover that they don’t need to pay MySpace a dime to leverage the network of MySpace users.

A few other items worth noting:

1. Business 2.0 has a link to this post under the headline “MySpace haters unload on the Web” — why is it that skepticism is always equated with fear and loathing?

2. An Economist article on new media cites Lauren Rich Fine, a financial analyst for newspapers, who estimates that “for every advertising dollar that a newspaper gets for a print reader, it receives only 20-30 cents for his online equivalent.”

3. A perfect example of a brand cutting out the media middleman is Land Rover’s new broadband TV channel Go Beyond — if this effort is successful, the dollars flowing from Land Rover to media companies will likely diminish significantly over time.

  • About CPM : I m afraid Comscore and Nielsen always underestimate the number of pages views. Mostly because they exclude traffic from outside US (and others reasons relative to the panel). So the real CPM is lower ...

  • grumpysecretary

    Regarding this:

    2. An Economist article on new media cites Lauren Rich Fine, a financial analyst for newspapers, who estimates that “for every advertising dollar that a newspaper gets for a print reader, it receives only 20-30 cents for his online equivalent.”

    This of course is true...for now. But that will change.This is a temporary problem caused by the unwillingness of the "print sales" infrastucture to embrace the internet. Most newspaper's sales staff's are full of old school sales folks who in many cases refuse to admit that the "online edition" is relevant to them. Most papers have seperate staffs for the "online edition" and small market papers may not have any online sales strategy at all! And the publishers are weak and feckless in the face of sales ineptitude.

    Don't you see? It is the "newspaper" that undervalues the online reader, not the advertiser.

  • Eyal, indeed, you are correct -- I was off by a decimal place. Unfortunately, it's going to take several more decimal places to make MySpace the hot property everyone assumes it will be.

  • Am I wrong here or $0.06 CPM is a mistake?

    Annual income: $200,000,000
    Annual page-views: 366,000,000,000
    Annual Mega Page-views: 366,000,000 (thousands of page-views)

    CPM: $0.55 (that's 200/366)

    That's the CPM I would expect from this type of website. No surprises here.

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