October 12th, 2006

More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0

by

There is now macroeconomic data to support the theory that Media 2.0 won’t be as profitable as Media 1.0 (from MediaPost):

In a break from historical patterns, the equities research team at Merrill Lynch says the rate of advertising price inflation now trails the overall rate of economic inflation. “Interestingly, advertising growth seems to be tracking real [gross domestic product] growth instead of nominal GDP growth, as it did in the past plus some,” writes Merrill Lynch ad industry analyst Lauren Rich Fine in a report released early this morning. “This supports our belief that media no longer enjoys the benefit of above average rate inflation, rather the opposite where increased competition & measurement is putting pressure on rates.”

“Increased competition & measurement” is one explanation, but there’s also this (familiar) explanation:

Neither Merrill Lynch nor TNS have explained why this is happening, but other economists, including GroupM Futures Director Adam Smith have suggested that at least part of the change may be due to the increasing efficiencies of digital media, which may be taking pressure off overall media inflation, especially in the traditional media, as marketers begin shifting budgets to lower priced online inventory.

The “increasing efficiencies of digital media” — indeed. As I pondered back in April:

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?

Andy Kessler has an explanation for this phenomenon in the second installment of his must-read Media 2.Uh-Oh series (via Paul Kedrosky):

My definition is quite simple: Media is about control of a pipe.

But therein lies the problem. Senator Ted Stevens notwithstanding, the way the Internet is architected, there ain’t no pipes to control. No “end to end” pipes anyway.

But what about Web 2.0 and the second coming of the Internet, with its $1.65 billion all-stock acquisitions? Or Andy says:

Hey, how about Web 2.0? How about it – APIs, mashups, user content, hyperlinks, Mentos. Oooooh! Co-o-o-ool. We can just simulate a pipe. Google did it, right? $10 billion in ads. Yeah maybe. But without a pipe, is their platform precarioius?

Precarious indeed.

Andy put his finger on the deep structural problem that I’ve previously highlighted: the loss of control. Web 2.0 works great as an ideology, but maybe not so great as the basis for a media economy. Less control = less profit.

I’m intrigued by Andy’s suggestion that Google may lose control of its “simulated pipe” and thereby lose control of its profits. Already, Google can’t control the exploitation of its “pipe.”

Why did Google buy YouTube? Because they have to own it to control it, and they need to control it in order to monetize it. But on YouTube and other user-driven content platforms, the users control the network. If they don’t like the ads or other commercialization, they will just jump to another node in the network — or jump to another network.

Think of it like this:

Pipe = one way in and one way out

Network = infinite nodes, infinite entry and exit points

Why does everyone assume that MySpace and YouTube will eventually be wildly profitable? Because in the past, no who controlled that much attention failed to make money. The problem is that MySpace and YouTube don’t control anything. They are networks, not pipes. Many ways in, many ways out, many alternatives. Even worse (from a media economics standpoint), they are networks within networks (within networks).

No control, no profit.

Ceding control to consumers was the dominant theme of the Association of National Advertisers conference — but if consumers are in control of your brand, the best way to increase sales is not by advertising in the traditional sense, but by making better products and providing better service.

As far as I can see, Google is the only media company that has successfully profited from the new network paradigm, and only through the herculean effort of controlling the network (fighting search engine spam, click fraud, arbitrage, etc.).

You can feel good about the loss of media control, if that suits your ideological sensibility, but I’m still not seeing the scalable business models.

Comments (31 Responses so far)

  1. PÃ¥ Claes Brittons blogg. • “Därför kommer media 2.0 bli mindre lönsamt än media 1.0″. Publishing 2.0 publicerar länkar och citat om det medielanskap som är byggt pÃ¥ en mix av bÃ¥de digitalt och tryckt. Läs här (varning utfärdas för mycket branschlingo. 2.0-allergiker bör helt avstÃ¥.)

  2. Scott Karp asks this question: What If Media 2.0 Is Less Profitable Than Media 1.0? In a recent update to his theory, he comes to the conclusion that media companies will see less profit because of a: “…deep structural problem that I’ve previously highlight: the loss of control. Web 2.0 works great as an ideology, but maybe not so great as the basis for a

  3. Webcomics Nation’s Joey Manley points us to Publishing 2.0 media pundit Scott Karp’s musings on how the media giants of the future won’t be as big as the media giants of the past: There is now macroeconomic data to support the theory that Media 2.0 won’t be as profitable as Media 1.0

  4. More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0

  5. So what to make of it all? You may make of it what you will but from it all I draw this: 1) Digital will continue to pound traditional. 2) It is likely to be profitable (Scott Karp wonders how profitable) 3) Traditional Media will have to move more rapidly 4) WOW you can sure sell e-books when there is a demand! 5) Sounds like what I have been saying for a while. Enjoying the length of this post.

  6. The irony of capitalism is that profit is dependent on the absence of competition, and as Warren Buffet once explained. Where competition increases, profits goes down. The Publishing 2.0 blog explains that this is having effect on the market for advertising. After citing recent studies, it offers the following comments: “Media 2.0 is about the “the loss of control. Web 2.0 works great as an ideology, but maybe not so great as the basis

  7. is a fundamental tension in Web/Media 2.0 between openness and control — openness is required to leverage the network effect of the Web and harness the power of socially-connected users, but control is required to get a share of any money. More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0 » Publishing 2.0 “the loss of control. Web 2.0 works great as an ideology, but maybe not so great as the basis for a media economy. Less control = less profit.â€? EMI Music CEO says the CD is ‘dead’

  8. Best videobloggers list from the Vloggies (the Judges’ choices) « Scobleizer – Tech Geek Blogger Alive In Baghdad Digimart Some intimate details on the Google YouTube Deal New audience metric needed: engagement « Scobleizer – Tech Geek Blogger More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0 Terry Heaton’s Pomo blog: “CBS/Yahoo deal not the win-win it seems” @ Mipcom: Cashing In On Those 15 Terabytes Of UGC Fame @ Mipcom: Making Money From User-Gen — Distribution Equals Power The Google YouTube Tango

  9. [...] Sur les limites du modèle publicitaire appliqué à l’environnement communautaire et la distribution: Le media 2.0 seraient-ils moins profitable que le media 1.0 (sur Publisher 2.0), un billet dont la suite vient d’être publiée. Une suite qui tend à décrire les limites du modèle Google mais que j’interpreterai différemment comme, tout simplement, l’émergence inévitable d’une des loi les plus fondamentale de l’économie: la loi des rendements décroissants qui implique en particulier la hausse des investissements de Google mais également l’affaisssement progressif des rendements de ses investissements. C’est sur ce dernier point que la rentabilité très discutable des Youtube et Myspace pesera lourd. Une démonstration chiffrée décrite justement dans le premier billet d’introduction de Andy Kessler sur le thème “Media 2.Uh oh: intro“. Une démonstration qui vise simplement à prouver que Google achète désormais son audience à perte… Posted by Emmanuel (ecosphere) Filed in Web 2.0, Medias, Pub et revenus [...]

  10. Bollocks, Scott. The new business model is not about the media players getting their control back, it’s giving control to the users of the medium: advertisers get better tools to track ROI from their advertisements, and the audience only see the ads that are relevant to their interests. These things are only made possible by having networks within networks, as long as information flows freely between those networks.

    I agree that it will be less profitable than the old way. But does that mean it will be any less successful? On the contrary. That is because it is only less profitable per unit of advertising. The model which can support every advertiser from the hits down the last thousandth-percentile on the long tail can make up in volume what the 1.0 model had to do with a smaller hits-based advertiser base.

  11. Web 2.0 is really about corner shop publishing and the ability to monetise small e-publishing operations. YouTube is used extensively by people who have set up video publishing businesses and want to avoid all the server cost – and so give it to YouTube. Just as I might not want to host pictures in an epublishing enterprise – I give that to flickr.

    Web 2.0 gives me plenty of ways to develop a website and to draw in content at next to know cost. larer media players are challenged by the amount an individual or small team can achieve. The sheeet volume of content in a newspaper website is no longer a challenge for me to match or at least appear to match.

    Advertisers will certainly benefit – if iI want to launch a calssified and ad sale business for a dozen websites I can aggregate them and do it and undercut most established media businesses. For example I could do $5 house sale classifieds profitably.

    We’ve yet to explore the implications of a million publishers who used to be called journalists unleashing that economic power.

  12. [...] In the past media organisations have had some form of control (being able to meet distribution costs, owning broadcast networks, cable pipes), a point made by numerous writers over the past 48 hours. Go here for a great summary. [...]

  13. Paul,

    advertisers get better tools to track ROI from their advertisements

    Therefore advertisers can spend more efficiently, and so don’t need to spend as much.

    the audience only see the ads that are relevant to their interests

    Fewer ads delivered means fewer advertising fees collected.

    That is because it is only less profitable per unit of advertising. The model which can support every advertiser from the hits down the last thousandth-percentile on the long tail can make up in volume what the 1.0 model had to do with a smaller hits-based advertiser base.

    Search is already getting $10+ Billion from the long tail. How much do you really think the long tail has left in it to spend? Do you really think it can it could make up for the loss of the crazy billions of spending from the big advertisers?

  14. [...] Scott Karp finds new evidence to support a point I’ve been fond of making around here: new media may not crank out as much money as old. [...]

  15. Juxtaposing this discussion around pipes vs networks is a dated way of thinking about this problem. It really comes down to fragmentation and branding. Fragmentation is real no doubt, but in the case of Google and YouTube for that matter, they have actually capitalized on fragmentation by being exceptional aggegrators of content. The result? Both now have exceptional brands that are “authoritative” in nature. This doesn’t allow them to control the network per se, but it does allow them to largely control access to it.

    One other quick comment – advertisers can track ROI much more effectively online, but that doesn’t necessarily translate into lower spending. In many cases, it translates into higher spending, particularly in nascent media markets (like the internet), where advertisers are hesitant to spend big without visibility.

  16. [...] or anything else you are interested in There is a lot of marketing potential in history. Google realizes it, and is already exploiting it, but not to its full potential. Invariably traditional publishers are losing control due to network efficiency. Warner is already threatening to sue Google over YouTube, but YouTube just sold for 1.65 billion. I think historical text (and maybe personalized versions of it) is another vertical which is low hanging fruit like video once was. [...]

  17. [...] Then, in More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0, Scott Karp writes:… Andy put his finger on the deep structural problem that I’ve previously highlighted: the loss of control. Web 2.0 works great as an ideology, but maybe not so great as the basis for a media economy.  Less control = less profit. …Link:  Publishing 2.0. [...]

  18. [...] It was also a week in which these issues came into the blogging community. Scott Karp argues that the next generation of media may simply not be as profitable as media industries traditionally have been. We’re looking instead at an era where the gross cost of advertising to industry radically declines. [...]

  19. Scott, we don’t disagree that 2.0 is less profitable. However, your attack on Google is unwarranted. Media 1.0 had many different huge providers sharing from a larger pie. 2.0 at the moment has one company dominating a smaller pie. Google’s profit is larger than any of the 1.0 media giants individually, even though it may not be larger than the totality of their profit. Does that mean Google’s position is precarious? Hell no.

    In fact, Google’s upside is not in the long tail, they’ve already cornered that market (which is still growing, btw). It’s in the short rump. I’m sure you’ve seen the studies saying that advertising on the Net is lagging the audience shift from TV. Many of those fat contracts with the TV stations will get transferred to the Google system – for less money than TV charged, but what does Google care? 100-X per cent of a cubic assload is still a lot.

  20. I’ve worked in advertising, and it’s an open secret that most ad dollars are completely wasted. The internet allows much narrower targeting, and much better tracking of ROI, the result cannot be anything other than less ad dollars are going to be spent, simply because companies won’t be throwing away 80% of their budget.

    If internet companies can create ways to capitalize on extremely narrow niches and matchmaking between consumers and the advertisements they want to see, they may be able to capture some of that 80% and turn it into something useful now that it is no longer being wasted. Instead of buying airtime, corporations will pay to have interactive web games made, or short entertainment pieces. Traditional advertising’s slice of the pie is going to shrink, but rather than disappear the rest is going to be eaten by methods of reaching consumers that are entirely new.

  21. [...] Publishing 2.0 » More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0: here is what is destined to be an unpopular option: maybe Publishing 2.0 is communism? Allow me to explain maybe. Publishing has moved from a centered medium to a decentered medium. Or if you will, a “pipe” — one way unidirectional blasting — to a graph structure. [...]

  22. Scott –

    I think your thesis (as I understand it) is a sound one. However, I’d challenge the notion that Google is the only company that has made significant profit in networked media. What about eBay? What’s different about eBay than Loot or any of the free classifieds papers? A significant amount of eBay’s money comes from listings – not just from the transaction component.

    I say this because somewhat inherent in your statement that “Google is the only media company that has successfully profited from the new network paradigm” is the notion that Google is a fluke. What is inherent in some of the succesful business-models is the ability to create difficult to replicate communities and layer on top of that tools and information that create true lock-in – i.e., a situation in which consumers choose to stay within the network. As much as people are upset with eBay’s fees, people continue to list there and to make money on eBay. Similarly with Google. Alternatives to each exist (and, in some cases, Google and eBay are alternatives to each other), but users / advertisers choose to remain with both.

  23. [...] Komen wrote that the "nailing copyright violators is the game of whack-a-mole," (a great metaphor!!!) and it is too easy to capture and share digital content.  Although third parties (like Bitacle) have no right to share, distribute, download or otherwise traffic in others’ intellectual properties, who will operate as copyright police?  Who can afford to?  This is where it is important to post links back to your own site for content control so that scrapers displaying stolen content. Posting notices of infringement are also important.Is this perhaps one of the reasons Media 2.0 will be less profitable than Media 1.0?  That is a very poignant question, posed by Scott Karp on his blog, Publishing 2.0.  Less control of content construes, then, to less profit?  Karp models this on a pipe (one to many) analogy which in media language would be called the "gatekeeper model".  This filter is no longer one-way with the disintermediation models in operation now with networks and nodes and content and distribution open to anyone at low costs or, as Karp put it, "infinite nodes with infinite entry and exit points." [...]

  24. As advertisers use their marketing budgets to more specifically target their customer, and waste less of that “80%”, what happens to television? As ad rates in TV decline, do television production standards get lower? Does capital dry up?

  25. [...] He also does a bit of food writing over at TheDietCast.com.Like this article? +del.icio.us | +TailRank var site=”s11blogcritics” Keep reading for comments on this article and add somefeedback of your own! Buy from Creative Advertising: Ideas and Techniques from the World’s Best CampaignsHudsonBook, Usually ships in 24 hours Advertising Now! OnlineJulius WiedemannBook, Not yet published Advertising Now. Print (Midi Series)Julius WiedemannBook, Usually ships in 24 hours Advertising on the Internet, 2nd EditionRobbin Lee ZeffBook E-Marketing (4th Edition)Raymond FrostBook, Usually ships in 24 hours Internet Marketing for DummiesBud E. SmithBook, Usually ships in 24 hours The Story of the Week: Classifieds [...]

  26. [...] More Evidence that Media 2.0 may be less profitable than Media 1.0 Scott Karp touches a nerve with his analysis of the revenue potential for new consumer generated and social media websites. At the time of this post, he had drawn 19 strongly worded comments – both pro and con his position. Traditional Media Still Gain Consumers Trust Debra Aho Williamson points to a study released by Lexis Nexis that “that during major national events, consumers turn first to TV, radio and print.” Not surprising. Traditional media continue to have water cooler effect for the really big events. [...]

  27. [...] Whether you characterise economy 2.0 as being nodal rather than hierarchical, collaborative rather than competitive or giving rather than taking will all be fairly arcane if the business model doesn’t work. The questions are well rehearsed but far from being answered.Can the inherent tension between user-generated content and business-imposed advertising be overcome? What proof is there that web 2.0 eyeballs welcome the intrusion even of targetted advertising? Why do so many geeks decry advertising’s effectiveness (rightly in my opinion) and yet assume that their revenues will derive from this source?Now, another element that has been nagging the back of my mind, namely the sanctity of advertising spend, has found voice in an interesting post discussing the relative profitability of marketing 2.0. I’m still digesting the argument and the comments but this statement obviously found favour with me.”Ceding control to consumers was the dominant theme of the Association of National Advertisers conference — but if consumers are in control of your brand, the best way to increase sales is not by advertising in the traditional sense, but by making better products and providing better service.”Synchronistically, I also found the New York Times taking up my question about Friendster’s failure. Apparently, it was due to technological deficiencies. VCs and the executives they brought in weren’t actually using the site. Their focus on land-grab, new territories and product extensions ignored the basic functional deficiencies and users clicked off. Advertising assumptions. Community loyalty. New paradigms. They should all come with a profit warning. [...]

  28. [...] Scott Karp is worried about the possibility that media companies will not be as profitable in the new digital era as they have been in the past (well, not the entirety of the past — just since the commercialization of mechanical reproduction technology and establishment of limited-access physical distribution systems and gatekept consumer outlets for media; a 19th/20th century set of phenomena). I’m not worried. I think it’s great news. I can easily get by with annual profits in the, um, low-to-mid five figures. And I’m not the only one. I’m guessing you can, too. Disney, obviously, can’t. It won’t go that far, of course, and Disney will always do better than I’m doing, and better than you’re doing, but the profit scenario for media companies large and small, even if it’s lower than it has been for a company like Disney, is still more than I (or you) have made at, you know, most of our day-jobs. Where we made media. Profit potential for a Disney is lower precisely because you and I, and hundreds of thousands of others, get to play the game now, and are nibbling at the pie. It will always take a lot more pie to fill up a Disney than it does the rest of us — and Disney will always get a much bigger part of that pie — but they (and their big media cousins) won’t get nearly as much of it as they did before. And we will get a little bit more of it than we ever had a chance to. So, yeah, that’s a good thing, from where I’m sitting. [...]

  29. [...] More Evidence That Media 2.0 May Be Less Profitable Than Media 1.0 “The problem is that MySpace and YouTube don’t control anything. They are networks, not pipes. Many ways in, many ways out, many alternatives. Even worse (from a media economics standpoint), they are networks within networks (within networks). No contr (tags: beyondbroadcast media media2.0 economics) [...]

  30. While I admit enjoying the loss of control that was bought by a few to serve the mass lowest common denominator and consequently, as scarcity means margin, margins have declined and so has profitability, as a “ideological sensibility,” I think you’re looking the wrong direction to find “the scalable business models.”

    Its about lowered cost of entry, reduced costs, diseconomies of scale (in the upward direction) and the loss of Coase’s transaction cost benefits. IE, the scale is about many small business models rather than the hit-mentality of the past.

    Honestly, if I’m reading you right you sound *concerned* that organisations with “problematic” behaviour cannot white-wash themselves with “axe in the head” media branding? That its a *bad thing* “the best way to increase sales is not by advertising in the traditional sense, but by making better products and providing better service?”

    You think it better the market operate on how much sh*t business models can wipe off themselves and their products with advertising rather than actually behave and serve the customer?

    I guess if you’re peddling the toilet paper, that would be the POV.

  31. [...] Where to now? YouTube was recently purchased by Google for $US1.65 billion ($A2.2 billion) in Google shares. Google’s purchase has created a monopoly- given it runs its own video uploading network, Google Video. Despite reports that it will continue to run as a separate company, questions are raised over how sustainable it is. YouTube’s profitability is purely determined by its users. Hence, if users tun out, YouTube becomes a white elephant. As Scott Korp from Publishing 2.0 argues: [...]

  32. [...] You may make of it what you will but from it all I draw this: 1) Digital will continue to pound traditional. 2) It is likely to be profitable (Scott Karp wonders how profitable) 3) Traditional Media will have to move more rapidly 4) WOW you can sure sell e-books when there is a demand! 5) Sounds like what I have been saying for a while. [...]

  33. [...] Over at Publishing2.0, Scott Karp analyses Merrill Lynch’s recent research (MediaPost) showing that for the first time media prices are no longer growing faster than the rate of inflation, and concludes that  as control shifts from media gateway monopolies greater competition is driving down the costs for advertisers to reach their audience.It’s an exceptional analysis, but I’d beg to disagree with the conclusion. What I think Merrills has spotted, and what is – temporarily – going on here is a price deflation at online media while old media companies (and some pure-plays) try to shovel the media1.0 "control of the pipe" model online. Between Mar05 and Mar06 online ad impressions purchased (not merely available) rose from 97.1 billion to 185 billion, more-or-less doubling (ZDnet). Over roughly the same period, online ad spend rose only 30% (SearchRules). That’s impressions doubling, revenues rising 30%. Yields are deflating, caused mainly, I think, by the fact that impression increases are driven by webmail and social networks (MediaPlannerBuyer) with considerable unsold inventory and (therefore) diminishing CPMs. That the old media model is breaking down online is, I think, unambiguously true – merely capturing a mass audience and putting interruptive commercial messages in front of people is a decreasingly effective strategy, and I suggest that what Scott and Merrills are seeing is the consequence of that. At PaidContent an anonymous corporate client complains "has any advertiser seen a return on their investment when it comes to online adveritsing? We have not and we have been doing it since 1997." To which I can only answer – it depends how you’re doing it, and who you’re doing it with. Shoveling ad spend online so that companies with a 1.0 "control of the pipe" model can mis-allocate it probably won’t show a return. Targeting ad spend where media owners can demonstrate a deep understanding of the relevance of your message to a targeted subset of their users might.  Where web2.0 will recapture value for media companies (and where Google is already limitedly succeeding, if almost entirely by serendipity) is in the new barriers to entry – relevance and targeting. It is trivial to capture a mass audience online through either creative/technical ingenuity or, failing this, marketing. So far, the mass digital audiences have fallen to media companies pursuing one or another of these strategies. [...]

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