May 24th, 2008
As media companies struggle to figure out their digital future, the elephant in the room is that they have only been able to monetize online audiences for pennies on the dollar compared to traditional media. Here’s why: Traditional advertising formats FAIL on the web. By traditional advertising formats, I mean display ads, video ads, and any other ad whose format and value proposition approximates or imitates that of an offline advertising format.
Google is the ONLY company that has succeeded in web advertising. Why? Because they perfected search advertising, an entirely web-native form of advertising, whose value proposition is perfect for the web and which has no offline analogue.
Why do traditional advertising formats fail on the web? Because people have no patience for them, as they did in traditional media, where we were habituated to looking at print ads or watching TV commercials.
Research by Jakob Nielsen puts this into sharp relief:
Now, when people go online they know what they want and how to do it, he said.
This makes them very resistant to highlighted promotions or other editorial choices that try to distract them.
“Web users have always been ruthless and now are even more so,” said Dr Nielsen.
“People want sites to get to the point, they have very little patience,” he said.
This is why pre-roll ads on online video = fail, why overlay ads on online video = fail, and why online display advertising is a commodity business, where online publishers have to shovel page views and battle for every $1 increase in CPM. Some sites can get $50-100 CPMs on some pages from certain advertisers, but $1 — even $0.10 — CPMs are common on the web.
Just ask newspapers and magazines about their ad pricing power in print vs. online. Can you imagine a print publisher getting $1 for 1,000 times an ad was seen? You’d go bankrupt after one issue.
Here’s a sobering thought: If all advertising in offline media got converted to current online media CPMs, it would probably be worth a fraction of the value, i.e. $300 billion would become $50 billion.
If 1 to 1 transfer of advertising value is at one end of the spectrum and 1 to 0 transfer of classified advertising value to Craigslist is at the other extreme, most of online media is closer to Craigslist — online publishers are vaporizing advertising value in the shift of dollars online.
Even Google has struggled with this problem, as they still make virtually all of their money from pay-per-click search and contextual ads.
But why, why is this so? Because most online advertising creates NO value for consumers.
Search advertising, because it is relevant to what users are already searching for, creates enormous value. But the search advertising is largely about helping people buy what they already know they want.
What about the objective of advertising to convince people to buy things they don’t yet know they want or need (or what never otherwise want or need)?
Consider this: What is the most successful type of advertising online advertising that convinces people to buy something they weren’t in the market to buy?
Spam is probably the most inefficient form of advertising every created, and it creates more hate and loathing among consumers than the worst 30 second TV ad ever created.
But it works. With millions of emails sent at virtually no cost, a 0.001% response rate can still be highly profitable.
The reason why most online advertising fails is that web users see it as little better than spam.
Display ads are ignored in the same mindset as spam is ignored — I’m trying to get something done online and your display ad is getting in my way.
As Nielsen highlights, web use is driven more and more by utility.
Despite the popular notion of viral content, e.g. viral videos, even entertainment on the web most often happens in a utilitarian context.
Sure people browse videos on YouTube, but searching YouTube is the killer app. Want to find video content? Search for it on YouTube, and chances are someone has uploaded it (legally or not). Why do you think Google acquired it?
Social networks have hit hard against the online advertising wall — I’m trying to talk to my friends and you’re showing me ads — get out of my face. I’m trying to talk to my friends and you’re shoving down my throat notifications of what my friends are buying (i.e. Facebook Beacon) — get out of my face!
Is it any surprise that most ad spending still happens offline? Most advertisers use the web themselves. They know how annoying traditional ad formats are on the web.
So what’s the solution?
We need to invent new forms of advertising on the web. But it’s more than that. Facebook introduced Beacon as a new form of advertising — but it didn’t create a lot of value for users.
Online advertising must create value for users or it will create little or no value for advertisers.
This would seem self-evident, but it has not been the case with traditional advertising, which was developed for CAPTIVE audiences, and web users are increasingly anything but captive.