Today's column is written by Matt Shanahan, SVP of Strategy for Scout Analytics.
The sciencification of advertising is on a clear, steady march toward greater and greater efficiencies, whether that be optimized cost for advertisers, agencies, networks, or publishers. Behind all the investment and strategy is the idea of harnessing the scale of the Internet. Unlike gaming, social networking, and daily deals, the digital media revenue model doesn’t scale with a network effect. This makes digital media the odd man out. Digital media should take notice, focus on segmenting profitable advertisers, and develop niche advertising strategies.
How did scale become so important, and why doesn’t digital media scale?
Advertisers want scale because the TV, newspaper, and radio audiences have been fragmented across thousands of Internet “channels” from social networking to social media, Internet radio, Internet TV, games and more. Scale for advertisers means the ability to re-aggregate their audience across this fragmented landscape using software and data.
Sites on the Internet want scale because of the double whammy of fragmented audience engagement and commoditized ad rates based on actual user engagement. Scale for Internet sites means the ability to attract visitors and generate engagement (i.e., ad inventory) using software and the network effect of community.
Of course, in between the Internet sites and the advertisers, the ad networks, agencies, data providers and exchanges all want scale because they want a cut of the pie.
Social networking scales because it is based on software that connects people, and people produce the content that creates engagement. Gaming scales because it is based on software that can be played over and over again -- especially social gaming, where additional scale is built on the interactions between players. Daily deal companies like Groupon scale because they create a marketplace and only have to source the offers, not produce them - plus the margins are good.
But here’s the problem for digital media, the media publisher revenue models don’t scale the same way social, gaming, entertainment and software do. Producing media is expensive; has little network effect; and has little reuse. Producing media takes a constant stream of fresh content produced by people under contract or employment. The content produced is usually read once or twice and not consumed again. This creates a model where digital media publishers have the highest cost per audience member and unit of engagement. Consequently, digital media is the odd man out on scale being pursued by the current advertisers and intermediaries.
There of course will be those that disagree. The common arguments are that “new” media should rely on aggregation of other’s content (e.g., HuffPo) or low cost editorial (e.g., Demand Media), but look at the recent activity in the digital media market. Demand Media is doing more premium content. AOL has hinted at subscriptions. And why is that? Commodity ad rates are a race to the bottom, and generating page views is not a business model. As any good business person will tell you, maximum profits come from scarcity and scarcity comes from niches. For digital media, a niche is a set of loyal advertisers aligned to a specific set of the audience and content. So in addition to segmenting the audience, publishers need to segment and curate the advertisers into a niche to reach profitability.
A good example of a niche for me is Coastal Living – at least in print. As good a magazine as it is, Coastal Living is only relevant to so many people – it has a limited audience. To make the revenue model work, Coastal Living needs to maximize the engagement of the audience with advertising. Advertisers are curated to match the audience’s interest in living near the ocean. Advertising matches and in some cases is integrated with the articles and from my observation, this pays off. My wife is a fan of Coastal Living because she likes the new products, design and entertainment ideas that are integrated with advertisements, and the directory of unique suppliers. My wife actually reads the advertising and makes purchase decisions from it because the advertising is linked to her interest and intent. In one case, she looked up a supplier in the directory to replace a 10-year-old light that had broken – the supplier had been advertising in Coastal Living for 10 years. For her and the advertiser, it is a great print product.
The online Coastal Living product abandon niche and is using scale advertising practices instead. Consequently, the online product (i.e., audience and advertising context) bears no resemblance to the print product and most likely underperforms. The advertising is not integrated with the articles; they are not contextually relevant (e.g., ads for Bejeweled game or Geico insurance); and the directory of suppliers is not available. On top of that if my wife’s usage resembles others, the audience is not engaged. For example, she does not use the site because it is confusing to navigate and does not contain anywhere near the same amount of information as the print product. The performance of the online advertising is likely to be much, much lower. This lower performance is not due to the difference of online versus print, but to the poor quality of user experience, ad integration, and advertiser curation. The online product is no longer niche, and neither are the advertisers or the revenue performance.
Producing a constant flow of engaging media and integrated advertising is more expensive per audience member than other online revenue models such as social networking, gaming, and daily deals. This makes a digital publisher the odd man out for current advertisers and intermediaries focused on scale. In digital media, profits exist in niches where loyal advertisers are provided a differentiated product (i.e., audience and advertising context). The digital media survivors will be those that learn how create scarce engagement of niche audiences rather than commodity page views in exchanges.