• by Joe Mandese  @mp_joemandese, May 25, 2005

In the summer of 2001, I began working on this story for another magazine. It never got published because the magazine I was writing it for, Brill's Content, folded due to the lack of advertising support. The story was about whether advertising was the wrong economic model for funding media content.

The story wasn't actually my idea. It came from the consumers of media themselves. After tracking a couple decades worth of data on media trends, something became apparent: Consumers were spending more of their time - and perhaps more importantly, more of their own money - on media that were funded primarily by consumer spending, not advertising. By the summer of 2001, the trend approached a tipping point in which advertising would soon become the subordinate economic model for media. And that made me wonder whether advertising was a mistake, and whether the rapidly shifting economics of the media industry were beginning to prove it so. 

It was easy to think that in the summer of 2001. Although dot-com economics were quickly unraveling, there were still some giddy notions in the air. Bob Pittman still ran the world's largest media company, which was then called AOL Time Warner. Pittman gave speeches to Wall Street analysts who talked about an even more fundamental transformation in the economics of media: AOL's ability to sell products directly to consumers with personal, one-to-one transactions. Instead of commanding CPMs of tens of dollars for advertising, Pittman claimed that aol could reap hundreds of dollars per individual user. He sold it to Wall Street. He sold it to AOL Time Warner's investors. And, he even sold it to AOL Time Warner's management. And suddenly "content" was no longer king of the media realm; "commerce" became its royalty, and for a short while it seemed to reign.

It proved to be a false prophecy, and the fundamentals of commerce as an economic model for media content began to erode as fast as the share values of any company whose corporate name ended with the suffix '.com.' 

DotBomb: Media Implosion

By the fall of 2001, a series of events seemed to push AOL Time Warner, as well as the entire media economy over the edge. The Sept. 11 terrorist attacks sent advertisers, consumers, and investors fleeing from all but the most traditional media economics, triggering what proved to be one of the worst recessions ever for the media industry. 

By mid-October, Brill's Content had folded, and Brill Media Holdings, a company that once planned to provide media content directly to consumers on-demand and for one-time fees, was on the verge of going out of business. 

Within a year, Bob Pittman resigned as coo of AOL Time Warner, and the company dropped AOL from its corporate name. Advertising, once again, ruled mass media economics, albeit in recessionary times.

But somebody forgot to tell media consumers. After getting a taste of what it felt like to access media content on-demand, consumers clearly liked the convenience and control. What's more, the Internet taught them that most content could be accessed for free, as long as they didn't mind skipping past banner ads as fast as their content was served. 

TiVo taught them to do the same with TV commercials. And the economics of media were beginning to shift in a way that was unimagined by the e-commerce evangelists. Commerce wasn't king. Neither, apparently was content. The consumer was. 

Consumer-Driven Reality

Fast-forward four years to the summer of 2005 and there are some ironic similarities to the summer of 2001. The Internet is once again booming. Dot-coms are once again some of the fastest growing brands, and online ad spending is surging. 

But the fastest growing segment of online advertising isn't content and it's not even commerce-related. It's consumer-driven. It's called search, and it's another indication that consumers are in control of their media content, including advertising. Instead of media companies and advertisers pushing content to consumers, consumers are pulling the content they want, when they want it, and to the media platform they want it on. Search is simply a way for consumers to control how they access advertising content.

"When I first realized what was going on, I thought it was the end of civilization as we know it," says Alvin Silk, Lincoln Filene professor emeritus at the Graduate School of Business Administration at Harvard University. "The technology was totally changing what economists thought was the cost of search."

By "cost of search," Silk, regarded as one of the leading thinkers on the economics of media, isn't referring to the cost of buying a keyword or online search term. He means the principle used by economists to describe the "information need of advertising." 

Under the ad-supported model of media, the cost of search economics was fairly simple, Silk says. "Advertisers paid for media, and consumers watched their ads." And for the past hundred years or so, economists thought that was the correct model.  "Advertising existed, because it informed consumers and lowered their cost of searching in other ways," he explains.

But online search, and ultimately TV-based search is changing all of that by enabling consumers to bypass the middleman (advertisers) and their middleware (conventional advertising messages). 

"Why can't consumers buy information directly? Why do they have to consume it jointly with entertainment and news?" Silk asks. "The answer was that it was always more efficient to do it that way and that if you had to sell information to consumers directly, you'd have to put in place ways to charge for it and collect it and that would make it inefficient for consumers and advertisers. And now you have to wonder if that hasn't all drastically changed." 

To understand this shift in consumer behavior, Silk says you have to look not at the mass market of media consumers, but at a certain sub-segment that developed their media consumption habits over the past 10 years, when the Internet became their content portal and when on-demand TV technologies altered how they used so-called linear media. 

The New Media Consumer

You have to look at someone like Joshua Lovison. Lovison, 21, an undergraduate film student at New York University, doesn't consume media the way most of us still do.  When he wants to watch TV he doesn't turn on ABC, CBS, Fox, or even Comedy Central. He watches BitTorrent or Gnutella, online file-sharing communities that give him instantaneous access to virtually all of the same content available on over-the-air or cable TV, on-demand, when and where a computer screen and broadband access are available. 

In fact, Lovison doesn't even use the term "program" to refer to the file he downloaded of an episode of Comedy Central's "South Park" recently. He calls them torrents, a generic term used to describe files of TV shows and feature films peer-to-peer file sharers exchange via BitTorrent, Gnutella, eDonkey, Ares, or FastTrack. 

Lovison is not alone. According to a report by Brian Wieser, vice president-director of industry analysis at Magna Global USA, such networks now average about 3 million users each quarter. 

"Peer-to-peer clearly reflects consumers' interests in accessing content in on-demand environments," Wieser says. "Equally important, p2p reflects consumers' interests in procuring content that can easily be moved from platform to platform (i.e. from pc to TV to portable digital player, such as an mp3 player or Sony's new PSP)."

Lovison affirms that view, acknowledging, "It's completely about convenience." He wants what he wants when he wants it. While that raises huge implications for media rights holders and marketers alike, it's a drop in the bucket that threatens the very fundamentals of Madison Avenue. 

"Commercials are really annoying," he says, "and advertising is becoming completely irrelevant because of the Internet." By irrelevant, Lovison means he does not watch any advertising when he downloads a torrent. The files usually strip advertising out to save space and download time. 

The funny thing is that Lovison is not opposed to advertising. He even understands that advertising is the reason many of the files he downloads exist in the first place. He just believes that to reach him, "advertising has to change fundamentally." 

Those fundamentals, he says, are that ads either have to be integrated directly into the media content he watches and have to be relevant to him, or it has to be advertising content he seeks out directly as part of a product or service via a search process he initiates.

"I don't care about the mommy van commercial," Lovison says, describing the shotgun way in which many TV ads are still scheduled. 

Alternative Economics

Clearly, Madison Avenue understands this. It is the reason why so many agencies and TV networks have flocked to branded entertainment and product placement. And it's the reason why online search is booming. But Harvard Professor Silk believes these tactics are still in transition as the media industry tries to develop a new set of economics that will replace traditional advertising. 

Even ad industry bible Advertising Age seemed to acknowledge as much in its recent "Chaos Scenario" cover story written by columnist Bob Garfield. His take is that the media marketplace hasn't evolved the way past futurists predicted it would, and that has left Madison Avenue ill-prepared to make the transition. 

"There is no reason to believe the collapse of the old media model will yield a plug-and-play new one," Garfield wrote. "On the contrary, there is nothing especially orderly about media's New World Order. At the moment it is a collection of technologies and ideas and vacant-lot bandwidth, a digital playground for visionaries and nerds."

One of those visionaries is Rishad Tobaccowala, the chief innovation officer of Publicis Media. Tobaccowala, a former tech nerd who founded Publicis' Starcom ip unit, is now leading the charge on video convergence. He is the main architect behind Publicis' Video Investment Group, a unit that coordinates media across all video platforms: TV, broadband video, and ultimately cell phone screens and whatever comes next. Tobaccowala says Publicis no longer distinguishes between these platforms. "They are all ways of delivering a video message," he says. The big difference, he adds, is how marketers utilize various video platforms to reach viewers.

As confident as he sounds about his grasp of the media future, Tobaccowala is the first to admit that he's not absolutely sure how it will pan out.

The biggest change he says he's preparing for is when "the Internet becomes television" and when people start using TV like the Internet. The convergence of these two platforms will lead to a seamless, on-demand, and ultimately fragmented video advertising marketplace, in which ad messages are planned not to reach households or even demographics, but individuals. 

In such an environment, traditional concepts of target-based media planning will become completely irrelevant, Tobaccowala says. The new focus of media planning, he predicts, will be on "reaggregating audiences." 

A number of agencies are beginning to explore, test, and even make media buys based on the kind of disaggregated addressability Tobaccowala advocates. Carat CEO David Verklin has become a major champion of the concept and has created a new unit within Carat Digital to test new forms of interactive, addressable TV advertising. The unit, headed by Carat Digital Executive Vice President Mitch Oscar, has already begun implementing addressable ad schedules for clients such as Hyundai. Working with the automaker's local dealers in markets where cable operators can deliver addressable TV ads, Oscar is trying to find out whether the return on these kinds of advertising investments is greater than the traditional broad reach, impressions-based advertising of the past. 

"At the end of the day, all a Hyundai dealer wants to know is how many people actually showed up on their lot because they saw an interactive TV ad," says Oscar. In that world, he says, CPMs [cost per thousand] and GRPs [gross ratings points] are far less important than response rates or conversion rates. Sound like direct response, or maybe the Internet? If it does, that's because Tobaccowala is right. TV is becoming the Internet. And vice versa. Their economic models are fusing, transforming everything we know about the way traditional advertising works. 

To date, that transition has been slow, because the primary gatekeepers of the TV advertising business - the big cable TV operators - are loath to embrace that change. The rollout of addressable TV advertising has been slow, and so far is only practical at the zip-code level, rather than the household or individual level that would make TV targeting truly analogous to the Internet's. Tech firm Invidi, plans to deploy its addressable advertising switching capabilities onto some big cable TV systems. Among the key players backing Invidi's rollout are Carat CEO Verklin and former gm Mediaworks Chief Rick Servaitis, who are on the company's board. 

Invidi's technology is attractive because it can segment and serve ad messages based not on the kind of TV shows a target is likely to watch, but on what they happen to be watching at that time. In other words, Invidi will enable ad messages to be behaviorally targeted on TV in much the same way they are online. 

The other big convergence between TV and online advertising models is search. Carat's Verklin recently predicted that a "search tele-vision" platform would soon emerge. Both Google and Yahoo! have launched video search services allowing users to find any video content posted on the Web, in a way that conventional TV navigation systems could never have foreseen: TV viewers search for any program, on-demand, and with relevant advertising messages embedded. That sounds like Josh Lovison's TV programming dream come true.

The only problem with this dream is how to make it work economically. Can the $60 billion invested in the current TV ad impressions business be effectively converted into branded content, search, and granularly-targeted addressable advertising messages? Some people think so, and they think it might even be better than the old advertising model it would be replacing. 

"What if we're wrong? What if people aren't skipping commercials when they get control? What if there are other options?" asks Gregory Wilson, founder of Red Ball Tiger. It helped develop TiVo Showcases, which are based on the concept that if an advertising message is relevant to a consumer they'll actually sit through several minutes of it. 

Wilson believes much of the current dialogue on Madison Avenue is misdirected and focused on figuring out ways of "circumventing" consumer control to keep people from skipping commercials.

"In the long-run, that has to be a losing battle," Wilson says. "Once people get control, they're not going to look at something they don't want to see. The only solution is to create good spots and relevant spots that people will want to watch. The trick is to make commercials so that they're not interruptive. And that goes against everything Madison Avenue knows. My belief has always been that the only way for advertisers and agencies to retain control is to give the consumers complete control." 

Why is that a better economic model for advertising? Because, Wilson says, it means that the ads people do see will have much greater "accountability." And if they are choosing to watch those ads, then Wilson says they are "involved" with them. Wilson's term for describing this new economic model is "roi," for return on involvement. In the long-run, he says, it will be a better model for advertisers, agencies, the media, and even consumers. Advertisers will pay for ad messages they know consumers are interested in and involved with. Agencies will be compensated for creating ads and media strategies that deliver them. The media will benefit from having happier advertisers and consumers. The consumers will be happier with their media content, because it won't be interrupted by annoying, irrelevant advertising.