• by Joe Mandese  @mp_joemandese, December 29, 2006

Pop! Next to Macy's Thanksgiving Day Parade balloon escorts, I can't imagine that sound striking more fear in anyone than this magazine's readers. The last time we heard it - some seven years ago - it was nearly deafening. It was also death-ening, killing a multitude of dot-com enterprises and one of the greatest expansions ever in the U.S. and global advertising economy. They dumped, we slumped, and the rest is, as they say, history. The question on everyone's mind, of course, is, "Are we repeating ourselves?"

After speaking to some of our industry's leading economists for this month's cover story, I can only conclude that we are not. This second rise of the Internet economy is real and sustainable. It is also having a profound and fundamental effect on the underlying economics of our industry, and that could lead to the sound of popping in some very big and well-established players. At the very least, it promises to gum up the works.

The problem is that most of the advertising and media world was built on an economic model of largesse and relative inefficiency, while the Internet was not. Ninety-five percent of what we do has been based on an incredibly inefficient model: Hurling massive amounts of advertising messages at as many people as possible, hoping to influence enough of them to make the whole thing worthwhile.

For the most part, it has been. For all their inefficiencies, mass media such as TV, newspapers, magazines, and radio worked really well. Advertisers aren't stupid. They saw the results. And by the 1990s, with the emergence of advanced modeling techniques, they could actually measure them.

Advertising works. So what, you already knew that. The problem is that it doesn't work as well as some might have hoped, and there is a real fear that - at least as far as those traditional media are concerned - it's not working as well as it used to. It definitely won't much longer. And it's all because of the Internet. Well, not all because of the Internet. Some other new digital media technologies are co-conspiring and helping consumers control when, where, and whether they are exposed to an advertising message. In that world, the old model simply does not work. And the rush online is an acknowledgement of that.

Once again, this is no big epiphany. We all understand that. But here's the really insidious part of what's been going on, and we're only just beginning to understand it. Because online advertising, especially search, is so much more efficient than old line media, it is actually putting the brakes on the advertising economy. And it's not just cost efficiencies, it's the actual costs of online media. They're cheap - really cheap - by traditional media standards. With the exception of the biggest and most premium online inventory, we're talking fractions of traditional advertising costs. "Penny CPMs" is how Isobar chief Sarah Fay describes them.

Others have begun alluding to the Internet's "efficiency effect," but only recently did it begin to manifest itself in a really macro way that suggests it is actually impacting the overall advertising economy. For two years now, U.S. and worldwide ad spending have begun to lag overall economic growth. That's a first since economists began tracking the relationship between the two, and it also coincides with a pronounced uptick in advertising budgets being shifted from traditional media to online media by major advertisers. The shift could be even worse, notes TNS Media Intelligence's Steven Fredericks, but the biggest advertisers - the top 50 - have actually been lagging the general marketplace in making that switch. If and when they catch up, watch for an even more pronounced slowdown in the expansion of the advertising industry. How's that for something to chew on?