• by Jordan Rohan , September 30, 2009

Last week, I participated in a panel discussion as part of Advertising Week. The panel was moderated by CNBC's David Faber, who asked a lot of insightful questions about the pressure faced by the ad agency business model. Clients want to pay less, but the complexity of reaching consumers has increased significantly.

The panel was pretty entertaining, in large part due to the largesse of one Miles Nadal, Chairman and CEO of MDC Partners, which owns controlling stakes in Crispin Porter, Kirshenbaum, and other top-tier marketing services firms.  Miles apparently wants his agencies to be paid like hedge funds, with upside based on the performance of campaigns, linked to exceeding a target number of Whoppers sold or Plum cards issued. Why not?  The hedge fund guys have done pretty well over time, to say the least.

And that got me to thinking. Maybe there are more similarities between advertising and finance.  There are ad exchanges patterned after financial exchanges.  There are more brokers of ads and stocks than anyone would have imagined.  Finally, financial markets are designed to take advantage of inefficiencies in a reasonably compressed period of time.  This belief forms the basis for the efficient markets theory.  But advertising seems so inefficient, almost at its core, almost by design. Is the ad market really a long-term inefficient one?

The Case in Point

An industry exec in the audience asked the panelists whether the Internet's continued growth in percentage of total media consumption would cause budgets to be sucked away from television.  According to a recent study from Forrester Research, television's share of ad dollars was holding firm at 31% despite a slowly waning 35% of media consumption, while Internet share of ad dollars has grown steadily to 12% of ad dollars vs. a surging 34% of total media consumption.

If the ad markets were really efficient, wouldn't this gap have narrowed more meaningfully?  As a believer in the long-run efficiency of markets, I think there is a reasonable answer...

Media consumption (i.e., hours in front of the computer or TV) may not correlate directly to the ability to influence brand selection or preference.  Nor does media consumption facilitate purchase directly. Instead, the attentiveness of the audience at the time of media consumption (or page view) is more indicative of a medium's true ability to influence consumers.  If true, it would explain the huge differential between the sites designed to facilitate hunting (search) and the sites that facilitate grazing (social).  

The Numbers Agree:  Search vs. Social Media

According to the IAB, 2008 U.S. Internet advertising totaled $23.4 billion, up $2.2 billion (+11%) vs. 2007.  Within that total, Google's revenue on its own U.S. search properties (not affiliate network) was $7 billion in 2008.  In fact, Google's O&O search revenues amounted to 30% of total interactive ad revenues in the U.S., massively over-indexing vs. its miniscule percentage of page views or time spent online (3-4%).  Social media, on the other hand, are trying to use data and incredible reach to offset the lack of attentiveness of the average social media consumer.  I hope the firms specializing in social media monetization (Facebook, MySpace or third parties) figure it out over time, rendering irrelevant my comparison of social media to Central Park. 

The Silver Lining:

Maybe this is good news for television, which may continue to hold its own over the long run, defying the dire predictions?