• by Diane Mermigas , January 26, 2009

Building a better house of cards from the advertising, consumer spending and global market ruins of the recession requires a new digital foundation cemented by interactivity. The scarcity of monetizeable, useful connections gives media and Internet players few places to start.

The failure of the mighty Google to apply its algorithmic magic to newspapers with its shuttered PrintAds illustrates how the absence of genuine interactivity--in this case, developed by publishers with advertisers and consumers--makes it impossible to realize digital's potential.

Interactivity that gives consumers more of what they want--and are willing to pay for--is the plum growth catalyst that eludes many companies, even as broadband is burgeoning as a global lifeline for critical communications and entertainment.

It also will be more difficult for colossus Google to make gains without playing on a vibrant, ubiquitous, interactive grid encompassing all media. Beneath the surface of Google's fourth-quarter earnings are some early telltale signs, including declines in revenue per search. How much more valuable it would be if search turned into discovery and advertising into sales.

The danger of failing to use digital interactivity to replace core static revenues--some permanently lost--could have destructive impact on companies as large as News Corp. It faces 35% declines in local TV station ad revenue, double-digit losses from the deteriorating DVD sale, which is nearly 70% of any film's profits, and the weakening monetization of MySpace and other Fox Web sites. All will contribute to a 28% decline in operating income in fiscal 2009 without robust offsetting digital revenues, according to Barclays Capital analyst Anthony DiClemente.

This is a universal predicament that makes all companies vulnerable. With local TV station advertising revenues contributing 13% to 17% of media conglomerate's overall revenues, the collapse of major ad categories such as automotives and a prolonged recession will take a toll. Meredith Corp. has said its TV station pacings declined 40%, while automotive pacings (12% of overall U.S. ad dollars) plummeted 70% last quarter. NBC Universal said Friday that its fourth-quarter broadcast operating profits declined 55% on a 25% fall in corresponding revenues. It makes the widely forecast 10% decline in overall U.S. advertising look a little lame.

Digital will never come close to offsetting such losses unless media and advertisers use interactivity to generate new revenues. An urgency comes from the global Internet audience, for whom interactivity is a given--steaming past the 1 billion mark, according to comScore, eclipsing television and all other media. The Obama administration plans billions in federal tax breaks, subsidized loans and grants to assure every U.S. household affordable, high-speed Internet access.

Interactivity affords actionable, value-adding elements, such as commerce and socialization, to create a new viral economy. It allows content and service providers to monetize their products by creating a more relevant, fluid "sticky" connection to target consumers. Throwing a $3 million, 30-second Super Bowl commercial at viewers might get an initial pop, but sustainable impact is only possible by continuously providing tech-empowered consumers with product information, conversation, services and deals that have personal meaning.

The technical infrastructure to execute a golden loop strategy and create a new vein of commerce is materializing at a disjointed snail's pace. TiVo searches video, and LG TVs stream Netflix on demand movies into the home. YouTube allows major content players to import their own ads into its social network. There isn't much of a coordinated interactive end-game for making money in any of it.

The Internet bypass is alive and well. Pay TV's value proposition is vulnerable without stretching interchangeably across all devices and platforms outside the home with social and commerce elements that are meaningful to users. Although an hour of home broadband Internet costs twice as much as an hour of cable or satellite service, per Bernstein Research, it provides crucial communication as well as entertainment options. "Traditional video distributors are at risk, particularly as more and more devices become Web-enabled (via Wi-Fi or Ethernet)," warns Pali Capital analyst Richard Greenfield. Last week's seamless integration of Facebook into CNN.com real-time inauguration coverage kicked off the evolution of high-quality connectivity that can be as profitable for players as it is critical to consumers.

Too often, such strides are one-time wonders that only hint at an ecosystem of new revenue possibilities from digital give-and-take. What are missing are layers of compelling and relevant interactive options that solicit action, one consumer at a time.

The problem is that so few companies know how to effectively do it. Efforts often are stymied by a superficial dance between traditional print, broadcast and film content and a new digital framework they barely mine for revenue-generating applications because they are too fixed on the elusive value of their own content.

Even search advertising has slipped into an 8% fourth-quarter decline, although it surely will continue to prosper in isolation. Without developing, integrating and utilizing interactive elements of relevance, discovery, social networking, e-commerce and other interactive wonders, companies will never know their digital potential. That will require challenging legacy breaks. The most stunning example: bold restructuring by Sony CEO Sir Howard Stringer to concentrate on gadget software and connectivity over staid commodities, like television, in order to recover from $3 billion in first-ever annual losses.

WPP chief executive Sir Martin Sorrell declared last week that "old media will never be as profitable as it has been" because it has been "disintermediated" by low-cost Internet business models that have virtually given away content and services for free.

The other half of the equation demands innovative leveraging of interactivity at all levels of advertiser-content-consumer connections wrapped around all things digital. It requires an enterprising application of interactive tools Amazon-style, from consumer-centric relevancy recommendations and user reviews to easy, secure transactions and refined micro-targeting.

Thousands of disparate tiny steps are being taken to explore connectivity as a core utility at a time when bold strides are needed. This is, after all, no recessionary retrenchment; it's a revolution.