Shift Happens – The Future of Advertising

In a world of rapid change, shift piles upon shift.  One can get thoroughly confused and draw the wrong conclusions by focusing on one change while losing sight of the shifts that are coming up.

Advertising is a case in point.  Seismic shifts are shaking up the world of advertising big time. But which shift is most relevant?  And what are the implications for executives?

Understanding the shifts

In the advertising world, multiple shifts are piling on top of each other and it is often hard to keep track of them, much less understand their implications. Let’s look at just some that are re-shaping the advertising world:

• Shifts from advertising placed in digital content to ads placed in social networks and applications
• Shifts from digital advertisements delivered through conventional PC’s to a growing array of mobile devices, with an increasing ability to target messages based on the physical location of the person
• Shifts in the behavior of digital users in their responsiveness to advertisements online
• Shifts in the way that companies connect with and build relationships with stakeholders (e.g., blurring boundaries between customers, partners and suppliers)
• Shifts in the revenue models for businesses, as online businesses in particular become more and more dependent on advertising as a key revenue source (e.g., is there any Web 2.0 start-up that doesn’t blithely answer “advertising” when asked about their revenue model?).
• If that isn’t complicated enough, we also have broader macro-economic shifts like potential near-term recessionary pressures

Whew! No wonder it’s easy to get confused, especially since one set of changes can offset or even reverse the impact of another set of shifts.  So, how do we make sense of all this?

In essence, three fundamental shifts are piling on top of each other.

• Advertising is migrating to digital media because it is far more effective in targeting and reaching relevant audiences than most traditional media.
• Aggregate advertising spend in the US is likely to experience a cyclical downturn as the economy softens
• People are confronting a proliferation of sources competing for their attention and becoming less receptive to advertising messages, even when they are very well targeted

Here’s the danger: we may become so focused on the recent growth in online advertising that we dismiss any short-term slowdown in spending growth as a purely cyclical phenomenon. In the process, we may miss the longer-term, and ultimately far more profound, impact of the diminishing returns that online advertising is already beginning to experience.

This is particularly relevant in the Internet space. Virtually everyone seems to be zeroing in on advertising as the basic revenue model. Titanic battles among Internet gorillas, including mega-acquisitions, are at least in part motivated by a desire to occupy choke-points in the advertising value chain. 

The likely evolution of Internet advertising

The basic paradox of the Internet can be framed very simply:  The very platform that makes advertising both more relevant and more measurable is the same platform that longer-term will challenge and ultimately undermine the basic role of advertising in communicating with customers. 

Why will the Internet ultimately undermine advertising?  A number of factors come into play:

• The Internet proliferates resources, all competing for the attention of people.  Even the most targeted and relevant ads over time will have a harder and harder time rising above the noise.
• The Internet creates powerful options for people in terms of how they become aware of new products and services and how they obtain information about the products and services that are relevant to them.
• The Internet offers increasingly powerful tools to filter and block advertisements (and, yes, product placements will be an interesting alternative for a while, until even that space becomes so cluttered that people will mentally filter out the products)

On the second point, social network sites provide increasingly robust platforms for us to learn about what our friends are interested in and purchasing (although in many cases still trying to figure out the appropriate balance between privacy and attention). In this context, Esther Dyson wrote a great op ed piece in the Wall Street Journal on February 11 on “The Coming Ad Revolution” (a longer version is available at her blog here) highlighting the “walled gardens” that users themselves are cultivating to connect with each other and with favored vendors.

Amazon continues to represent a leading edge example of how a trusted third party intermediary can help filter and present information about the interests and purchase patterns of others in ways that are very helpful in discovering new products. We are still a long way from the infomediaries that I wrote about almost ten years ago in Net Worth. However, the proposition of a trusted advisor who can help us sort through the growing array of resources and discover those that are truly relevant and valuable becomes ever more compelling.

As we find richer and more diverse ways to connect with friends and trusted advisors who can help us discover what we need, conventional advertising – even with all of the best behavioral targeting algorithms - will become viewed at best as marginal value and at worst as an increasing nuisance. People want to connect with vendors, especially vendors that can address unmet needs, but they will increasingly want to do it on their terms.

Advertisers are wrestling with this shift in user preferences.  Recent declines in online click-through rates and the especially dismal click-through rates experienced on social network sites like Facebook should be an early red flag regarding the challenges ahead.

Implications for advertisers

For advertisers, the key message should be to build the skills required to genuinely engage people around their products and services in such a compelling way that people seek them out – and keep coming back because they have received so much value. The old game of paying for placement of messages, no matter how targeted, will yield diminishing returns. The long trajectory that will shape the advertising business is the move from random interception to targeting intention to seeking attention and ultimately to attracting attention. 

The end game is collaboration marketing where advertising, meaning paid placements of messages, becomes more and more marginal. The focus shifts to becoming more helpful by creating rich, serendipitous environments that people will actively seek out (there’s a lot more to be said on this front, but this is a blog after all, so the details will be left to the imagination of the reader).

I want to be clear: while I am skeptical about the long-term future of advertising as paid placements of messages, marketing becomes more and more important in an era of abundance.  Companies of all kinds will wrestle with growing challenges in terms of connecting, and building deep relationships, with key stakeholders.  I also understand that advertising does far more than convey information; it also excites and engages people in imagining how their lives could be improved with the vendor’s products.  Marketing will still need to address this emotional and psychological mission – my only point is that advertising in online environments will be increasingly marginalized as the vehicle for accomplishing this mission. Will advertising go away?  Hardly, but it will move from the core of marketing to the edge, challenged by diminishing returns and more robust options for engaging people.

Implications for revenue models of businesses

If advertising is likely not to be a sustainable revenue source, it means that online businesses must find other sources of revenue to support their businesses long-term.  What might be some of those revenue sources? Well, one option is to get customers to pay. In this regard, Kevin Kelly has an interesting post on “Better Than Free”.  Observing that the Internet is a vast copy machine that makes copies of everything super-abundant and free, he concludes that “when copies are free, you need to sell things which can not be copied.” Kevin highlights eight uncopiable values that can in one form or another be sold – immediacy, personalization, interpretation, authenticity (meaning here certification of authenticity), accessibility, embodiment, patronage and findability. It is a thought provoking piece and, for my money, it begins to shine the light on the key question: what will people continue to pay for in this digital networked world?

Kevin’s perspectives are largely framed in the context of digital goods and services that are the core of the Internet today.  More broadly, until fab labs become consumer items, physical goods that cannot be reduced to digital code will still command a price, although we need to be ever watchful about the extent to which these goods will be transformed into services (look at what’s happening to computers as they get sucked into the cloud). 

And, if Chris Anderson is to be believed in the preview to his forthcoming book, more and more things will be free in the economics of abundance. But even Chris ultimately circles around to finding money.  As he observes, “to follow the money, you have to shift from a basic view of a market as a matching of two parties — buyers and sellers — to a broader sense of an ecosystem with many parties, only some of which exchange cash.” While he acknowledges advertising as one source of cash, Chris offers a much more nuanced view, tapping into a number of other cash reservoirs.

So, where’s the money?  Here’s my answer: to find the money, seek out scarcity.  Abundance in some areas inevitably creates scarcity in others. Attention, reputation and talent become relatively scarce in economies of abundance.  Businesses will be well positioned to charge for their services if they can deliver one or more of the following values:

• help amplify attention through more effective advice/recommendations
• foster and protect reputation
• help amplify talent development through rich learning environments

The real winners will realize that amplifying return on attention, building reputation and developing talent are deeply and intricately related – the most valuable platforms will address these needs in powerful new ways.

Bottom line

Bottom line, if entrepreneurs want to build hot properties that can be flipped quickly, relying on advertising as the primary revenue source in the near-term may be OK – it will position you for a robust exit as long as investors stay focused exclusively on the first shift (I can hear a lot of my entrepreneurial colleagues breathing a deep sigh of relief at this point). 

On the other hand, if entrepreneurs want to build enduring businesses that will change the world, resist the temptation to become too dependent on advertising. It’s OK to offer many products and services for free (in fact, that will be essential for success) but just be sure you understand your role in a broader ecosystem where someone (even if it is not directly you) is making a ton of money with platforms and services that people will pay for. In particular, look for ecosystems with platforms and services that generate increasing value as the number of participants expands.

(PS – I appropriated the title of my posting from a great YouTube video of the same name – the video, created by Charles Frisch, looks at globalization and information trends and is well worth viewing. I believe it was Jean-Louis Gassee, a Silicon Valley entrepreneur, who first used the term.)

Addendum: Here's another great YouTube video that captures the dilemma of many advertisers (hat-tip to Max Bleyleben).

Comments

[Jeff Paul Internet Millions]

I must say that it seems their target audience is the 65+ age group only, which led me to see traditional television advertising as almost a dead form of marketing.

[Nate Swanson]

Although internet advertising is becoming the wave of the future. We cannot overlook the fact that many people are still swayed by the old fashion kind.

[Homemaker Barbi (Danelle Ice)]

I have to agree with you that the shifts from traditional to digital advertising are dramatic and will trigger not only the intended but unintended consequences as well. I contemplated this very idea while watching the NBC nightly news and musing about the sorry selection of advertisers showing commercials during the breaks. It seems their target audience is the 65+ age group only, which led me to see traditional television advertising as almost a dead form of marketing. Thank you for the great article.

Homemaker Barbi (Danelle Ice)

[Shaw Mills]

Insightful article. Question - literally million dollar is - when will the shift happen.

[Bart Stevens]

John,

FYI : http://www.ichoosr.com/blog/

Thanks!

Bart

[Dr. Letitia Wright]

offering product placements is a great way to get exposure in media at the cost of products

[Wayne Mulligan]

Hey John,

Much of this argument was predicated on a couple of assumptions you made:

"Aggregate advertising spend in the US is likely to experience a cyclical downturn as the economy softens"

And that intention targeting ads are decreasing in performance.

Google's revenue and click-through data released yesterday sort of negate those assumptions...how does that fit in (or not) with your thesis?

-Wayne

[Annie McQuade]

Thanks for this blog. Great stuff, truly. What is so interesting to me about this 2.0 or 3.0 culture is that everyone is looking to make money (a noble endeavor that I fully support) but they are looking to make money in the same ways they always have not recognizing that we DO NOT live in the same world we always have. If we fail to recognize the actual patterns and trends in front of us, we'll never make money. If we approach it like we always have, we'll never make money. If however, we look at how things actually are, and are willing to experiment beyond the traditional container of advertising, we will eventually make money. In the process, if we experiment in the right way we will create a loyal customer base that talks to everyone about what we're doing, and that will make money.

Thanks again. Really appreciate your contributions

[Mike Bonifer]

John, thank you for the prescient post. You just sold a book.

[Jake Yarbrough]

Fantastic. Thought-provoking. Terrifying. Inspiring. Great post. I'll definitely be back to read again.

[Randy]

What I find of interest is that there is a certain shying away of traditional web advertising. You mention the death of the banner add and so I went to as many sites as I could find and saw that the banners seemed to lack the attributes as defined by Kevin Kelly. Moreover I have a notion that the e-mail will become the next information aggregator fro social network updates and that is all it will be used for...a dumping ground for all of your updates so you can save some and ditch the rest. I'm still waiting for RSS feds to be editable so I can dump the feed items I have no interest and keep interesting one around for a while.

[Richard Stacy]

Here is my take on the future of advertising - which I wrote March last year.
http://preview.tinyurl.com/2w96bl

[Jeff Popoff]

Interesting thesis John, enjoyed reading it.

Jeff Popoff

[Glenn Nicholas]

John, in response to your list of things to seek out scarcity. Attention, reputation and talent are all good, yes. But maybe permission is even more important, likely to be the most valuable commodity online.

[John Allsopp]

An excellent take on the whole free/advertising/business models thing.

It's not just online industries that are being changed by such thinking - with even such capital intensive industries as air travel moving in part toward business models that drive low cost, or potentially free airfares - RyanAir being a well known example.

BTW, I can't verify this, but AFAIK, it was Jean Louis Gasee (Apple, then Be founder) who popularized, if not coined the term "shift happens".

thanks again

john

[Kin Lane]

It is funny how some individuals involved in companies affected by shifting have to find blame on someone else.

Rather than just realizing "Shift Happens".