Changing ad biz vexes new-, old-media players

Changing ad biz vexes new-, old-media players

CHICAGO -- The steady shift of advertising dollars from traditional to digital broadband media is beginning to dramatically reshape overall industry economics. It also is affecting the value and structure of established and newer companies, whose financial interests, liabilities and advantages are becoming more aligned.

Some recent developments tell the tale.

For instance, Yahoo!'s unexpected alert last week that its second quarter and subsequent earnings are being weakened by a decline in advertising growth set the stage for the revelation that Yahoo! has joined the hustle of mostly traditional media companies interested in acquiring Facebook as a quick fix to fortifying its younger demographics and related ad spending. The only reason Viacom, Yahoo! or any other media company would consider, much less try to justify, spending an inflated $1 billion on a student-based social Web site and MySpace wannabe is because Madison Avenue wants to be there. It's the reason other popular startups such as YouTube, the 20-month-old darling of online video sharing and another fertile ground for advertising, could sell for upward of $1.5 billion.

That same mentality contributed to Monday's coincidental upgrade of Time Warner's laggard stock by Morgan Stanley and Sanford Bernstein analysts in the belief that a 40% ad growth could offset similar losses in fees from subscribers, to whom 75% of the Internet search engine's current advertising is tied.

All of this movement is evidence of how quickly the playing field is leveling among so-called new- and old-media players and of how advertising remains the undisputed lifeblood of an industry that doesn't yet have its arms around how it can be created, placed, priced and otherwise reinvented in the new digital age.

It is indeed ironic that Yahoo! -- the second-most-visited Web destination behind Google -- has found itself in a position not that different from conventional print, broadcast and cable media struggling to rejuvenate and grow their leading source of revenue from advertising sales. But there is nothing sure or fast about that task given the flux in Madison Avenue attitudes and allocations.

In fact, Merrill Lynch analysts assert that Yahoo!'s warning is company specific (dragged down by lighter auto and financial services spending) and not necessarily indicative of online industrywide weakness. Indeed, an overall economic slowdown is a risk for all media spending.

But what all industry analysts fail to take into account is the extreme alteration in forms, function and value of advertising in an age of digital broadband interactivity that will impact all media.

That even Internet players can sing the advertising sales blues might not be obvious looking at current trends. Domestic Internet advertising rose nearly 40% the first six months of 2006 compared with the same period a year ago, according to a study released Monday by the Interactive Advertising Bureau and PriceWaterhouseCoopers.

However, 40% more ad spending on the Internet, which happens to correspond to about 40% less ad spending with newspapers from a year ago in some cases, has not resulted in a clean sweep for new-media companies, whose fundamental balance-sheet issues and restructuring challenges are beginning to show signs of the same vulnerability as more traditional media rivals.

While interactivity is a given for new media, there is no guarantee that even the biggest online players know how best or creatively to use that platform to take advertising to the next level -- which might be contributing to Yahoo!'s quandary.

There is overwhelming evidence of this in traditional media, where a company such as E.W. Scripps already generates more than 13% of its overall revenues online as a result of getting in sync with the interactive tapping its content and strengths compared with other publishing giants such as the New York Times, Dow Jones & Co. and Belo Corp. which are now forecasting a sharp decline in their third quarter earnings due to a pull back in print advertising and failure to translate more of their business to the Internet.

Scripps president and CEO Ken Lowe last week observed that "eyeballs are shifting faster than dollars" and that his company's recently acquired shipping sites like Shopzilla and uSwitch as "highly efficient models that get closer to that Holy Grail that advertisers are seeking."

But there are surely even bigger extraordinary forces at work.

We are witnessing the slow, painful emergence of converged advertising models that apply to and rely on new and old media, the bedrock of which is quantification. Despite a newspaper's circulation or a television network's ratings, there is no way for advertisers to know for sure the individual consumers they have reached and ways they can follow up on those static media platforms. Add to that the exploding viral, interactive forms (from click-play video to virtual local coupons) and influence of online marketing and advertising that companies like Google are about to take to the next level, and the issue of valuing ad placement and reach becomes more murky.

For now, nothing holds a candle to clear-cut interactive click accountability, despite the valid and unsolved concerns about click fraud.

The problem that remains with television ratings measurements is that they are estimated readings compared to clicks directly connected to individual consumers, the power of which is best underscored by Google's relevancy in search and advertising. That is the new advertising measurement standard to which all media must subscribe, for starters, and which static broadcast and print media find the most difficult to embrace.

The more refined, practical and pervasive applications Google promises in the future are not restricted to isolated advertising messages, like television's basic 30-second spot, but marketing that infuses any space and time, and to which consumers will respond. Brand, search, transactional and other advertisers have begun to make that psychological leap on the Web, where marketing and sales innovation can be instantly applied and rewarded.

To be sure, the models for creating, placing and pricing advertising have only just begun to surface. Even the extent to which Google can revolutionize customized advertising with search will be hindered by viable concerns about click fraud on the one hand and the pressure to produce rigorous innovation on the other. That is, in fact, the same game that television and print media know they must get into if they are to survive.

Broadcast networks are opting for what they consider the next best thing by embracing a "new advertising model" that, among other things, includes a cumulative approach for accounting for the reach of specific programs across various media devices and platforms.

This new advertising model, described by David Poltrack, chief research officer at CBS Corp. and president of research-based CBS Vision, includes DVR playback, out-of-home audiences in places such as college campuses and on popular portable Internet-connected wireless devices, and how engaged viewers are with the programs they are watching. Ultimately, all of it hinges on television networks and their distributors, such as digital cable operators, working out a model for addressable television delivery of advertising.

Any way you cut it, the new advertising infrastructure, models, assigned consumer value and overriding dynamics come down to the interactivity that print and television still don't have and that advertisers increasingly crave. For its part, TiVo is working to revolutionize the network television model with plans to sell commercial-viewing data to networks and advertisers. There are primetime commercials custom made for the 15 million DVR users who are tempted to skip past ads loaded with unique content and propositions.

Although broadcast television ad revenue was up 3.4% in second quarter and up 6.8% the first half of 2006, according to the Television Bureau of Advertising, analysts warn that bigger than normal losses could be on the way next year when analysts predict advertising growth will lag gross domestic product (GDP) for the third consecutive year, there will be a dearth of ad spending catalysts, and the shift on online ad spending will near critical mass.

Much will depend upon how quickly advertisers attach a quantifiable value proposition to their accelerated online spending -- especially if they are given interactive opportunities to develop rapport and transactions with targeted consumers. As interactivity becomes the media status quo in and out of the home, advertisers will increasing demand the opportunity to explore and pay for more the connections with consumers that can lead to their ultimate goal -- a transaction. The problem is that Yahoo! can offer advertisers that option now, and it still can suffer a notable weakness in ad revenue. How will print and broadcast media, without an interactive base, be able to avoid it?

The good news is that when media companies, advertisers and related parties finally work their way through this muck, there will be viable, constructive ways to create, sell and extend advertising into a new realm of e-commerce and accountability that will likely benefit all concerned. But as Yahoo! woes have starkly demonstrated, the long road to that end will be paved with unexpected fits and starts.
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