Kevin Watson asked:

Broadcasters, marketers and media buyers agree that, because we now live in a video-on-demand world in which consumers control what they watch and when, the broadcast advertising model is broken.  And while the media industry is still sorting through their predicament on television, perhaps the even more troubling news is that, due to the tough economic conditions the world faces going into 2009, all indications are that online ad spending will dip over the next year.  What can media companies and advertisers do in this floundering ad ecosystem?  The short answer: they will have to change the way advertising is bought and sold, measured and delivered.

Traditional television audiences are eroding.  In October, the four biggest broadcast networks reported declines in audiences between the ages of 18 and 49.   Many analysts believe that those eyeballs are moving from television to online.  Advertising Age, in a study on social networking and its impact on television, found that 25% of users of social networking sites like Facebook indicated they were spending less time watching TV because of the time they were spending online.  And more than a third of all 12 - 64 year olds online indicated they used social networking sites regularly.   With audiences being siphoned away from television, and using time-shifting digital video recorder (DVR) technology like TiVo to skip ads while they are watching TV, advertising dollars to be had in the broadcast medium are on the decline.

So media companies should simply follow their audiences online, right?  The picture is not that clear.  The current economic climate is eroding ad spending across the board.  TechCrunch indicates that in the third quarter, Google, Yahoo, Microsoft and AOL collectively eked out only a 0.6% increase in online advertising revenue quarter over quarter. reports that, while online ad revenue is up 11% year-to-date, compared to last year's growth of 26%, growth has all but stalled in 2008.   They predict that 2009 will be the first flat year for online ad spending since 2003.  Others offer an even gloomier outlook.  In a survey of attendees at AdTech New York, private equity firm Halyard Capital found most predicted digital-marketing budgets would be down 10-20% in 2009.

And even worse news for media companies: rates that advertisers are paying for digital ad space, as traditionally measured by cost-per-thousand impressions (CPM), are trending downward.  According to research by Morgan Stanley, the average CPM for a banner ad has dropped from  $3 to $1 over the past decade.  Consensus seems to be this is because of the proliferation of available inventory (places on the internet to display these ads).  In China, advertisers are paying as little as $.05 CPM because of the rapid explosion of inventory.  And MediaPost predicts that this decline in the rates advertisers are paying will extend to online video advertising in 2009, which is an area that has been enjoying a two year spike in CPMs.

But what about those social networks to which television viewers are being drawn?  Do they offer hope?  Halyard Capital found that 68% of those surveyed believed social networks are in the "strongest position to expand" among the alternative marketing channels over the next two years.   Advertisers see vast potential in social networking as a channel in which to better target advertising to consumers because of all of the personal information being shared.  And content providers see opportunities to tie together traditional media and social networking.  Broadcasters are starting to incorporate community features into their online video players.  Companies like Joost are tapping into social networks like Facebook for social video sharing.

At first glance, then, social networks seem to offer promise as an advertising haven in an economic downturn.   Sites like Facebook, MySpace and YouTube boast a tremendous number of pageviews, a higher than average number of pageviews per user, and a longer average time-on-site.  In a CPM-driven world, this massive pool of pageviews represents a virtual treasure trove of "inventory," because of the sheer number of eyeballs.  The problem, however, is that the data shows that the actual performance of ads on these social networks is absolutely dismal. Click-through rates on these sites are 10 to 100 times lower than the average for banner ads, which were already in the 0.1 percent to 1 percent range.

According to Dr. Augustine Fou, Senior VP of Digital Strategy at MRM Worldwide, a digital marketing agency, the very nature of social networking sites make them unsuitable for traditional advertising:

"While the largest Web 1.0 sites (Yahoo, CNET, New York Times, etc.) were content sites that aggregated massive audiences and supported large numbers of pageviews, the largest Web 2.0 sites are social networking sites. The nature of these two types of sites is very different. Users go to Web 1.0 sites and portals to read content or do e-mail by themselves. Users go to Web 2.0 social networks to interact with others and are usually so immersed in socializing they are even less likely to see, let alone act upon, ads, despite the large number of pageviews generated per session. This may partially explain the dramatically lower click rates for ads on social networking sites. "

Ted McConnell, general manager-interactive marketing and innovation at Procter & Gamble Co., postulates that social networks are not only ineffective channels for advertising, they are wholly inappropriate places to market in which attempts to do so alienate consumers.   McConnell poses the question to advertisers: "What in heaven's name made you think you could monetize the real estate in which somebody is breaking up with their girlfriend?"   He makes the point that "social media" is not really "media" at all.  Media is a one-way communication that contains blank spaces that constitute inventory for advertising.  Social networking is a dialog between consumers, in which advertising becomes disruptive.  Consumers were not intending to create media, they were intending to talk to someone.

If television ad revenue is on the decline, digital ad spending on the whole is trending downward, and social networks are failing to deliver on their promise to reach consumers, what can advertisers and media companies do to weather the storm?  Advertisers must ensure that they are getting the best return on investment they can on their remaining ad spending dollars.  Instead of paying for the biggest number of eyeballs they can, they should focus on advertising best positioned to make a conversion.  Online, this likely signals a needed shift from a CPM model, where advertisers pay for the number of folks who will see an ad, to performance-based measurements.  An ad model based on performance would have advertisers paying only for clicks or other targeted consumer actions.

McConnell predicts that as the economy worsens, the fortune of performance-based advertising will rise as impression-based models falter. "'Spray and pray' is a little harder to do when you're under economic pressure," he said. "So performance-based advertising will gain share over CPM."

And according to Dr. Fou, "in the Web 2.0 advertising landscape, many advertisers have already moved beyond the cost-per-impression (CPM) model to a more measurable and accountable cost-per-click (CPC) model (e.g., Google Adwords) in which they only pay when users click through, no matter how many times the ad is displayed. Some have even moved to the next step of cost-per-action (CPA), where the advertiser does not pay until the user does the desired action-e.g., make a purchase. "

How can media companies respond to the demand for performance-based advertising?  It is no longer enough to simply make inventory available, now these companies must ensure that the advertisements will be effective.  This means that it will be more important than ever to target the right advertising to the right consumer at the right time.  And media companies will have to work directly with the advertisers to ensure that advertising is tightly integrated with the content in a way that provides the right context and timing for the message.

One channel that offers some interesting promise for targeting of content is mobile.  62% of AdTech's attendees responding to the survey by Halyard cited mobile as the advertising platform that will grow the most in the next two years.   Mobile has the potential to target a consumer at exactly the right time and the right place.  Imagine walking into a drug store and receiving a coupon by text message on your mobile phone for an over-the-counter pain reliever.  That is the power of location-based advertising, made possible by the proliferation of global positioning system (GPS) technology on mobile phones, that allows providers to know exactly where you are.  This is not science fiction - companies like Loopt and NAVTEQ are already starting to serve up location-based ads on a handset near you.

And while social networks may not prove to be the holy grail in providing a channel for advertising, their vast potential for understanding and targeting consumers may still be the key to effective advertising in a performance-based world.  Dr. Fou explains that "By redefining social networks as 'the collective conversations and actions of customers, evidenced online,' marketers can instead use social networks as places to do research-e.g., test messages with real customers in a real environment, listen to how customers describe their products or services to peers, or get ideas for new products or how to improve current products. And finally, advertisers can identify influencers, mavens or 'heavies' on social networks (the ones who are most active in talking, posting or sharing) and let them beta-test and write about their product or service."

Not only can social networks help advertisers better identify, understand and influence their targets, they have the potential to exponentially extend their reach.   According to Advertising Age, there is "emerging evidence that mapping the online relationships among consumers -- creating so-called social graphs -- can be just as valuable as traditional targeting and segmentation in predicting how people will respond to marketing messages."  The idea is to not only market to your identified target consumer, but market to the other people in that consumer's social network.  The theory is that advertisers should associate "consumers who are already connected and share values and beliefs, a concept called homophily."  Yahoo and several small start-ups are starting to prove out this theory.

Finally, there may still be hope for television.  In early November, Dish Network struck a deal with advertising technology firm Invidi that involves the creation of "advanced receivers" capable of "targeted advertising delivery" and "dynamic commercial insertion."  According to Advertising Age, what this means is "[r]ather than bombarding millions of TV viewers with the same ads for things many of them may not be looking to buy, marketers could in the next two to three years send different ads to different households -- making certain, for example, that Procter & Gamble wouldn't have to pay for Pampers ads watched by a couple with no wee tykes and General Motors wouldn't have to show ads for its Hummer vehicles to a house full of Prius enthusiasts."  Industry experts believe that if consumers are presented with highly relevant advertising, they are far less inclined to skip the ad on their DVR.

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