Mar 18, 2009

Why is it going to be increasingly more difficult to subsidize news with advertising revenue?

The challenge that journalism has always been facing is to be financed. The cost of information has never been fully covered by the end customer. Revenue sources vary by media and by countries. Today, advertising is the main -- and very large -- source of revenue. But, governments, special interest groups, readers (for print), foundations..., also contribute to the financing of information.

Businesses need to advertise their products and services. Media offer a vehicle that can display the ads. Either they offer mass-market reach or niche reach (local or specialized). Advertisers buy eye-balls hoping that some of them will be customers. Media, using polls, study their customers and build their sales pitch around it. They offer a limited amount of space (time or number of pages) and sell this scarcity to the advertisers.

Digitalization is fundamentally changing the game.
  1. Media no longer have the monopoly of offering a platform to display ads. Any website can display ads. Why promote the release of a new DVD on a newspaper site and not on the Target site?
  2. Scarcity does not exist anymore. There are no limits to inventory space. The limit is on the advertising side. There are just not enough ads to finance everybody. When scarcity does not exist anymore, prices (CPM) go down.
  3. Data collection is the name of the game. Before, it was difficult to collect information about customers. It is why we were using a lot of tools based on polls. Today, polls are in competition with real data collection. Why use polls when you can track the habits of each customer one by one, compile and analyze them? Today's data are much more precise than yesterday's polling data. Pages are talking to pages. Data are being linked. Devices are starting to talk to each other. The Internet is becoming this huge machine, as Kevin Kelly is explaining at this Ted conference in December 2007, full of information about each one of us. Question : how much data are we willing to give away? The privacy limits are probably going to be decided by the legislators.
In the conferences I give, I love to say to media executives, "we are not any more in the news business, we are in the database business". Know your customers. Then anticipate and serve targeted information and news content, and targeted commercial messages.

When you are losing, step by step, your monopoly of serving ads... When the price to advertise is going down... What do you need to offer to stay the best advertising vehicle? You need to offer the best ROI. In other words, you need to move from an eye-ball logic to a transaction logic. And you'll get your dollars if you are able to prove that your vehicle helps to increase sales.

I know ! It is tough because all of a sudden you become somewhere responsible for the quality of the advertising and the quality of the product/service. It is a total paradigm shift. The total nightmare for the media and advertising business. But, Google, with CPC and CPA based ads, has already been changing the game. A few words online (ad-word campaign) can have better ROI than a very sophisticated and expensive ad on TV. Tough times.

Not only does the media need to display ads, but also they need to show to the right person. And on top of that, the right person for a business is a person that buys the product or service advertised. Bottom line is that businesses need customers. The winners will be -- are -- the ones providing the best engine to get those customers.

So, if news organizations still want to finance their operations with advertising dollars, they need to ask themselves : "Are we in the data collection business?" If the answer is no, your chance to survive, with an advertising model, in the medium-to-long term is close to zero. And if advertising revenue dries up, who is going to subsidize the information?

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5 comments:

  1. Mike @ Epic1:34 PM

    Jeff, great post. I actually posted at Mediapost right after your entry. I 100% agree with your analysis. Online display advertising is not suffering from a lack of creativity, or an exhaustion of ad units, or anything else other than an economic normalizing and right-sizing. The inherent qualities of advertising online go way beyond what one can do in print, tv, etc. because of the data available to advertisers and the abundance of choice on where to spend their dough.

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  2. Jeff,
    great post.
    I really appreciate your second point.
    As for the evolution of an eye-ball's logic to a transaction one, don't you think this is far more than that : the aim is to developp an interaction logic.
    Also, could we explain the situation because of a "bubble" regarding the amounts of advertising versus ROI in traditional way ? I mean, everybody agreed to sell/buy advertising on TV and papers without really knowing what was the real ROI. Just conventions between buyers and sellers. But the web, with its digitial "footprints" (clicks) has begun to show that the whole economy of this sector wasn't so high (thus CPM has gone cheaper and cheaper...).

    (hope this is clear, as I don't practice enough my english).

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  3. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


    Kaylee

    http://www.craigslistpostingtools.info

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  4. I think the new just-announced Google profiles is about Google getting people to offer themselves up as ready targets (so a DIY sort-of thing) in exchange for being able to control what kind of information the outside world sees when they Google your name.

    Just think of all the additional target-feeding information Google will be able to aggregate and analyze.

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