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The Future of the Advertising Business Model

2010 December 15

Does the ad model have a future?  Many think not.

The arguments are twofold: one based on supply and one based on demand.  On the supply side, pundits say that that consumers have grown tired of having their media experience interrupted and will increasingly avoid ads.  On the demand side, they say that marketers are becoming more savvy and are learning that advertising never worked anyway.

Both arguments are specious and don’t hold up to scrutiny.


Supply: The Myth of Ad Avoidance

At the crux of the first argument is the assumption that people simply hate ads.  They are offended that their media experience is diminished and, if given the option, will run in droves from the cheesy media owners that force them to sit through ad breaks.

This should be ridiculous on its face.  There has long been alternatives to ad supported media:  Public television, paid TV like HBO and recorded entertainment like DVD’s.  Nevertheless, TV broadcasters have prospered.

In actuality, there is no evidence at all that people make an effort to avoid ads.  It’s not that hard.  If you want to avoid banners, just download something like this.  It’s free!  Don’t like TV ads, get a TiVo.  However, despite a penetration rate in the mid-30’s, timeshifting on DVR’s makes up only 6% of total viewing and even then a lot of people watch the ads.

Besides, an ad free world is not the nirvana that some would have us believe, as anybody who lived in the former Eastern block can attest.  I personally experienced the last dying gasps of it and I can tell you that it wasn’t a pretty sight.  To get an idea what it was like, take a look at this Polish ad below reminding people how it was.

The headline reads: No Ads? We already know what that's like.

Demand: The Myth of Ad Decline

The second leg of the argument against advertising business models is that marketers are finally smartening up.  They’ve finally realized that advertising doesn’t really work and that they’ve been throwing away their money for decades. (Ooops!)

Okay, maybe this isn’t so ridiculous.  If advertising doesn’t work, business would be wise to not waste their money.  Therefore, since advertisers are spending less money, they must finally be waking up. Quod erat demonstrat.

Unless…of course…you actually check the facts.


The above chart shows the trend in global ad spending since 1997.  As you can see, advertisers spend more every year pretty consistently, with some dips during recessions.  They do it because it does work and as profit driven corporations it is in their interest to do so.

It’s no accident that the “old media is dead” nonsense reached a fever pitch during the economic crises.  What’s a bit bewildering is that, as media companies are coming back strong, some of these idiots still won’t give it up.

The Crux of Change: Owned, Earned and Paid Media

None of the above should be taken to mean that things aren’t changing.  They are, and in profound and important ways.  Probably the best way to understand what’s going on is through the relatively new framework of owned, earned and paid media.

Owned Media: This used to mean things like packaging, occasionally and other forms of self promotion, but has been expanded to include stuff like websites, blogs, Twitter accounts, Facebook pages and even TV programming.

Owned media is a very hot area right now, but I, for one, am skeptical.  I just don’t see how replacing crappy 30 second TV ads with crappy full length content will accomplish much.  As for blogs and social media, well, there’s a lot more to writing than typing.  No doubt some will succeed, but most will fail.

Earned Media: Earned media is really just another word for advocacy.  Much like owned media, it  existed before, but has become a much more serious enterprise with the rise of social media and blogs.  In the past, “word of mouth”was a  nebulous concept.  However, social listening tools are getting very, very good so “earned media” is getting some much deserved attention.

Paid Media: Buying ads, as discussed above, is supposedly out of vogue, but in reality it remains the main promotional vehicle for serious marketers and with good reason.

To get a sense of how important paid media still is, take a look at the top branded Facebook fan pages.  Almost all are heavy spenders in mass media.  Last year even Google bought a Super Bowl ad.  If budgets are shifting, it is at a tectonic pace.

The real difference is that, with digital convergence and improved research methodology, we are increasingly able to measure owned, earned and paid media on a level playing field.  When we do, TV almost always comes out on top (followed by word-of-mouth).

Our increased ability to understand our marketing environment is changing the way we operate.  I’ve gone into this topic at length in one post about brand pathways and another one about the evolution of advertising strategy.  For those who want a slightly different perspective, here’s a good article in HBR that makes similar points.

The Quick and The Dead

Marketers do not operate in a vacuum, but must prevail in an intensely cutthroat environment.  They need to launch new products, stay relevant in the minds of fickle consumers and meet sales targets while their rivals are vying to thwart them at every step.  Brands may be built in the long term, but competitive battles are fought every day and losing them is no way to win.

Therein lies the reason why the advertising business model will continue to thrive.  There is simply no faster or more effective way to get your message out.  While it is true that some brands have social media followers in the millions, in the context of mass media that doesn’t amount to much.  Nothing can consistently match the reach or impact of paid ads.

It also explains why ad spending continues to rise with almost metronomic regularity.  As economies grow, businesses need to reach an expanding consumer base (or risk losing to the competition who will).  Therefore, advertisers will always be more willing to pay to reach consumers than consumers will be willing to pay for content.

As long as brands need to promote themselves and content needs to be financed, the ad model will continue to prosper.

- Greg

18 Responses leave one →
  1. December 15, 2010

    Good perspective. The more of this kind of opinion in front of business leaders and the public, the better. Hope they catch on before they drink too much more kool-aid. Gosh, I love the free market.

    [Reply]

    Greg Reply:

    Thanks, Steve. I’m glad you liked it.

    - Greg

    [Reply]

  2. Olga permalink
    December 15, 2010

    Thanks a lot for, as always, insightful post

    [Reply]

    Greg Reply:

    Thx Olga:-)

    [Reply]

  3. December 15, 2010

    Thanks for putting this in perspective, Greg. It does seem pretty obvious from the consumer point of view that people actually need ads in some form or another. People actually ask for them via e-mail subscriptions to promotions, among other means. We like to have our favorite brands–and alternatives–top of mind when looking for a certain product. We don’t like to think, I need Widget A. To get it I’ll go to… ummm, I’ll go to…”

    Of course, when it comes to penetration and frequency, we do have our limits, I’ll grant.

    [Reply]

    Greg Reply:

    Taqiyyah,

    Good point about frequency. One of the benefits of digital advertising is that we can finally limit it.

    - Greg

    [Reply]

  4. December 16, 2010

    Very interesting perspective. It seems any time new media technology comes to market, pundits everywhere declare existing media to be dead. Clearly that has never been the case… And, I suspect won’t be the case in the future either.

    Where I would challenge your point of view is to say that new media and new ways to reach customers are making traditional media evolve rapidly. More than ever before, in fact. Personally, I believe that it won’t be long before all paid media is interactive and is designed to extend into owned and earned media.

    For example, paid ads will be designed to facilitate social interaction (earned media) and / or extend the storyline into longer, larger content chunks produced by the marketer (owned media.)

    By extending the story through multiple channels and media types, marketers create a more immersive experience that customers can dive as far into as their needs take them
    michael nurse´s last blog post ..Why don’t more people start companies

    [Reply]

    Greg Reply:

    Michael,

    I would actually agree with almost everything you said (I don’t believe all media will be interactive, but things are moving in that direction).

    What is certainly true is that paid, earned and owned media need to be integrated into one strategy, with paid media leading (it’s the only way to achieve scale quickly). Owned and earned media are much more suitable for long term objectives, but are somewhat limited tactically.

    Thanks for a great comment!

    - Greg

    [Reply]

  5. December 16, 2010

    Hi Greg,
    Very good article, good perspective. Especially the point that the current technology enables us to measure far better than before. Paid media will always be a part of a balanced campaign, although i think that owned and earned media will become increasingly more important due to the interaction/engagement factor. To my opinion another reason why ad spending has gone up is that brands currently have to work harder to keep into the evoked set of the customer hence spend more bucks on promotion than ever before.

    [Reply]

    Greg Reply:

    Anthony,

    I see your point, but demand drives media prices so the real reason why individual advertisers are spending more is that other advertisers are spending more. Reach targets haven’t changed and, over the past decade, frequency targets have generally gone down.

    - Greg

    [Reply]

  6. December 18, 2010

    Great article!

    At some point, we all need to start writing about the machine who’s goal is to overturn the old so it can take all the money spent on advertising – and keep it for themselves.

    This is, it seems to me, a major driving force behind the mythology creation you’ve called out. Google need an opportunity for revenue growth. But they’re big enough that the internet won’t do it. So, they invent GoogleTV – purely to try to steal ad spending to add to their bottom line. The result? A product that really doesn’t have a well though out consumer value.

    It’s a rampant problem driven by research companies, venture capitalists, and the entrepreneurs/company’s themselves.

    Anyway, thanks for the great post.

    …Doug
    Doug Garnett´s last blog post ..How Segmentation Becomes Fragmentation- Online Advertising’s Incredible Blind Spot

    [Reply]

    Greg Reply:

    Thanks for sharing, Doug,

    -Greg

    [Reply]

  7. January 6, 2011

    How do you explain this chart? Interest in advertising falls steadily since 2003.

    http://www.google.com/insights/search/#q=advertising&cmpt=q

    Looks like a sinking ship!
    Ferodynamics´s last blog post ..Where To Spend Your Marketing Budget

    [Reply]

    Greg Reply:

    PJ,,

    That’s a search graph. Can you explain why you think it’s pertinent?

    - Greg

    [Reply]

  8. Tyrone permalink
    February 25, 2011

    Hi Greg,

    Whether you think advertising is dead or not – there has been a change in how global leading brands view the strategy they use to communicate.

    Smart marketers are moving from interruption to engagement or conversation and dialogue.

    Sure advertising spend is up and will continue but many brands have shifted their perception of what they consider advertising- for instance twitter, myspace or even a Facebook presence is considered as advertising/marketing.

    You might want to check out this website and see examples of how people are using a new mindset and a new media mix to engage their audiences. http://www.directnewideas.com/

    Scale and reach aren’t as important as they were before -I’m sure you know about the ripple effect?

    [Reply]

    Greg Reply:

    Tyrone,

    Thanks for sharing. However, since your comment assumes that marketers weren’t interested in engaging before and that they should start “interrupting” now. I’m afraid I would have to disagree.

    Thanks again for your comment.

    - Greg

    [Reply]

  9. February 4, 2014

    even more relevant now than when first published

    [Reply]

    Greg Reply:

    Thanks Sirvon!

    - Greg

    [Reply]

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