Advertising is Not A Sufficient Revenue Model to Sustain Content Companies. Jack Myers Think Tank.

Originally published June 2008

The digital media industry will under-perform ad-revenue expectations if it continues to embrace outdated values, metrics and marketing initiatives that are undifferentiated from those of traditional transaction-based mass media. There are two future paths for advertising-dependent content companies, which I describe later in this commentary.

Beyond search engine marketing, digital media companies are looking and acting strikingly like traditional media. Executives are embracing mass media "network" advertising models that may appear viable in the short term, but will ultimately fail to deliver on the promise of a bold new interactive communications universe. Venture capital investors are the first to note this dangerous reality. Ask almost any VC who has made a bet on content-based and advertising-dependent companies how these investments are performing. Two-to-four years in, most are generating returns for investors of two-to-five time multiples. These are far below the minimum ten-time multiples they expect. At the other extreme, equity investors who have pumped billions into high-profile media content and distribution companies are struggling to realize their expected return-on-investment. Many digital media acquisitions that are dependent on advertising revenues are not generating anticipated growth and the stock market performance of most ad-dependent media companies' is consistently disappointing.

Advertising is simply not a sufficient revenue model to sustain content companies into the long-term future.

For the foreseeable future, the pool of available advertising dollars will be stagnant. There are new media alternatives virtually every day and ad budgets are splintering into micro-fragments. Advertisers are being pulled in multiple directions. Dollars are seeping from traditional budgets into search engine marketing, event marketing, cause-related marketing, merchandising, experiential marketing, location-based marketing, public relations, conversational and word-of-mouth marketing, social and mobile media, and consumer and trade sales promotion. This year's national television Upfront market could be a bell-weather for determining advertisers' continued appetite for paying significant cost increases for eroding audiences.

Unfortunately, the "tried-and-true" no longer can be relied on to deliver steady growth. Compounding that reality, "steady growth" is insufficient when investors require double digit -- and even triple digit -- increases.

I have preached evangelically for nearly three decades about the bifurcation of the media and advertising marketplace into 1) a transactional commodity business model and 2) a relationship-based brand-focused premium marketplace. Most media companies and agencies are investing appropriately in the technology resources required for their transactional businesses. Brand building, relationship-based business models and premium-priced enterprises require completely new and innovative models, and can take years before they generate returns that justify the investments. Industry realities place enormous pressure on executives to adhere to traditional business models, and companies that foster and advance innovation are often drained of resources before they can deliver the return-on-investment demanded by the stock market, equity rights holders and VC investors. Typically, implementation of new business models must be forcefully imposed by the CEO, need the blessing of investors, and they cannot be managed by executives trained exclusively in the ways of traditional media and advertising.

In the past few decades, only a handful of media companies recognized the imperative of brand-creation and even fewer made the commensurate investments in organizational resources to support them. Most investors in digital media companies remain dependent upon the transactional advertising business model, expecting to build wealth by capturing a growing piece of a shrinking advertising pie. Many are being confronted by the reality of underperformance and unachievable growth requirements.

Traditional mass media had the advantage of delivering rifle-like silver bullets to millions of consumers simultaneously- a Gatling gun affect. Today, media sellers, marketers and their agencies-– both traditional and emerging -- still seek to replicate those mass-media models, but the affect is more comparable to weakened short-range shotgun pellets. Advanced targeting tools such as behavioral, contextual and conceptual targeting are not advancing the state-of-the-advertising-art, but rather are being used to justify the further spreading of ad messages across a digital landscape of thousands - even hundreds of thousands - of websites and blogs. The digital media industry will under-perform ad-revenue expectations if it continues to define itself with outdated values, metrics and marketing initiatives that are undifferentiated from those of traditional transaction-based mass media.

There are two paths for advertising-dependent content companies.

1.) Drive mass audience reach and build powerful advertising engines for delivering targeted audiences at cheap costs based on traditional mass media metrics with added measurable interactive capabilities.

2.) Invest in building relevant and differentiated media brands that generate multiple revenue streams, and invest in organizational resources that enable marketers to connect in meaningful ways with their consumers through your brands and brand extensions, understanding this requires risk and a long-term commitment to innovation.

The ideal media companies of the future will offer both. Content companies that fail to deliver either will continue to struggle in a purgatory of under-performance.

To learn more about the Jack Myers Innovation Network and Jack Myers Relationship Services, contact Jack at jm@jackmyers.com.