By Jim McCarthy Jan 20, 2009 2 comments

It’s Time to Stop Trying to Save Advertising

I loved this post by Larry Kramer in The Daily Beast, called “Let Newspapers Die Already.”  Here’s a key snippet:

“It’s one of my favorite lines in Citizen Kane, the 1941 classic about a newspaper publisher. Kane is responding to his top financial advisor who just pointed out that Kane’s newspaper empire is losing a million dollars a year.

Charles Foster Kane: “You’re right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars next year. You know, Mr. Thatcher, at the rate of a million dollars a year, I’ll have to close this place in…60 years.”

Turns out he was right, give or take a few years. Sixty-eight years after Kane uttered those words, the newspaper industry is staring death in the face.”

Well, you called it, Mr. Kane.

But, let’s talk for a minute about where the newspapers are, and why they’re facing extinction.  It’s not because they’ve been replacing their mogul owners’ carelessly discarded toboggans, but because their business model stopped working, and they didn’t replace it with a new one.

To review, here’s how it used to work:  newspapers had a kind of local monopoly because readers had few sources of information about the world; because of that, the papers could sell print advertising to businesses because, like readers, businesses had only a handful of ways of reaching potential customers.

Meanwhile, consumers not only lacked news and information; they also had extremely limited information about products they might need or want.  Turning to the newspaper, they got both, and, being exposed to far less advertising than today’s consumer, probably even saw the advertising as somewhat useful.

That earned the newspapers the precious attention of consumers and enabled them to broker that attention to advertisers at good prices.

But if you go back through the last couple paragraphs, none of that is true anymore:  consumers now have lots of ways to get information about the world and about products they’re thinking of buying; businesses have lots of ways of reaching customers; consumers are exposed to an endless stream of paid media, and they don’t have a compelling reason to pick up a newspaper.

The model, in other words, is not just broken.  It’s based on faulty assumptions, like a trying to run a car on Kool Aid.

The Kool Aid will not burn.  The car will not go.

And everything I just said about newspapers is true of broadcast TV, magazines, and even websites dependent on ad revenue.

What makes you think your advertising is valuable in a world of consumers awash in information and hostile to advertising?

When I was at GeoCities (lo, these many years ago) we routinely got $20 CPM (cost per thousand) for regular old banner ads.  That means on a big site like ours, we could have lots of advertisers paying us $10 to $50k a month to be present on our site.

Today, the industry standard (the real one, not the one on rate cards) has dropped to about $1 CPM, which means those same advertisers would be worth $500 to $2500 a month to us.  Not enough to pay for our beer and chips around the foosball table.

This is what Adrian Slywotzky in his b-school classic Value Migration calls a ‘migration to a no-profit industry’ on the part of the advertising business.  Slywotzky, in 1996, talks about the airline industry, but could be saying many of these same things about advertising-driven businesses today:

“In the past two decades, airline companies have made 15 to 20 strategic moves and countermoves.  Many were errors.  They did not create value growth, but rather contributed to a pattern of large-scale value destruction.  The Value Migration pattern in the airline industry was initiated by an external event in 1978:  deregulation.  Unlike many external events, however, every airline CEO knew this was coming.”

Replace “airline” with “media companies,” “1978” with “the mid-90s” and “deregulation” with “the advent of the Internet” and it rings pretty true.

Slywotzky goes on to say that, “There is no law that says there must be profit in an industry.  An entire industry can become and remain profitless.”

Why should an industry based on selling a product that nobody wants and of which there is an amazing overabundance ever be profitable again?

Surely, businesses need a way to reach customers, and somebody’s got to fund the creation of the content we all love.  Until recent history, both of those questions had a single answer:  Advertising.

Isn’t it just possible that now they’re simply two separate questions?

UPDATE:  Google eliminates print ad program.  Not bad news for Google.  Just killing a dumb idea before it metastasizes.  Not that Google Ad Words isn’t subject to the exact same forces as above…

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