Wetpaint CEO Ben Elowitz on the Future of Digital Media
This article was published as a guest post at AdAge, and is republished here for Digital Quarters readers.
Facebook will replace online display advertising as we know it. It will save digital media by reversing the commodity pricing trend. And it will become the highest grossing media property in history.
Believe me? If you’re one of the investors who was burned by Facebook’s disappointing IPO, you might not be so bullish. At a multiple of 28X last year’s earnings, Facebook’s offering price presumed fast-growing and scalable revenue streams. But the reality of Facebook’s advertising trajectory has been lagging, and continued percentage growth isn’t going to make it up.
Facebook needs a huge discontinuity in its advertising revenues to make that math go round.
Fortunately, I think we’re about to see a huge discontinuity. Facebook’s great opportunity is to create an advertising product that the world has never seen. And it can be done.
The key is in a single idea, and Facebook is singularly able to deliver on it: SELL RELATIONSHIPS, NOT IMPRESSIONS.
The first 100 years of brand advertising was built on the paradigm of a captive audience with interruption advertising in TV, radio, print, and online. That created a $540 billion market to reach a mostly-right audience at the mostly-right time, with a sometimes-right message delivered via occasionally-great creative. The basic idea being that if you reach those people with enough frequency and decent creative, they’ll eventually hear your message.
But never, ever, ever has any brand had an advertising platform that could create a relationship with a consumer before she makes a purchase.
A relationship is worth a hundred or a thousand times an impression – or more – depending on how you monetize it.
The ability to sell relationships puts Facebook in a completely different business than every other media company – and their product is orders of magnitude more valuable. To undermine that premium would be absolute folly. That’s why Facebook should never, ever sell impressions.
But with no proven model for selling relationships, how will Facebook make relationships a reality? Here are five unwritten rules that should guide them, memorialized here so we will all know what to expect:
1. Create an offering that can’t be price-shopped or commoditized
Facebook has the commodities of digital media in abundance: 900 million users, 1 in 7 minutes of our online attention, and 500 billion pageviews per month.
But they won’t – and shouldn’t – open the banner ad floodgates, because they saw this movie back in 2007: MySpace flooded the market with banner ad inventory and watched their value plummet to pennies per thousand views. There’s no scarcity of ways to reach a target demographic with a banner ad, and anything remotely similar to a banner ad will be price-compared to a banner ad.
By creating truly original ad products that have no comparables in the market, Facebook will be able to create and sustain its own price point. And because Facebook is the only game in town when it comes to selling consumer relationships at full scale, they have a lock on that market. Scarcity of sources with huge reach and a product that cements relationship for life could be a killer combination. (Sidenote to Adam Bain: shouldn’t you sell Promoted Follows for 100X the value of Promoted Tweets?)
2. Create an offering that can’t be measured in one-time conversions
Back when she was at Google, Sheryl Sandberg designed AdWords and AdSense to do something nobody had ever done before at scale: form a direct link between the cost and value of an ad. She had pretty good results – today Google owns more than 60% of the market for direct response advertising.
Now that she’s with Facebook, Sheryl knows better than to fight Google for the same pie – especially when Facebook’s opportunity is so much larger. As a medium of connection rather than transaction, social is perfectly suited to brand advertising. And the market for brand advertising happens to be 9 times the size of the direct response advertising universe that Google has increasingly dominated.
What’s more, advertisers have been pent up, waiting to invest in brand advertising on the web. To date, they’ve allocated only 40% of their online ad spend to branding, even though more broadly brand advertising garners 90%. As a relationship broker, Facebook is the one who can convince them to spend. Just as Google proved the value of direct marketing online, Facebook can prove that brand relationships can be built more effectively on social media than through any magazine spread.
3. Create an offering that enhances rather than compromises the user experience
The holy grail of media is advertising that actually adds to the value of the content. You can see it today in the print editions of magazines like GQ and Vogue – the advertising spreads are so gorgeous and smart that readers think of them as content.
Not so online. Users often think of ads as a tradeoff, a price to pay for access to free content and services. (For some high-end brands, online advertising is even seen as an image liability. That’s why Hugo Boss and Louis Vuitton have yet to embrace digital ads – they know it is interruptive rather than additive.)
Facebook is poised for this challenge. Zuckerberg has always put the user experience forever ahead of revenue today. He knows better than to devalue the audience’s experience with advertising products that serve advertisers while frustrating users. No doubt advertisers – not to mention Wall Street investors – will continue to be annoyed by their second-class status in the short term, but Facebook’s unyielding focus on user experience will serve all their constituencies well in the end.
4. Create an offering that closely guards the data
Facebook’s greatest competitive advantage is the incomparably rich dataset it owns about each and every one of its 900 million users. That data is scarce and tremendously valuable for targeting – which means that Facebook will be able to charge a premium for every advertising offering it puts forth using it.
Much to the chagrin of advertisers and publishers alike, there is overwhelming strategic value in keeping that data limited rather than selling it wholesale. Facebook will never give advertisers the data. They could sell access to the list of people predisposed to buy your product, or they could make all user data available and let anyone analyze it. The former preserves scarcity and the other destroys it.
And that’s also why Facebook will lend its data sparingly. Even in the most recent FBX announcement (an enhancement to its least valuable form of advertising), Facebook kept their own dataset out of it completely, allowing use of third-party data only. When it comes time to sell, or more realistically, lease, that data, Facebook will do it with tight controls and at a huge premium.
Remember: the media industry was once robust and profitable. What was different then? The targets were the same, but the ways to reach them were fewer.
5. Create a supernetwork that has no borders
If Facebook plays by the four rules above, they will create the killer ad offering that will finally bring the big brand advertising dollars online. But Facebook ads on Facebook will be only the beginning. Just a few days ago, Facebook took its first step in the direction of the bigger opportunity: extending those services to other publishers on the web.
I’m not talking about AdSense – I’m talking about creating a far more intelligent programmatic relationship between users, their interests, and branded content. Every publisher would be better off if they were using Facebook’s comprehensive and lifelong relationship with users to inform their advertising – and if they themselves had a way to sell relationships, not impressions. Ultimately, exporting the offering to the rest of the web (86% of user attention is spent elsewhere, after all) will send more value right back to Facebook in the form of a larger dataset. Not to mention a nice cut of the revenues that Facebook would be entitled to.
This is a huge opportunity for the entire digital media industry. Online advertising has become a commodity (thanks, Google!). Facebook is digital media’s one best hope to reverse that trend and make online advertising more valuable than offline advertising by tenfold. Google took direct marketing and made it extremely efficient, allowing advertisers to spend less. Facebook has something to sell that might actually make advertisers open their wallets more: a magic brand relationship machine that far exceeds the value of transactional clicks.
Wall Street would much rather that Facebook ignored the five rules above, because Wall Street wants profits now. Facebook wants profits forever. May the latter prevail.
Laura Lang has a proven and powerful track record as a media change agent.
As CEO of Digitas, she helped uber-marketers like Procter & Gamble and American Express move smartly into digital advertising. And she is conversant and fluid with new publishing platforms – and knows how to make them profitable.
Now, she’s been asked to lead Time Inc., and its 21 venerable titles, which include Time, People and Sports Illustrated.
Time Inc. has absolutely amazing brands with outstanding reputation, heritage, editorial staff, and customer bases; but, at the same time, the business model of magazines is structurally breaking.
What an interesting – and tantalizing – choice.
And you can’t be a media leader today, unless you’re willing to innovate on the business model itself.
Which is why Laura seems so promising.
I love the idea that at Time Inc. she’ll be able to innovate in core product, just like she did at Digitas. I also love the notion that she’ll aggressively develop new products for advertisers.
What will be new to her is the actual business of publishing – a business where Time Inc. stands stronger than almost any other player.
The central question for me is whether Time Inc. is ready for the change that a leader like Laura will want to (and need to) bring.
Indeed, Time Inc. has fundamental open questions to address when it comes to its own relevance in the digital world.
While the powerful brand of Time magazine has set the American agenda for decades, Time.com has wandered. In the past, Fortune magazine always spoke to the most important business issues and people; but today, its online brand is less clear, with basic confusion even in its home-page address (http://money.cnn.com/magazines/fortune/). This simply muddles Fortune, Money, and CNN.
To be as successful in the next century as it’s been in the past, Time Inc. will have to adapt more fully to the digital world. That means developing new business models, as well as new attitudes toward consumers, advertisers, and the product itself. It will also require a healthy reinvigoration of key brands, an area where I think Laura may especially shine.
All of this will take nuance, to bend things without breaking them.
I’ll end the year on an optimistic note, and say that I hope Laura can finesse major innovation for this major publisher. If she can, watch out world – because very interesting and far-reaching things will happen.
There are plenty of naysayers who point out that Rupert Murdoch’s new initiative The Daily — the first major-media publication created expressly for tablet computers like the iPad — is an expensive and risky bet.
But here are four reasons why Rupert is right:
1) Rupert knows the ad model of publishing is doomed. Print and broadcast command the heftiest premiums, and both are at risk of price and volume erosion as consumers cut their ties to offline media. In the digital environment, online advertising is highly commoditized: the explosion of content publishers is outpacing the shift in demand, while technologies target audience ever more efficiently. Advertisers have plentiful ways to reach a consumer.
For his part, Rupert knows that his offline publications are at risk from decreasing ad revenues, and web-advertising models are hardly an adequate solution. Whether it’s out of desperation or vision, Rupert is willing to break through — and lose money in the short term — in pursuit of a better model.
2) Rupert can afford a long-shot bet — and can’t afford not to make one. He’s leveraging his considerable influence by putting something out there that can be truly cutting-edge. A $30 million investment may seem ridiculous for a new publication — and it is. But even with that hefty price tag, this is an insignificant bet relative to the industry and consumer behavior Rupert is trying to move. Throwing money at this is OK, because the possibilities are so great; if The Daily succeeds — or even provides the key insights so his next venture can succeed — it will be worth billions.
3) Rupert has influence to change consumer and industry behavior. He beat his drum loudly last year to get paywalls on the agendas of other publishers’ boardrooms. And it’s worked; just look at The New York Times’ pending move to a metered system. This is what I love about Rupert: Unlike other leaders in publishing, he uses his voice — and his treasury — to influence the industry and consumer behavior. He’s all about trying to get to a more successful model.
4) Rupert has a friend in Steve. Steve Jobs has a lot riding on this, too. Is Apple (NSDQ: AAPL) in the device business or the media business? To date, the lion’s share of its revenue and growth has come from the sales of ever-more-advanced devices. But as device categories mature, Jobs knows growth will get harder to come by: iPod sales grew at just 2% for Apple in 2010, as the venerable device line nears saturation.
In a world where mobile devices are ubiquitous and fiercely competitive, the fat margins of media revenue-share arrangements can powerfully fuel profits. But even more attractive is the tremendous expanse of the pool: Apple’s media revenues are currently around $5 billion — a paltry sum compared to the global media and entertainment market that PricewaterhouseCoopers pegs at $1.3 trillion.
Apple has already proven that in its remarkably successful closed media ecosystem, the company’s store can earn an estimated 30% of the top-line for media sales — without having to produce any media. This happens when Apple creates compelling devices, exciting user-experience platforms, and fresh marketplaces. For Steve, the upside here is huge. And so he should be happy to tie that upside with anyone who is as crazy-aggressive as he is about getting legions of consumers in the habit of paying for media. And that list has just one name on it: Rupert Murdoch.
A fresh start and a new division — with a new concept and a new design for a new platform — is the only way someone like Rupert can have the freedom he needs to reinvent media for a new age. And only Rupert can do this — without falling into the ruts of compatibility with existing businesses or holdover assumptions from old models.
Kudos to Mr. Murdoch for summoning up the courage, and putting up the money.
Despite the significant economic pressure they are under, it’s all too rare to see a print magazine let go of tradition and embrace a new model. So I was delighted to find that at least one Time Inc. magazine is doing just that.
Stephanie Clifford’s article about People StyleWatch in the New York Times last week shows what happens when offline executives adopt a digital mindset. Clifford points to a number of things that Susan Kaufman, People StyleWatch’s editor, is doing well, and notes the results: 8.6% circulation growth in the second half of 2009 and 130% growth in ad pages in the first quarter, easily besting a shrinking industry.
Although I wouldn’t call it top-tier journalism (does “Find Your Perfect T-Shirt Bra!” really merit an exclamation point?), People StyleWatch replaces an elitist, artistic view of its subject with a pragmatic appreciation of what their audience likes. It’s a habit learned online and applied offline.
Here are five lessons from online media that the publication is successfully bringing to print:
This is more than just flexing editorial styles to meet the expectations of web-addicted younger readers. The magazine is embracing a new business model with lower costs and more attractive content for advertisers that allows it to grow in an otherwise contracting space. They are hitting on one of the key success factors for Publishing 2.0, namely an adaptive business model. Time Inc. CEO Ann Moore, who has led the People brand for more than a decade in various roles, no doubt is taking notice.
Regardless of your personal opinions of the content, the results – in both readership and profitability – are hard to dispute.