The economy is in a rut because of Big Risk – beyond just the subprime housing market.
First, it was Big Finance – AIG and company. Second it was Big Media – the NYTimes and friends. Third, it was Big Auto – GM and gang. It’s quite plausible that the next victims will be Big Advertising – WPP et al.
What’s the relation?
-> Each of them has profited from heaping risk on their customers … when they should have been the ones taking risks.
The Web learned this lesson starting in 2001 on to 2003:
The Dot Com Bubble and Burst happened because:
- Dot-coms’ business plans stated: (i) Get lots of users (then aka “eyeballs”) (ii) Sell ads on a Cost-Per-1000-impressions (CPM) basis
- Humans don’t like interruption advertising – like CPM ads – and they ignored most of these CPM banner-ads
- The measurably poor Return-On-Investment (ROI) led advertisers to stop buying these ads
- As a result, the dot-coms’ business plans broke. And the dot coms went broke.
Since 2003, however, companies operating on the web learned the lesson of risk distribution.
They measured the risks of buying ads, compared them to their ROI and priced the ads accordingly. This was done largely by virtue of the widespread adoption of web analytics software, which enabled advertisers to precisely measure their Return On Ad Spend (ROAS, an ad-centric version of ROI).
Thus a transparent market developed where both parties went in with their eyes wide open, making precise cost-benefit analyses.
One company in particular learned the lesson and applied it thoroughly: Google.
This transparent market led Google to shift from selling banner ads on a flat-CPM basis – where all the risk remains on advertisers’ shoulders – to selling their now famous cost-per-click (CPC) ads. With CPC, advertisers only pay for clicks they get, which shifts some of the risk away from the advertiser and sends it over to the media publisher (Google, in this case).
Furthermore, rather than dealing only with advertisers who could afford a “minimum-spend” in the tens-of-thousands of dollars – a common practice in Big Media – Google opened its doors to anyone with $5 to open an account and a few cents more to spend on ads. This obviously makes trying out the ads a lower-risk proposition than news-media advertising.
If that weren’t enough, Google combined this with a simple math formula that rewards the most efficient advertisers – those who can generate the highest ROAS and are thus able to pay Google more for advertising.
Unsatisfied, Google has continued to help its advertisers become more efficient, by offering advertisers:
- Decent quality web analytics for free,
- An ad platform that lets them test one version of an ad against another to see which performs better,
- Programming goodies (APIs) that let third parties write ROAS-maximizing-software (facilitated by the trend making data a commodity),
- Fancy testing software to improve the selling efficiency of their [the advertisers’] own websites,
- Numerous filters and targeting mechanisms to only buy those ads that work for the advertiser.
Of course, we all know that by empowering its advertisers to cut the fat in their advertising programs, Google has gone near to the edge of bankruptcy become the world’s first $100 Billion Brand. That should tell you something about building a brand with word-of-mouth vs branding via advertising [your own wares], ironically enough…
But this hasn’t just been Google’s story – most of the web economy as a whole has integrated this risk-distribution lesson as a fundamental operating principle.
Others took this redistribution of risk even further with the cost-per-action (CPA) model, where advertisers only pay for a specified result. Thus the majority of the Internet Retailer 500 – the web’s largest ecommerce operations – now pay commissions to CPA publishers who refer them sales.
This is particularly profitable to expert media publishers who test their advertisers’ efficiency against each other to maximize their net yield. Numerous pieces of software and companies have emerged to facilitate this. Read this for more on Yield Optimization.
Now let’s compare that to housing, finance, news media, cars and non-search advertising… The NYSE dropped 7000 points over the past 2 years.
Big Finance pushed credit in varying forms and descriptions at consumers who could ill afford it. The loan sharks who offer “cash advances” and “payday loans” continue this practice as we speak.
It’s clear therefore that TARP is a bailout for the wrong people, unfortunately. It deals with the symptoms – the failure of risk made Big by centralization in a handful of large companies.
The problem, however, was that the risk was made Big by having it aggregated amongst a few financial companies.
In other words, the risk for the economy as a whole was terrible because it was poorly distributed. Half of the problem lay with those who couldn’t afford the debt, while the other half lay with the centralizing, the aggregation of this risk in Big Finance.
Additionally, Big Finance has been resistant to innovation, which is perhaps the worst risk you could possibly take!
For one obvious example, peer-to-peer lending of the type covered regularly on Jim Bruene’s NetBanker, hasn’t quite been welcomed by Big Finance. Why haven’t any of the big banks adopted Prosper.com‘s technology and offered to facilitate their customers’ investments in other people’s loans for a simple monthly fee?
There’d be a wider distribution of risk, fewer [opportunities for institutional] crooks, and smart financial management generally.
Big Media forced advertisers to take all the risk upon themselves, for decades.
Perhaps ironically, traditional ad agencies priced their services partly on the size of the ad spend, or “media buy,” that their clients made. Yet they never optimized this spend by tying it to sales metrics, because then advertisers might cut the ad spend that was just “fat” and not producing revenue!
For why this thinking is short-sighted, see Google for what advertisers do when they successfully cut unproductive advertising dollars…
The most successful segment of offline advertising today is direct response advertising. Direct response advertisers built their own measurement, testing and segmentation tools. Gurus like Clayton Makepeace, Michel Fortin, and Gary Bencivenga and hugely successful companies like Agora Publishing have grown by measuring their risks and optimizing them.
If you know what a Bowflex is, you’ve seen direct response advertising. The fact that it’s still around today speaks to the efficiency of its creators marketing risks.
Of course, advertisers tried to shift the marketing market’s risk balance and transparency by experimenting with different formats and styles. That’s how viral marketing campaigns, publicity stunts and others arose.
Those experiments tried to shift the risk. They sometimes succeeded, but not on a scale large enough to affect the media market. That’s why ad dollars fled to the web when the web brought media-measurement to the masses.
The news media need to understand that their ad divisions are in the sales business.
Their purpose is not to sell exposure but to sell sales. Web 1.0 was about exposure to eyeballs, and look where that got the dot-com soap-bubbles.
The news media’s ad arms need to adopt more risk in the ads they publish, whereby they’re paid for performance. They need to build inhouse direct response teams and test ads aggressively. For one obvious example, I was browsing a travel section on a Big Media site that was super enthusiastic about a given destination. But rather than show affiliate ads for travel packages, I was shown credit cards ads.
Big Media has also bet against innovation.
Various newspapers are cutting their budgets for investigative journalism. Yet that’s the very core of innovation in news. That’s like Big Pharma saying that they’re going to stop doing R&D and just copy each other’s most popular drugs. Oh wait a sec…
From an internet marketing perspective, the existence of linkbait shows that people love feature length investigative reporting. And as Cosmopolitan magazine’s monthly “101 Ways to Have a Romantic Sundown Date” articles show, people will pay for it. As I wrote here:
I wouldn’t pay for the P.o.S. newspaper handed to me free in the subway bc the content is all wire stories + ads, and the wire content reads like it was written by a soulless monkey. It’s 100% generic.
My family still subscribes to a print newspaper, and I get much greater satisfaction reading it than the metro paper. It’s the difference between a full meal and swallowing a Hershey’s kiss.
The path to saving newspapers’ subscription business is more journalism, not less. More soul, less wire crap. More research, less rehash.
Big Auto sinned by pushing risk to the environment and trying to fight the ecological culture that has become mainstream in today’s America. GM are known for trucks and SUVs. Honda is known for the Civic and hybrids. You tell me who bet on the past and who bet on change and R&D.
Additionally, regulators failed by letting Big Auto get to the sizes they did. Detroit became a [3-]company town. The result has been homes selling for under $10,000. [Source] This is similar to the centralization of risk in Big Finance’s case.
As an aside, I’d like to note that new laws need to be made for situations like this. While the current recession is terrible, imagine what might happen if Wal-Mart went bankrupt tomorrow. These obese firms are a risk to the whole economy.
There need to be caps on the percentage of a population that can be employed in any given industry. This will minimize the risk of any company’s failure, as well as encourage competition and thus, innovation. By the number of mom-n-pop shops that Wal-Mart has destroyed, it’s clear that mega-corporations do more to hurt the economy than to help.
History shows that betting against change is a sucker’s bet.
You can flip a fair coin 100 times and get 100 heads in a row, but keep flipping and you will eventually get tails. Here’s hoping the economy learns that lesson, and changes to better distribute risk. Following the lead of the internet marketing industry would be a good start.
photo credit: Steve Montgomery
Gab Goldenberg is an SEO professional. He wrote this on his own behalf and on behalf of PromotionalCodes.org.uk, a CPA site known for using voucher codes to drive incremental revenue to its advertising partners, such as Apple Computers.
Gab is on the agenda to speak at the next Search Marketing Expo, in Seattle.