Category Archives: Advertising

The End of Brand Advertising (Part I)

This is an update to a post I originally wrote in 2008 on Seeking Alpha.

The internet has witnessed the conversion of analog advertising dollars into digital advertising pennies (credit due to Jeff Zucker when at NBC for “coining” that metaphor). Despite the fact that a viewer is always just a “click away” on the internet, online advertisements command only a fraction of the cost of far less measurable media – like print, radio, and television. Consider this: an advertisement on Facebook might cost $.25 to show to 1,000 people ($.25 CPM), versus $25 for 1,000 readers of Time magazine ($25 CPM).

In the good old days of performance-less advertising, engagement didn’t really matter because you generally couldn’t quantify it. Studies on Reach, Frequency, and Recall aside, General Motors had no way of measuring the marginal benefit (much less revenue!) of a particular advertisement. But on the internet, it is quite clear that if nobody is clicking on your ad, then nobody is noticing it, much less “connecting” with it. Proctor and Gamble has likely spent millions of dollars on Facebook advertisements that attract a few dozen active “followers” – probably the same hit rate they had in Time magazine 20 years ago, but with one key difference: Now anyone can prove that people don’t engage with the advertisement! If only Facebook (and internet advertising agencies) hid such pitiful data, perhaps the pennies would somehow metastasize back into dollar form. When there’s no way to measure the marginal benefit of an advertising unit, it’s very easy to get ripped off.

Pundits will argue that with increased ad targeting, profiling, and all sorts of other algorithmic alchemy, online ad revenues will be boosted. Such talk is nonsense insofar as brand advertising (not direct response) is concerned. Rather, a seismic shift is underway – one that will not only change the nature of advertising, but will also show that the last century of offline advertising witnessed a tremendous amount of money being flushed down the toilet. We are a lot smarter than we were 50 years ago, and those analog dollars really should have been analog pennies all along.

The result of this peculiar wastefulness was (and, for the moment, still is) a “private” consumption tax for the funding of “public” content. If the BBC is funded by the British government (i.e. taxpayers), NBC is funded by Proctor & Gamble, Coca-Cola, General Motors, et al (i.e., consumers of those brands). If you happen to watch your favorite sitcom without transacting with any of those brands, then you are free-riding off of those who do spend – a remarkable corollary to the piracy of paid content. The “free content” system of the past century is no different than forcing people to buy NBC content from iTunes, but instead of the cost being charged to their Visa cards, it is tacked onto the cost of their Tide, Cherry Coke, and Chevy Malibu.

Don’t expect it to last, though. As the brands recognize that they are being bilked – rather, that there is at best a tenuous link between consumption of their goods and consumption of the free content they are sponsoring, they will be less likely to foot the bill. For the beneficiaries of free content, the internet is unraveling this whole ecosystem with unwavering speed.

If you are a media company, or a shareholder in a media company, there is a good reason to worry about what the next ten years hold in store. The enemy is not Google or the internet, but rather increased intelligence and analysis of advertising spend, which will irrevocably change the way advertisers allocate their dollars.

The Danger and Opportunity of the Intermediate Metric

Are social media companies overvalued? The question is not just a matter of revenue multiples (low or high), but rather whether that revenue is actually generating new sales for advertisers. Google convinced the world to believe in the click, Facebook has done the same with the Like, Twitter with the follower, and Pinterest is planning on unveiling the same with the Pin. Creating these “intermediate” metrics between impression and ultimate purchase is a great move to boost revenue, but must stand up to scrutiny as software eats the marketing funnel. For startups seeking to build a valuable advertising business, creating an intermediate metric is crucial, but so is ensuring that that metric holds up to scrutiny.

Let’s rewind a bit, though. Without commerce, without transactions, there would be no advertising. The point of an advertisement is to generate sales. Full stop. Brand building, goodwill, mindshare, buzz, and a lot of other niceties might come about, but even those are meant to eventually lift sales. Without a transaction at the end of the line, advertising has no raison d’être.

The challenge, though, is that it’s often difficult to draw a straight line between “person sees an advertisement” and “person buys a product.” Impression and transaction are the two endpoints of the advertising-commerce lifecycle.

And, the chronological delta between impression and purchase can be wide. A 15-year-old might be bombarded with BMW advertisements for 10 years before she finally pulls the trigger on a fancy, brand-driven car purchase. Deciding to buy Advil vs. Tylenol might take years of external inputs and supermarket trips.

Enter the intermediate metric, which is anything that falls on the continuum from impression to purchase: clicks (the Internet’s first intermediate metric), likes, bookmarks, views, shares, app downloads, recall, followers, retweets, mentions, pins, etc. Intermediate metrics help publishers (e.g., Google, Facebook, Twitter, Yelp, Pinterest, etc.) attempt to show their impact when sales are not readily measurable — either because of chronological disconnect or because the transaction data is not readily accessible. Or, cynically, and in some instances, because there are no downstream sales — making the intermediate metric the best way to obfuscate while purportedly showing performance.

intermediate metric

Intermediate metrics help advertisers show internal and external stakeholders that they’re doing a great job. It’s hard for Clorox’s marketing team to be given an instruction of “sell 20 percent more bleach this quarter and you get a big quarterly bonus!” A national “must wear white to participate” tomato fight might increase sales of Bleach without Clorox lifting a finger. So many advertisers will compensate and reward their teams for the achievement of intermediate metrics.

  • “Your goal for the quarter is to get 10 million Facebook Likes, and to get a 15 percent increase engagement on Twitter.” (This must increase sales, right?)
  • “Twenty percent of your bonus this quarter will be based on getting 100,000 mobile app downloads.” (Mobile is hot and people are using mobile phones everywhere, so it must drive revenue!)

The greatest intermediate metrics allow for the broadest attribution tracking possible (accounting for marginal intent generation), while being somewhat unique to the medium. At scale, Quora might charge for a promoted corporate answer; Gmail might charge for a bolded email; Waze might charge for a “route added.” These would all be intermediate metrics, knowing that none of these actions yield an immediate purchase but hopefully contribute to one. Without an intermediate metric, there would be a publisher-advertiser marketplace failure, since immediate “transaction” tracking would undercount efficacy and cause metrics-driven advertisers to abandon the platform.

The greatest intermediate metrics allow for the broadest attribution tracking possible while being somewhat unique to the medium.

The smartest thing that Google did was charge for the click, not the sale, because it isn’t Google’s fault if your site converts poorly (or if a sale/action is not relevant, as it is for, say, auto research).

The smartest thing that Facebook did was define the like not just as an intermediate metric, but as a quantum of self-worth. Watching Samsung hit 20 million Likes must have made HTC mighty jealous and want to respond accordingly. When I asked a large restaurant chain where they spend most of their money online, the president said “Facebook. We get a lot of likes, and that must be better than not a lot of Likes.” A click — Google’s classic intermediate metric — isn’t too relevant for a restaurant that doesn’t deliver or allow online transactions. Facebook has a potentially broader audience, yet less transactional intent — so ultimately those likes will need to turn into revenue.

As Twitter goes public, it probably needs a stronger intermediate metric that can resonate with the long tail of advertisers. It might not make sense for regular people to “follow” an advertiser like Oreo in the same way they might follow their favorite moviestar, thus making followers a poor metric; in fact, The Bronx Zoo’s Cobra (an actual snake) has more followers than Oreo. The famous Oreo Superbowl tweet was retweeted only 16,000 times. The most retweeted brand advertisement on Twitter (from Nokia) has yet to top 50,000 retweets. Yet perhaps Oreo was seen by millions of people on Twitter, yielding a spike in supermarket sales, and thus followers and retweets — the intermediate metrics with which pundits seem to be measuring Twitter, are the wrong intermediate metrics.

The danger of intermediate metrics is that they feel quantitative — these are numbers, people! — but they might actually be meaningless. Ironically, both parties, advertisers and publishers, often have a vested interest in separating them from sales — for the short term — lest the music stop. Separation allows for “quantifiable metrics” when sales are just too hard to perfectly measure, so advertisers can keep spending and publishers can keep charging.

If a company’s revenue is based on selling questionable intermediate metrics, be cautious — no matter how quickly that revenue is growing. Sometimes metrics are purely about internal vanity and do not last. As an example, “number of app downloads” feels like a key performance indicator, whereas for many companies (Supercuts has an app?!), “apps” make little sense as a paradigm. Depending on how this intermediate metric (app downloads) stands up against actual incremental sales, the whole app download market could suffer. The same goes for many other intermediate metrics. When advertisers start thinking of the intermediate metric as the final action (the R in ROI = achievement of intermediate metric), the market is inflated.

For any company — whether buying traffic or selling it — intermediate metrics are often a crucial strategy in building a broad revenue model and in having a metrics-driven approach to customer acquisition and retention. But it is unwise to divorce the intermediate metric from the final, and crucial, metric of the transaction — to ignore it, or to exaggerate it, is penny wise and pound foolish. Plenty of startups and established industries (television advertising!) will be obliterated when data finally lights the path from impression to transaction and, in some cases, reveals it to be seldom traveled.

Preempting Search

Google: 65.8%
Yahoo: 17.1%
Microsoft: 11%
Ask: 3.8%
AOL: 2.3%
(Search Engine Market Share, source: Comscore, August 2010)

Outside of a tectonic shift in search results/quality – think how offering 100x more email storage encouraged people to switch webmail companies back in 2004 — people are not going to ditch Google as their primary search engine. And Google isn’t taking any chances – by paying Dell $1B for their search toolbar to be pre-installed on new Dell PCs, or pushing Android (who’s the default search engine?), they are doing their part to make current habits continue and lock down their whole “supply chain.”

For Google’s enemies, the best way of hurting the search goliath is not to build a better search engine, but rather to give people a reason to stop searching for a wide class of goods and services by preempting search on Google. Given Google’s dependence on harvesting “transactional intent” for its revenue, the key is to move transaction initiation off of Google. The ComScore search marketshare numbers at the top are somewhat meaningless; Google could lose massive revenue while their overall search share, for non-transactional search, stays strong or even grows.

What can preempt Google search — or at least the money-making parts of it? There are two things for Google to worry about: Vertical Search and Intent Generation. Vertical Search will nip away at vulnerable parts of Google in the same way that Etsy, Copart or IronPlanet has nipped eBay – think OpenTable for restaurants, Kayak for travel, Amazon (yes, Amazon) for traditional e-commerce, etc. And Intent Generation catches people further up the funnel, before they search, and delivers them what they want, and gets them to purchase, before they start searching. Intent generation can also spawn impulse purchases and overcome inertia to get people to buy more quickly.

Intent Generation is perhaps the more dangerous, because it is stealing purchases from Google’s clutches – bypassing any kind of search.

Vertical Search

Amazon: if everyone in the world signs up for Amazon Prime (unlimited, free 2-day shipping) and becomes a loyal Amazon customer, who would search for anything shopping-related on Google? We’re a long way from this happening, but imagine Amazon as the “e-commerce search engine” and Google as the “random stuff I’m looking for when not buying” search engine. I believe the long-tail of ecommerce resellers will deteriorate due to economies of scale and lack of geographical differentiation (e.g., 40,000 offline shoe stores, but only 5 of scale online), thereby making Google less relevant for a whole category of searches, and benefiting Amazon as the largest, broadest ecommerce company.

ZocDoc, OpenTable, and Yelp: Since becoming an OpenTable convert and Yelp user, I have not searched once for a restaurant on Google, and I bet these two companies are quickly taking away searches from Google for the dining category. I’m a big believer in ZocDoc, and if that can become the Expedia of medicine (long way to go for that to happen), Google could lose another category.

Kayak and Expedia: Expedia is a great example of what Google needs to avoid. If you’re looking for a hotel in Phoenix, you probably head straight to Expedia, Kayak, or another online travel agency (OTA). Google doesn’t have much to lose here because it’s never had a foothold in travel search, but its purchase of ITA is very strategic as a way of reversing that.

Intent Generation and Catalysis

Groupon: for “impulse” purchases, things like Groupon are pushing offers to consumers rather than relying on consumers to pull (search). The half-million or so Gap Groupons sold on 8/19/2010 represent half a million customers who won’t be searching for Gap, much less any other clothing retailer, on 8/20/2010. Groupon snatched these customers (and their discretionary clothing spend) before they got a chance to search. Some of this is accretive and not preemptive, but consumers only have finite income and a million Groupons every day will have a substantial impact on Google.

Facebook: With more traffic than Google, Facebook only has an estimated 5% of the revenue of its rival. Social recommendations, a catalyst for Groupon’s success, can help preempt search, but these tend to further curate intent rather than harvest it, as Google does. The holy grail is the ability to show the perfect advertisement at the perfect time (precognition, like in Minority Report), something Facebook has a better chance of doing than anyone. The popularity of gaming on Facebook is another angle we have seen be effective – encouraging people to buy something (e.g., a new sweater at Gap) in order to get credits in a game. This is both an example of intent generation and intent catalysis; perhaps you knew you were going to buy a sweater eventually, but you decide to buy it today, and buy it from Gap and not Macy’s, in order to deck out your virtual restaurant on Restaurant City.

Payment Companies: By knowing how much you spend and where, payment companies have tremendous opportunity to change future behavior, generating and catalyzing intent. American Express recently sent me a very nice coupon/gift certificate for Barneys. A month later, when I thought about going shopping, I went straight to Barneys, and didn’t search elsewhere. It preempted my search and changed my behavior. Unlike Groupon, which offers great deals to everyone, payment companies have nonpareil data to use in targeting offers to consumers, and furthermore allowing merchants to target specific consumers. PayPal, American Express, or a resurgent Google Checkout could fundamentally change the nature of ecommerce through intent generation in the same way that Catalina Marketing has altered the CPG and supermarket industries.

With Bing, Microsoft has made a laudable attempt to out-Google Google, but Google has thousands of engineers who can quickly out-Bing Bing. The battle for search is over for now — Google won — but the battle for the underlying revenue is just heating up.

The Rise of Transactional Advertising

The marriage of brand advertising and free content is facing peremptory annulment. There is no shortage of punditry around “the death of the media company” and whether it is a just dessert or a societal travesty. But that’s looking at it from the media company and consumer viewpoint – what do advertisers think about all of this? Where is online advertising headed and what does that mean for free content?

Making content free was not a well thought out business model. Rather, before the days of Sirius XM and DirecTV, there was no more of a way to charge for freely accessible radio waves than there was to charge for air or sunshine. Making content free, and charging for advertising interspersed in that free content, was pretty much the ONLY business model back then.

And it worked pretty well, because supply (advertising “units”) was limited by the amount of content produced and, more importantly, by the narrow “channels” where such content was made available. With such low supply, high demand, and massive reach, it was easy to reach large swaths of the populace. The advertisers couldn’t really quantify their results, but they came up with a wide variety of methods to attempt to do so. Market research firms such as ACNielsen flourished to fill the need for “metrics.”

But, as I argued in my last piece, brand advertising doesn’t really work – or, perhaps better put, is superseded by “transactional advertising.”

The old logic went like this — people were more likely to buy Coca-Cola versus Carbonated Dark-Colored Sugar Water X because Coca-Cola had a brand (which Coca-Cola has spent billions on). What’s the value of Coca-Cola’s brand? Pure math – it’s the Net Present Value (NPV) of the difference that consumers will pay for Coca-Cola versus, say, RC Cola, for the lifetime of the consumer and duration of the brand. When you pay $1 for a Coke versus $.50 for an RC Cola, the $.50 difference is chalked up to the “brand.” (Yes, perhaps there are differences in taste, too – but even with an identical formula and taste, I would argue RC Cola wouldn’t sell as well as Coke). Multiply $.50 times billions upon billions of cans of Coke, and you see the power of brand.

I don’t disagree with this notion, but I would argue that it is becoming largely irrelevant for a large class of goods and service providers (think soda or television set, not Rolex or BMW), and that the “brand” advertising money can be better spent, thereby imperiling expensively produced, freely distributed content. To wit: what if Walmart refused to stock Coca-Cola, instead stocking just RC Cola? Granted, Walmart stocks Coca-Cola because consumers demand it, and consumers demand it because of the brand that Coca-Cola has created, but that can easily be reversed. If Walmart decided to stock only RC Cola and expel Coca-Cola from its shelves, this would change RC Cola’s fortunes, and harm Coca-Cola, quite a bit.

Preferential placement of a good or service at/near the point of a transaction is something I call “transactional advertising,” which I predict will expand as a category in the coming years. Transactional advertising describes a clear food chain of brand and positioning; the titans at the top are Google, Amazon, Walmart, and other “aggregators” who themselves hold considerable brand equity and/or organic traffic. Smaller players exist in niche fields: BankRate,,, Lending Tree, even have become destinations that steer consumer decisions. These have potential to be the new “media” companies in a transactional advertising universe, odd as that might sound.

This form of transactional advertising exists today, although you might not know it. Proctor & Gamble spends great effort and expense (though it pales in comparison to their brand advertising spend) to ensure eye-level placement wherever its products are sold. Many retailers “charge” for shelf-space, with the clear understanding that better merchandised goods have a better chance of ending up in consumers’ shopping carts.

Today you see very little in the way of transactional advertising online; rarely does one brand pop up in another brand’s checkout experience. There’s a good chance that will change in a major way in the near future. If old media companies can figure out how to attach themselves to more transactions, they have a fighting chance of sticking it out online.