Andreas Goeldi's Blog

Times are tough for media companies. One newspaper after the other slides into bankruptcy, and most other sectors of the media industry are suffering too. This recession seems to hit media companies harder than expected as consumers migrate to the Internet and advertisers are cutting their budgets more than ever.
Most media companies still hope that revenues from their new digital channels will replace much of the lost sales volume in their traditional businesses. But so far, digital revenues have stayed far below expectations. It looks like “digital pennies” are replacing “analog dollars”, as NBC CEO Jeff Zucker recently put it.

Why is there still no really viable business model for content on the Internet? All the big Internet success stories — Google, Amazon, eBay, Facebook … — are based either on commercial transactions or on context-creating technologies, i.e. services that help users make sense of the vast jungle of information on the web. There are a few somewhat successful web-only content plays — the Huffington Post comes to mind — but their size and profitability is very modest compared to the kings of the Internet.

I think the biggest misconception in this discussion is that traditional media companies are all about content. They’re not.

The most important (and expensive) asset that a media company has is its distribution channel(s). It costs hundreds of millions to build and run the production and distribution infrastructure of a major newspaper. TV networks are even more expensive, and even somewhat simpler media like radio require very large investments.

It’s actually interesting to talk to owners of regional newspapers after a glass of wine or two. Many still see their companies primarily as a printing business. Their newspaper is just a monetization strategy, and the content they distribute is just an input factor they need to attract advertising. But the core of the business and the real pride of its owner is typically the printing press and the capability to bring printed matter into every household in their area.
The huge capital outlay for distribution is the main barrier to entry in the media industry and the reason why so many traditional media companies enjoy a cushy oligopoly or even a regional monopoly. Of course there are some companies that produce content independently of a distribution network — independent movie producers or record labels for instance. But these smaller companies often struggle to survive or have to enter into agreements with a big distributor.

In other words: For traditional media companies, content is just the bait. The real, defendable and profitable business is in distribution.

The Internet is fundamentally different. There are no comparable barriers to entry for content producers. Content distribution on the Internet is almost free. Sure, the infrastructure in the background still costs many billions, but this cost is shared by so many participants that access to the net is affordable for everybody. Every Internet user is not only a consumer, but can be a producer of content, even if it’s just one Tweet at a time.

The result is a huge abundance of readily available content. Of course, much of it is of terrible quality, as you can immediately tell from a brief visit to Youtube. But there’s more great stuff out there — literally just one mouse click away — than a single human being could possibly ever consume.

Since distribution is not a barrier anymore in the digital age, the only way for a media company to differentiate itself is through the superior quality of its content (and maybe through its brand, but that’s secondary). Unfortunately, that’s not necessarily the core competence of old media. Let’s be honest: How much of the stuff that you get on TV or read in a newspaper is really, truly great? Exactly. Not that much. The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.

But even for producers of really great online content, it’s difficult to stand out and get compensated for their work. For several reasons, both cultural and technical, it’s difficult to charge people directly for web content. And the volume of Internet advertising still hasn’t reached the level it would deserve given today’s consumer behavior. There’s another simple reason for this: Advertising agencies (in particular their media arms) don’t have a real incentive to sell Internet advertising. They make far more money pushing TV and newspaper ads.

Media agencies are a bit like financial advisors: Theoretically, they only have the best interest of their clients in mind, but in reality they will of course always prefer to sell the products that give them the highest commission. At some point, online advertising could grow to a point where it can finance many more content sites, but it will take a lot of time to overcome the ad industry’s inertia.

Until then, the way to profitability will be to try to control content distribution even under the particularly difficult circumstances of the digital world. Interestingly, a technology company (not a media conglomerate) has managed to do this for music: Apple with its iTunes store. And another tech company is trying the same for e-books: Amazon with its Kindle e-book reader. Both companies are following a similar strategy: Control the whole chain from content licensing to the end-user device — not the content itself, but its distribution. Old media companies have failed with similar projects because rivaling conglomerates were never able to agree on a common platform. Old rivalries sometimes destroy new opportunities.

To summarize: The Internet doesn’t have a business model for content because the world of old media didn’t have one either. The media industry has always extracted its profits from the control of distribution channels, not content itself. And it’s unfortunately not clear yet what will replace this model on the open Internet.

Advertising on social networks continues to struggle. But whose fault is this? Are advertisers simply too ignorant and conservative? Are the advertising opportunities that social networks are offering not attractive enough? Or is there maybe a much more complex reason?

There’s little doubt that the social web (formerly known as “Web 2.0”, and often called “social media”) is the media phenomenon of our decade. Hundreds of millions of Internet users spend unbelievable amounts of time on Facebook, Youtube, Twitter, countless blogs, discussion forums and other social media sites.

But even though these Web 2.0 sites are amazingly successful in terms of usage hours, their financial success is modest. Facebook’s costs seem to rise siginificantly faster than its ad sales. Youtube is still losing money, to the tune of hundreds of millions of dollars per year (according to some analysts). Big advertisers such as Procter & Gamble are openly saying that they’re unhappy with the success of their social network campaigns. Many companies dabble in social media marketing, but real success stories are rare. For example, Dell sold PCs for $1 million through Twitter. That’s nice — but Dell needs less than nine minutes through their traditional channels to make that kind of money.

So what’s going wrong here? Are advertisers too conservative? Or are Web 2.0 sites simply not innovative enough when it comes to monetization?

This article wants to make a different case: The social web is so fundamentally different from traditional media that we will need decades to really understand it and find the right way to commercialize it. We are at the very beginning of a long development path because social media is structured so differently from everything else that we know.

Until recently, we’ve known two types of media:

First of all, there are media that enable a 1:1 communication between two people. Examples are the telephone or e-mail.

Communication in 1:1 media is closed, which means that no third party (under normal circumstances) can listen in. This secrecy is explicitely guaranteed by postal and telecommunications laws. This intimacy is the reason that 1:1 media don’t really work as advertising channels. Unsolicited telemarketing calls and spam e-mail are the least popular forms of marketing and are often even illegal.

The second form of media are 1:n media. A single sender (for instance a newspaper, a TV or radio station, a traditional website) broadcasts its content to many receivers who typically can’t (or don’t want to) react directly to this communication.

It’s of course well known how to use 1:n media for marketing: Advertisers pay a media company to insert their ad message in the context of the normal media content.

The advertising company basically injects its message into the normal communication stream between the media provider and its customers. The spectrum ranges from a subtle presence with small ads to intrusive interstitials that completely interrupt the flow of content.

All of this seems natural enough. But historically these “classic” forms of advertising needed a surprisingly long time to emerge. Almost 150 years passed from the invention of the printed newspaper (around the year 1600) to the first publication of paid advertising in a paper. The modern ad agency, and with it the professionalization of advertising, emerged around the middle of the 19th century. Modern TV advertising was only invented in the mid-1950s, almost a quarter of a century after the first TV broadcasts. And modern advertising in general, with its strongly focused, typically very emotional messages, packaged more or less creatively, was first developed in the 1960s.

The media industry obviously needed many years to “monetize” 1:n media in the modern sense. It’s therefore maybe not surprising that after only 15 years of the Web as a mass medium and five years of Web 2.0, we have not yet found the ideal form for advertising in these new types of media.

But back to the social web: The specific new quality of this form of media is that it connects many senders with many receivers in a mostly open way. The social web, in other words, is an open n:n medium.

That sounds pretty mundane, but it isn’t. We all understand intuitively how n:n communication in the physical world works. A discussion at the familiy dinner table is n:n, and on a bigger scale a classroom discussion or a town hall meeting would be typical examples.

But when n:n communication suddenly occurs over an open, global, technical medium with persistent storage of all communications, we don’t understand the consequences at all. There is no equivalent in the physical world for an interaction between people that can be accessed by pretty much every person in the world, instantly and (thanks to search engines) with high precision.

Because we have such a limited understanding of this phenomenon, it’s not surprising that ugly social media scandals happen all the time. The recent Youtube scandal around two Domino’s Pizza employees is a typical example. Very obviously, these two people didn’t grasp the consequences of uploading a disgusting video that could signifcantly hurt their employer (not to mention their own future) to a globally accessible platform. But they’re not alone — most Internet users probably don’t fully understand what happens with the content they put on social web sites.

If this is difficult for individuals, it is even more complicated for companies. Big organizations are structured for 1:n communications. Traditional advertising is 1:n. So is customer service: When a consumer tries to contact a company, for instance by calling a 1-800 number to complain, it is a case of 1:n communication. Other customers of the same company don’t learn about that customer’s complaint.

Traditional market research works in 1:n mode too. A company surveys customers, conducts focus group studies or sells its new products in test markets. The company thereby receives information about what customers think, but the other customers typically don’t get any insight about each other’s opinions, and they don’t influence each other.

Modern corporations master 1:n communications on a very high level of sophistication. They invest significant resources to standardize their communication processes, to push a consistent marketing message and to react to customer contacts in a clearly defined manner. A call center script is a typical part of these standardized communication processes.

All of this works very differently in a n:n medium, and that’s something that completely perplexes most marketers. In a n:n medium, there’s inherently no way to push a marketing message in a controlled and consistent way to a big audience. Consumers can simply ignore the message, can react to it directly or will even come up with parodies or adversarial messages. Advertising in the social web can’t be intrusive, or else it will trigger very negative reactions.

How and where marketers should position their ad message under these conditions is obviously a difficult question. Should they just put ad banners on social media sites? Is sponsoring the right tool? Viral marketing? Direct engagement with users? Or should companies build their own online communities?

The diversity of platforms, formats, interaction modes and ad vehicles in today’s online media is confusing even to experts. Most marketers grew up in a world with a manageable number of different ad channels — TV, radio, newspapers, magazines, direct mail. So it’s no surprise that they are completely helpless when they face the overwhelming complexity of the online world.

Even worse: Consumers are now suddenly able to react to ads, in a very public way. They can also describe and publish their (often negative) experience with a particular product, and this opinion is — on Twitter for instance — made available to a significant number of people, but not necessarily to the actual manufacturer of the product. Some users now even think that it’s the manufacturer’s job to actively get all this feedback. There’s a growing number of people who expect that companies read their tweets and react to complaints automatically. And some companies already do this. Over time, customer service could change from a push to a pull medium.

This rich feedback loop is highly dynamic and impossible to control. Many a well-intentioned viral campaign turned into a marketing disaster, simply because the blogosphere or twittersphere reacted in unexpected ways. A recent example is the “Motrin Moms” Twitter storm. A pharma company put a somewhat unconventional commercial for a pain reliever on its website. It was intended to be ironic and funny. Unfortunately, some female bloggers perceived the video as insulting and started online protests, which in the end forced the company to cancel the campaign. In the world of old media, a campaign stop would have silenced critics very rapidly, but in the echo chamber of online media, the waves of outrage continued for weeks. This is a real nightmare for any old-school marketer.

So what about all the advisors that big companies pay to develop marketing strategies? Unfortunately, they’re not much help either. Most traditional ad and PR agencies are masters of 1:n communication, but are not less confused about social media than their clients. The frequently outright negative opinions about social media expressed by ad executives are easy to explain: Somebody here feels threatened, and rightfully so. Not even most interactive agencies are strongly positioned when it comes to social media. Let’s be honest: Most corporate websites that are produced by these agencies are just traditional 1:n advertising in a digital form. Real interaction is not their strength.

Traditional companies, particularly large corporations, are fundamentally badly equipped to deal with the open, complex communication processes in n:n media. Their carefully cultivated marketing skills from a 1:n world are actually a detriment to success in a n:n medium, because the discipline of strongly focused 1:n communication directly prevents real interaction with users in social media.

Blogosphere luminaries like Robert Scoble tell companies to simply start very, very transparent “conversations” on social media and to interact with consumers in an authentic and unscripted way. But that’s like telling an elephant to increase its speed by simply starting to fly — great idea, but almost impossible to implement.

So what’s the conclusion?

First of all: The problems of insufficient monetization of social media platforms can’t be solved simply by finding better ad formats or by hiring more competent sales teams. This is a fundamentally different medium, and the biggest and most professional advertisers in the world — large corporations and their ad agencies — are structurally badly prepared to take advantage of this new channel.

A lot of time and many bold experiments will be necessary to find the best way to commercialize social media. Of course, coincidences will play a role, as they have in the development of traditional media. For instance, legend has it that the modern 30 second TV commercial was only invented because TV stations were not able to find enough customers for the sponsoring of a whole show.

Who will be the winners? In the short to medium term, social media is a great marketing opportunity for smaller companies that can interact with their customers in a flexible and personal way. This is a great way to build a loyal customer base without huge resources, just through authenticity and focus.

Larger corporations will need years to adapt to the new reality of 1:n social media, and many will fail. The more Internet users participate in social media (and since even Oprah is now twittering, it’s definitely mainstream), the more important social media will be as a channel to reach customers — just not with the mechanisms of traditional, hierarchically structured advertising, but with new, networked structures that have more in common with real marketplaces.

This is a step of the same magnitude as the invention of mass marketing at the beginning of the 20th century. Mass marketing became possible through 1:n mass media, and it changed the structure of the economy fundamentally. The modern corporation would not be possible without it. It is conceivable that we will see new forms of corporate organization that are driven by the new media that are shaping our private and commercial communication.

In all the daily noise around new social media apps, platform wars or industry scandals, it’s easy to forget that we are experiencing the birth of an entirely new, unusually complex medium. It will take decades to find stable structures and explore viable business models. And we are in for a lot of surprises.

(This is a translated and updated version of an article that I wrote for netzwertig.com, the leading tech blog in German-speaking Europe.)