The nails and the coffin — Photo Ann Nygard, Unsplash

(This is the second part of a series on the relationship between the media industry and Big Tech. Part one is here).

When I arrived in New York in 1990, the local newspapers were filled with two types of ads: the first category would be labeled “display ads” and the second “performance ads” in today’s jargon. For a car brand, the first was an ad for the Jeep Grand Cherokee shot in a scenic Arizona setting, while at the same time, the Chrysler dealership on Hell’s kitchen had bought an ad with the sole purpose of inciting a test drive. Two different goals: brand awareness and status on one side, let’s-visit-the-dealership on the other. Only the second one was measurable against its investment in the local newspaper. More realistically, both of them fall into the famous quote from marketing visionary John Wanamaker (mistakenly attributed to David Ogilvy in a previous version):

The inefficiency of advertising in print, radio, and TV has always been its historical flaw. It was concealed by the unbeatable talent of Madison Avenue to self-celebrate its creativity while flattering the flair of their clients. But the actual efficiency of an ad campaign always owed more to the intensity of its media blitz than the emotional load it carried. The ad community was living in fantasy land, which sooner or later was going to crumble in on itself.

The reckoning materialized half a century after Wanamaker’s dreadful assessment. It took two forms: a sudden rise in the performance and a terrible disconnect between the prices stubbornly defended by legacy media (print and broadcast) and what was allowed by the market.

1 . The rise of the performance

The buy-side of the ad market was craving for a big change in yields and prices and the internet served it up on a silver platter. With their heads deeply buried in the sand, the news industry didn’t see it coming.

With the advent of performance-based advertising, clients suddenly realized that they could: (a) target the customers the most likely to convert into a buyer, (b) quantify the cost of the conversion, and (c) calibrate their investment as they wish. It was a dream come true, not only for the big brands that were under pressure to justify their advertising expenses but for the little guy as well. To come back to my earlier example, not only was the marketing department of Chrysler able to measure the effects of its outflow of money but the New York Jeep dealer was able to see how much it had to spend to get someone in the store.

Blind and deaf, the newspaper industry was dead before it knew it.

The press magnate William Randolph Hearst (1863–1951) once said: “If you make a product good enough, the public will make a path to your door. But if you want the public in sufficient numbers, you would better construct a highway. Advertising is that highway.”

Hearst was wrong on the size and shape of the road. Instead of a highway, the internet created a path of conversion with meandering, sinuous alleys divided into multiple branches that reach the exact profile of different customers. For instance, it could be the guy in the market for an SUV with adequate purchasing power (based on his revenue bracket, his credit history, the kind of purchase he makes, where he spends his vacations, and the size of his family…). If a plumber advertises on Google or Facebook, he can fine-tune his ad to reach people in a radius of 5, 10, 15 miles. And it works. 76% of mobile users who searched for a nearby good/service visited a local business within a day, according to data from Google. 28% of those visitors made a purchase, too. Nobody could beat that. Especially the regional and local media who became the principal victims of the shift towards efficiency.

2 . A lethal deflation

At a first glance, the chart below looks like the textbook case of a market replacement. It comes from the Australian Consumer Competition Commission which issued, in 2019 the Digital Inquiry Report, a 670-page opus, which constitutes the basis for the national case against Google (Australian media economics are well-documented and considered as a credible reference for other markets.)

It shows, in yellow, the rise of online advertising and the near-perfectly symmetric plunge of the print media.

Case settled. Online ads killed the print ads. But as always, it’s more complicated. In fact, the refusal of legacy media to acknowledge the effect of the sudden performance of digital ads translated into a spectacular contraction of ad expenditure as advertisers migrated to cheaper, more adjustable, and more measurable, new forms of advertising. The chart below shows a drop of 25% in media ad spending as a proportion of GDP, across four different markets:

This table comes from the Progressive Policy Institute, a Washington DC think tank, which produced some of the best research on the uncoupling of the advertising expenditures and the rest of the economy.

This drop of a quarter is attributable to the continuous deflation of digital ads relative to print Amazingly enough, as digital ads became better and cheaper, the response of the legacy media was to increase its prices. The PPI report reminds us of a telling example:

“For example, compare the price of classified ads in the Washington Post in 1990 and 2000: in 1990, the price of one line in an employment classified ad, placed one time in a daily edition of the Washington Post, was $6.70. By 2000, that same price had gone up to $11.06, a 65% increase. By comparison, the core consumer price index only rose by 34% over the same stretch”.

The chart below outlines an implacable mechanism which shows that during steady inflation (red), ad prices went from an index of 50 in 1982 to more than 200 in 2018. Blinded by their presumed impregnable position and the certitude that the print press was the place to go to promote merchandise (the Hearst highway), newspapers across the world continued to increase their advertising rates, peaking at an index of 400 while magazines went above 450. This took place in spite of the obvious explosion of digital advertising as these peaks coincided with the real take-off of digital ads with the creation of Facebook in 2004 and the maturity of Google.

In addition, the news media developed an infinite supply of pages, as no one took the decision to close off most of the inventory to ads in order to preserve some kind of scarcity. As the result, the gap kept widening:

Overtime, the entire catalog of the print media became far less attractive for brands and their media buyers than the ads sold on the internet, and not by a small margin:

Another indicator should have sounded the alarm. Among the metrics I have been following for years in the Monday Note is the ratio between the time spent on various media and the ad expenditures they carried. It is well documented by the analyst Mary Meeker in her annual State of the Internet. It clearly shows that, back in 2010, the precipice was already in sight.

Ten years ago, print media captured 27% of ad investment compared to a mere 8% of the time spent. Now it’s down to 3% of the time spent and a sizable 7% of the ad investment, which means that the correction is not even complete.

3 . Could things have turned out differently?

This is highly disputed.

No one could honestly argue that this disconnect between the rising ad rates for print media and their acceptability by the market was not visible. In the early 2000s, every media and business writer was extolling the incredible performance of targeted advertising, its obscure auction system, and its unparalleled measurable efficiency.

Could Google and Facebook be blamed for these achievements? Is it normal to think there is a justification for some sort of reparations, as suggested by some media execs (see last week’s Monday Note)? The question could be raised for Kodak, unable to seize the breakthrough in digital imaging, or Nokia who ruled the first wave of mobile communication before being crushed by the smartphone, or the typewriting sector, the VCR, vinyl records. The answer to that is clearly no. Some industries rise while others die. This is the way it works.

Others in the news sector keep saying: What became Big Tech started with a crucial advantage of the blank slate. No unamortized assets like printing plants, no legacy business structure with ossified layers of incompetencies, widespread unaccountability, multiple management layers, a salary system aimed at rewarding long-lasting average performance over attracting and retaining true talent. All of the above secured by unions and guilds, the ultimate protectors of the status quo.

All of this is true, but I can’t help but considering there could have been some alternatives.

There is the case of Schibsted ASA, the Scandinavian media giant, who very early on, in 1995, detected that the internet was about to disrupt a third of its revenue business (the classifieds ads), and eventually as Moore’s and Metcalfe’s laws would keep pushing on (better and cheaper interconnected devices), reading habits would change forever. Not only did Schisbted try its best to anticipate the reader’s shift to online, but in a pure Clayton Christensen way, it accelerated the decline of its legacy print classifieds business to allocate new resources to the development of free (or freemium) online classified platforms that would end up becoming global while carrying 40% margins.

So, yes, the outcome could have been different for large media, but probably not for the local or ultra-local news outlets whose business was doomed.

Another often-heard question: should regulators have intervened to prevent the huge market imbalances between print and internet advertising? Was it a mistake from the American Federal Trade Commission and the EU to approve the acquisition of DoubleClick by Google? Possibly. But in 2007, everybody was working on ways to further optimize the transactional processes for digital ads. The DC takeover by Google undoubtedly acted as an accelerator, maybe a decisive one, but my take is that it wouldn’t have fundamentally altered the course of the industry.

Some cracks could have been exploited by the news media like anticipating consumer behaviors, which shifted from focusing on the price of an item to being influenced by impartial recommendations — which led to more informed customers, as outlined by Benedict Evans:

After all, online legacy media could have easily taken advantage of the trust of its reader to become a clever arbiter of the good or bad in the unfathomable world of internet commerce. The New York Times acquired and developed The Wirecutter to do just that, turning it into a nice $150m business.

In due fairness, it was impossible for the management of a large publishing operation, confronted with a swarm of smart and agile competitors, to develop a radically new approach in their business. You can’t hire large groups of engineers while taking huge restructuring charges for the closing of printing facilities.

Most of the legacy media were in denial. They acted too late and too little. But they were not in a position to do otherwise.

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