10 June 2009

Dinosaurs Walk Among Us (aka the big unified theory of many small things)

Fundamentally, I believe that we now have clear indications that many of the large media companies are either fucked (print) or in deep peril (TV). In the case of print, this is largely the result of the steady increase in operating costs since the early '90s (print, paper, postage) and the dramatic decrease in revenues from advertising over the last ten years (largely driven by a combination of fragmentation caused by technology, a change in the control relationship between brands and consumers and demographic shift). In the case of TV this is largely due to fragmentation in TV due to cable etc, technology innovations like VOD, DVRs etc, a dramatic shift in user attention to the internet, the rise of low cost competition for advertising dollars (internet) which can offer measurable ROI, the change in the control relationship between brands and consumers and the collapse of two of the top sources of advertising dollars (financial services and automotive).

But in both cases - the real and direct cause was arrogance and ignorance. The media companies have had more than a decade's warning that this was coming. They even had an early warning (dot-com) which they ignored after the bubble burst. In fact, they've seen two prior illustrations of what could happen (ESPN taking out Sports Illustrated and digital distribution taking out the recording industry). None the less - they either didn't want to believe that this was coming, couldn't imagine that it applied to them or simply didn't understand it. Nothing is static. Nothing is monolithic. Change is inevitable -- regardless of whether or not you want it. And these businesses have waited so long that now it's likely too late for many of them.

These large media companies came to exist through consolidation and expansion at a time when there was a concentration of ad dollars, increase in ad costs, a control relationship which enabled "rinse and repeat" advertising forced upon consumers and limited media options for these consumers. In this environment, these large media companies made sense. Now that ad dollars are not concentrated, spends have decreased (and efficiencies and measurability increased), the control relationship has reversed and options for consumers are near limitless -- very large media companies don't make sense. And not only do consumers have more choice - worse yet for these companies, consumers are choosing to maximize these options. They are in fact demanding more choice and are getting it.

This massive change has been at least partially masked by demographics. The change has occurred largely in the youngest audience segments and has occurred very little if at all in the oldest (until recently). As a result, it has taken years for it to start to show impact on the aggregate and as such not only have the companies been able to ignore it - so have analysts. But as the trend slowly rises through the age segments and as the market overall ages - we start to see an exponential wave.

With the introduction of affordable and efficient methods of reaching consumers - methods that are measurable and most of all are performance based - large media budgets have finally begun to shrink. with fewer reasonable venues to spend your money (print going away - prime time broadcast not making sense for all but a few brands - radio gone) total ad budgets will go down on a per client basis. To be competitive in the current market, media companies are having to cut their CPMs. This is also going to decrease total ad budgets per client. In addition, many of the large media companies long ago lost sight of who their "audience" is. Many of them began to act as if they were in the business of serving advertisers - rather than consumers. Their offerings, as a result, became less and less focused on giving consumers what they want -- and consumers figured this out.

To make matters worse - as mentioned above, the control relationship between Brands and Consumers has changed. Brands once owned the relationship and used this dominance to force messaging upon consumers. This lead to the large, national, untargeted, mass media "rinse and repeat" advertising campaigns. These campaigns were effective and expensive. With the control relationship flip-flopped, consumers are rejecting this sort of relationship and not only are often uninterested in having a "conversation" or relationship with a Brand - they are having these conversations more often between each other (with the Brand not invited). This means that this style of advertising and marketing is now just expensive (and in no way effective). In an ROI-driven and efficiency driven marketing world - that's a fail. As these campaigns once represented a huge percentage of total advertising dollars - we are seeing further shrinkage in spend.

Beyond that - the change in control relationship actually calls into question the effectiveness of traditional advertising - period. You could make the case that there are two kinds of "traditional" advertising - advertising for awareness and advertising for sales. The argument can be made that advertising for sales is a solution for a failure to establish a relationship between a Brand and the consumer. If the control relationship is flip-flopped, then advertising is no longer an effective solution for that problem. And if media no longer has effective reach or brand affinity, then traditional media advertising (as opposed to "word of mouth" or even PR) is no longer efficient or effective for awareness.

The error in the thinking of many of us (including me) has been "the money has to go somewhere." We've assumed that as TV ad spends decrease (for example) the money will go to Internet, or in-Game or out of home. But it doesn't have to. It can simply go away. It can be spent on things other than advertising. This isn't going to happen over-night. But it's going to happen. In fact, it IS happening.

Large advertising and media agencies arose during the time of the growth of large media companies. The ad agencies grew in the same manner - and grew to capture the maximum ad budgets and justified their existence based on the size of those budgets and the complexity of advertising across so many programs and media types. The problem is that, while the complexity will still likely exist, the budgets won't. And more than that - if the large media companies collapse - the relationships between the agencies and the media companies go away. Efficiency becomes more important. Most of all -- the money goes away. Agencies make their money (when you get right down to it) as a percentage of media budgets. As total money spent on advertising goes down.... the money the agencies makes goes down.

Large agencies are inefficient. More than that - agencies' revenues are basically directly tied to headcount. In order to get efficient - agencies will have to get small. In order to be profitable with decreased revenues - agencies will have to get small. In many cases - clients have realized this. They've realized that smaller, more efficient firms are not only better companies but they are more likely to be innovative and be able to adjust to the changing market (offering "word of mouth" marketing services, guerilla promotions marketing, etc). And, of course, they're cheaper...

The problem is... agencies have morphed into non-diversified conglomerates owned by publicly traded holding companies. And simply saying "we'll get small, have lower sales, but still be profitable" isn't going to work for this kind of company. As such... we can expect a brutal fight for dominance for a shrinking market among these titans - and I think we can expect that the winner will still, eventually, lose.

Now... some caveats.... First of all - this is going to take a while. It's not an overnight thing. There is going to be enormous conflict and fight that is going to delay this. I think it's likely going to involve attempted legislative actions at a federal level (multiple ones). I'd expect things like the cable companies pushing back hard on the content providers to put premium content in gated (either metered or subscription based) online offerings that cable companies at least partially control.

And in addition - there are some exceptions. The more diversified a company is (especially if the company is agile and ruthless and flexible) the better its odds are. If News Corp or Disney are willing to quickly cut loose assets that are going to fail and are willing to quickly shed business models and partnerships that are going to underperform and are willing to use the tremendous leverage they have NOT against consumers but against partners and vendors... they'll survive. The more a company is Entertainment (rather than Media) the better the odds.

There are some complexities and additional issues beyond or underlying all of this. I think that economies of production scale still matter - but that these economies of scale do not actually imply large companies. I believe that for all of this to work content creators must get paid - but this doesn't mean that the only way for content creators to get paid is for their to be large companies. This is a commonly assumed myth - but the reality is that distributed "collective" entities coupled with effective aggregation and paid syndication would (in theory and for example) be more effective and efficient. More than that, every point of value creation should get paid - and in the current model this is not happening.

The problem is that right now an enormous amount of the money goes to points where there is no value creation. And there are big pieces of the current process (smashing trees to make books, most activities of the record companies, all sorts of legacy crap) that make no sense anymore. Consumers pirate music not because they hate the artist and don't think they should get paid. They steal it because they know that the money never gets to the artist. The steal it because they hate The Man - not the Artist.

In general, consumers over the last 10 years have become a lot smarter about what they're paying for and they've learned that they can unbundle costs - so they will. This is obviously making some folks very unhappy. I think it's important to understand that consumers are largely not looking for things to be free - but instead to pay for value and pay for what they want and pay in a manner that they think is ethical and fair.

It's the unbundling that is the crux of the issue. And the more a company's business model is dependent upon bundling - the more pain they're going to feel and the more danger they are in. This is why, fundamentally, I think cable companies are in the most trouble in the short(er) term.

I think there is going to be (as a result of the danger to cable companies) a push for metered bandwidth. I'm going to go out on a limb and say that this is going to be the catalyst for the start of the end game. The consumer backlash is going to be enormous - and the opportunity for new services to get into the game and grow quickly will not only exist but will be exploited. This is going to be ugly.

And all of this doesn't apply just to media/ad agencies and the big media companies. Something important is going on at a fundamental level on a few key dimensions. First of all scale used to be considered the end all be all - and it looks like it doesn't matter as much as it used to and it may in fact be a negative soon. In fact, I think it may already be a negative. I can think of few if any companies of more that 100 people that are not dysfunctional. Given the coming pace of change and flexibility that will be required - and given the issues with the huge fluctuations in revenue we've been seeing - I don't think large, cash consuming dysfunctional organizations have good odds. Secondly, consumer consumption is changing dramatically. I think we're seeing a regression to the mean -- rich countries are regressing to spend less while undeveloped are regressing to spend more. This has societal implications, cultural implications, financial implications (think stock market) and massive implications for organizations. I would also hypothesize that the "true mean" is in fact coming down as well - I think that "target normal" consumption per-capita 30 years from now will be less than it is today. This, of course, is largely driven by the regression in the rich countries which spend a disproportionate percentage of money but also is driven by the globalized economy and a new found lack of faith in long term economic prospects for growth (worldwide). Finally, the combination of connectivity, portability and real-time communications has profound implications across all of this.

In essence, I think most of us saw a long time ago that print was in trouble.
Then we saw that radio was in trouble.
Now people are seeing that TV could be in trouble.

I think what should be clear is actually that large media companies (over all) are in trouble.

And as a result - large agencies are in trouble.

I think we could see the collapse of some large companies in two entire industries - Media and Advertising. And I think that the companies that don't collapse are either going be incredibly agile and well diversified or are going to end up splintering into many, new, smaller companies.
It's not going to happen over-night.
But I think it's going to happen.

I simply think these companies have become so large that, when the seas drop, their bones won't be able to support them any more.


At 8:39 AM, Blogger Sarah said...

"But in both cases - the real and direct cause was arrogance and ignorance."

Right on, Chris. This is a sagely written, uber-intelligent post clearly honed by deep experience.

As an ex ad agency, global giant vet, I too have watched the bloat and BS of these companies as they ignored the seismic signals. Thanks for laying this all out so succinctly. (Valerie is right -- she does have a wicked bright boyfriend)


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