The Demise of Online Advertising Is Upon Us

by Jason Falls |
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I always laugh when reading media reports of announcements by analysts. In the sensationalism-driven market that is today’s journalism, lots of superlatives are used as if some numbers cruncher at J.P. Morgan is the modern day Nostradamus.

One such analyst last week lowered his prediction for the growth of online advertising spend. Imran Khan adjusted his prediction of online display advertising in 2008 and 2009 saying the overall economic downturn will have a trickle-down effect. His 2008 estimate for the online display market is now $8.2 billion, down from $8.6 billion. He expects 27 percent annual growth in the U.S. ad market now, down from a 32 percent projection earlier this year.

And the reaction from the media, both in the Associated Press story and elsewhere, has been Doomsday-esque.

Relax. He’s lowering the growth projection, not saying the market will go south. You’ll have to wait another couple months before buying the beach condo in Boca. I’m not the only one who sees through the spin.

TechCrunch says total online ad spend was down 2.4 percent in Q2 of this year compared to last, the first-ever decline in digital spend from year to year. But the Wall Street Journal says online advertising rose 20% in the second quarter of 2008.

Everyone interprets the numbers differently. The simple explanation of it all is that growth and spend is slowing because the economy is slowing. Should the economy rebound, the numbers will as well.

But that doesn’t necessarily mean the online advertising world isn’t crumbling.

Another thing Khan said in his new projections intrigued me. He indicated search ad spends will fare better than display because of advertiser’s preference for, “performance-based advertising.” The WSJ article said advertisers think the safest way to reach the online consumer is through the plain text offerings of search engine pay-per click ads.

Now, I’m not an analyst, per se. But I do work at an advertising agency and I do work with clients who buy ads. My firm makes recommendations to them on what they should purchase and what they shouldn’t. Thankfully, we have expert media buyers and planners that make those recommendations because I think online advertising is broken and these hidden hints begin to reveal why.

Average click-through rates on Internet banner advertising as of mid-2007 were 0.2% according to Eyeblaster. A quick poll of the pay-per-click marketers who follow me on Twitter resulted in paid search ad click-through rates varying between two and 25 percent, depending upon the industry, craft of the ad copy and so forth.

But these are just clicks — opt-ins to see your content. There remains severe drop off from click to engagement and even more from engagement to conversion, depending upon what your conversion might be (sign-up, address capture, sale, etc.). Advertisers are much more interested in performance-based executions because if the money they’re spending isn’t driving revenue, they lose their jobs. Sure, the engagement and conversion portion after click-through is the responsibility of the advertiser, not the media property, but display ads often are, account for much more of the total spend and simple pay-per-click isn’t going to be enough moving forward.

We have to come up with something better.

By we, I mean some combination of advertising professionals, marketers and media outlets. Whomever cracks the code first will have a leg up on redefining an entire industry. What’s intriguing is that the answer is going to be a blend of advertising, content and engagement which makes me think social media thinking will have something to do with it.

No, I don’t have the answer, but certainly hope I’m a part of discovering it.

While the new advertising model hasn’t yet been discovered, there are at least two companies I’ve found that are walking down unique paths. One is pushing a video advertising solution that seems to get closer to a better payoff than what others are doing. The other is an enterprise-level platform and social networking solution whose business approach is shockingly refreshing. While neither has nailed the solution, the thinking is surfacing that indicates an answer could be on the horizon.

VideoEgg takes cost per click a step further with its video-serving solution by selling a cost-per-engagement model. All the banner ads, impression and so-forth are free. The advertiser is only billed when the user clicks to watch the video. The guarantee is that the primary content is being consumed by an interested party (it’s not built on an auto-play model) and thus the advertiser is getting more performance for their dollar.

India-based Pinstorm bills itself as a pure, pay-for-performance digital advertising firm. Their model is refreshing and mind-boggling cool. They design it, create it, build it, manage it and more (with the client being as involved or not involved in any of those steps as they prefer) and the client only pays for the performance metrics they determine to be important. So, if your bank wanted to build a social network based on financial services and the important metric to you was number of “expert” inquiries made by users, Pinstorm would build and manage the community and own the responsibility of driving those inquiries. You only pay them when the inquiries occur. Certainly, the cost per action will be much higher than a click on a search ad, but still … you define the performance metric and only pay when you get it.

I don’t argue with the growth projections from J.P. Morgan, Forrester or anyone else for that matter. Analysts and researchers are much more qualified to make those predictions than I. But I do think 26 percent growth is unlikely if the advertising model online doesn’t change to better accommodate advertiser’s performance expectations.

The silver lining, and often overlooked outcome, of this trend toward better advertising, is that better performing ads, by definition, give we, the consumers, a better media experience. The only question remaining is who will figure out how to provide it?

What do you think can make online advertising more successful? The comments are yours.

Note: Image from Tombstone Generator (Click here to make yours.)

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About the Author

Jason Falls

Jason Falls is a leading thinker, speaker and strategist in the world of digital marketing and is co-author of two books, No Bullshit Social Media: The All-Business, No-Hype Guide To Social Media Marketing and The Rebel's Guide To Email Marketing. By day, he leads digital strategy for Elasticity, one of the world's most innovative digital marketing and public relations firms. Follow him on Twitter (@JasonFalls).