I don’t know when this started happening, but the digital media industry has been going down a path in which every company is making a pitch that’s takes the following course: crabs in a barrel, transitioning to the dog ate my homework.

To be a little more blunt, companies are now lining up with a digital media value proposition that consists of a “crabs in a barrel” explanation for market development. When pressed, the explanation is akin to “the dog ate my homework.”

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Some funnels are good, and others are bad. For example, funnel cakes fall into the “good” category, but funnel clouds are considered by many to fill the obverse role.

In the world of marketing, there is the often-mentioned “marketing funnel” which shows the range of marketing activities from awareness all the way down to (purchase) intent. The proverbial “line” of above- and below-the-line fame lies somewhere about two thirds of the way down the funnel, and it speaks volumes to the types of marketing objectives that exist in the world of advertising.

Put simply, brand advertising dollars are invested at the top of the funnel where they drive brand and product awareness. Further down the funnel, performance marketing budgets reach closer to purchase intent. As this happens, it becomes easier to measure campaign effectiveness in terms of click-through rates and intent to purchase.

A few days ago, I was talking about targeting with someone who quickly repeated the current industry assertion that online marketers will want to deliver an automobile advertisement to someone who’s in the market for a new car. This is true, but the true question isn’t whether targeting can deliver such an advertisement — it’s how much will marketers be willing to spend to reach buyers in this stage of the process. Dollars per funnel inch…or something like that.

Because not every advertising dollar will get spent at the bottom of the funnel. And even as hundreds of companies hope to make it big by bringing scads of targeted digital inventory onto the market, we have to ask this fundamental question — what is the proper ratio of dollars spent at the bottom of the funnel in comparison to dollars spent at the top? 1:2? 1:3? 1:5?

It’s an open question, but I have to wonder whether anyone is thinking about the size of the market for below-the-line, performance-based, digital advertising targeted at consumers at the “intent” stage of the marketing funnel.

Sorry to be such a reductionist, but this is the epistemology that keeps coming to mind. Digital advertising can be disruptive, but it won’t likely change the core fact that no marketer will want to wait until someone is looking for a new car to introduce them to their brand. Imagine trying to sell a Lexus over a Toyota when that time comes. If you can’t explain the brand at the top of the funnel, then how will you succeed by focusing all your resources at the bottom?

You won’t. And that’s why — as a marketer — I’d prefer to make a calculated investment across the funnel, not just concentrated at one spot on the bottom.

I wanted to let enough time to pass since Yahoo!’s search announcement with Google so that the (other) windbags had the chance to state the obvious. And then I figured that I’d weigh in with a point-of-view to look at the deal from a completely different angle.

I should start by saying that I’m not an expert in search algorithms, and that topic has the same effect on me as a warm glass of milk, a 37-slide PowerPoint presentation and the entire activity we know as golf. Okay, so that last one wasn’t warranted, but you get my point.

Anyway, I’ve been pitched just about every angle on Yahoo!’s inclusion of Google search ads amongst their paid search advertising options. And I have one word for you: AdSense.

Let me explain. Let’s suppose that you run a digital media company. Many people do this every day, so this should be relatively easy to imagine. And you have an online property that you wish to monetize through advertising. Again, relatively straight-forward and believable.

So you do the thing that each of your peers has chosen to do, and that is to select a couple of advertising networks to place advertising at different locations on your web page. Again, this is a common practice in digital media.

And one of those ad networks is Yahoo! and the other comes from Google. Again, no surprises here.

So what’s the rub? Isn’t it just fine to use multiple ad networks? Isn’t it acceptable to use multiple sales channels?

So what if it’s search? Couldn’t we make the same argument for a social network, webmail property, or anything else for that matter?

After all, how exclusive are these bits? And what are the barriers to entry?

My colleagues Dan Taylor, Jen Simpson and I just took a briefing with Kent Ertugrul, the CEO of Phorm. As many of our blog readers may know from reading The Economist (my favorite magazine), Phorm provides an interesting twist on online advertising. Phorm does two things that promise to overturn the advertising apple cart:

• Omniscience. Phorm’s traffic analysis servers, sitting on ISP premises, filter (nearly) all end-user web traffic and observe the keywords they are interested in. By “keywords” I mean the most frequently occurring words contained in pages served up by webservers users visit. For example, if you visit the front page of Talking Points Memo, Phorm will associate page keywords “Obama”, “McCain”, “527″ (and the other most frequently used words with that page) with a random unique identifier that represents you. It knows these things because it has read and indexed the page when you read it.
• Disintermediates search engines. As you would expect, because Phorm reads the content of nearly every web page (on port 80 aka normal unencrypted HTTP) the user visits, it has unparalleled visibility to the user’s activity. The system is also “opt-out,” meaning that if the ISP installs it, the user has to take an active step to not be included in the system. These two properties — drastically expanded visibility, and the fact that the user cannot escape unless they opt out — enables ISPs to go “over the top” of the heads of Google and other search engines. It has the effect of disintermediating them entirely by allowing Phorm to claim, “yeah, these other guys know what user 123 has been searching for, but we know about all of their interests, across all of the websites they visit.”

Richard Clayton of Cambridge University has published a highly technical analysis of Phorm’s system on the his website. It makes for excellent reading, and I recommend it highly. The comments are particularly entertaining; one reader notes wryly that “It seems the only way to full opt out of this is to change ISP.” Wikipedia also has an informative article that is, on the whole, fairly hostile to Phorm. To date, the biggest objection to Phorm has come from researchers and observers who feel that the fact that it reads and indexes (nearly) all pages you visit is an unwarranted invasion of privacy.

In the briefing, I learned quite a bit about Phorm’s goals from a corporate perspective. My queasiness about inspection of customer web sessions aside, it seems that continued badgering from the press and from UK observers has forced Phorm to add more privacy-preserving features. Certainly, the point of going “over the top” of Google and the other search engines means that Phorm tracking cookies are accessible by any website who wants to use it. It’s clearly very appealing to ISPs, who desperately want a slice of the Internet advertising pie.

The question is, how bad do they want it? It’s clear that researchers like Clayton are not happy with the way Phorm’s system works. The way the system is set up (forcible inspection of HTTP traffic, cookie forging) seems a lot like a wiretap to me (albeit one to which, according to Phorm, the user consents). Today, the system is trialing in the UK with three carriers, including BT and Virgin Media. What happens when Phorm expands to the US is the real question. I suspect the Electronic Frontier Foundation and the ACLU will be all over this like a fat kid on a Twinkie.

For all of its novelty and potential for disruption, adopting the Phorm platform value proposition is a risky one for ISPs. The issue is not about whether Phorm gathers the right kinds of consent from end-users, anonymizes data it collects, or offers appropriate data protection tools for end-users. Phorm may (or may not) be doing all of the right things; that isn’t the point. The issue is, regardless of what Phorm does, whether opponents can muster enough opposition to poison the reputations of ISP customers who adopt it. Examples from other emotionally-charged consumer fights around genetically modified organisms (GMOs) and environmental issues suggests that aggrieved consumers, when riled up, have rather sharp elbows. “Spying on their customers!” would be one charge. “Big brother” would be another.

Phorm’s response, in our briefing, was essentially, “once consumers understand our system and its benefits, they will like it.” Let’s assume for the sake of argument they are right. It would still be an uphill battle, though, because business models predicated in part on user education usually fail. My vendor customers in the consumer security business know this all too well!

All of this leads me to conclude that ISPs who adopt Phorm would be putting a cyanide capsule in their mouths. The worst-case scenario is suicide-by-public-relations. Enough jostling from consumers and — crack — there’d be the sudden, familiar whiff of almonds in the air.

You gotta love the progression of the communications bundle. After a decade of getting into each others’ businesses, the cable companies and telecoms operators are thinking long and hard about their bundles. Brian Stelter at the New York Times has written an interesting piece about how internet service providers are starting to look at the meaning of “unlimited” internet access. Evidently, many large ISPs are thinking twice about the levels of bandwidth and traffic that they’re honestly willing to provide for a fixed rate. And Brian hits the nail on the head by talking about online media consumption. In the world of flat-rate internet access, iTunes, Netflix and Hulu are free riders.

Last week, I was listening to the radio and heard a nearly identical story about airline travel. The editor for that piece took the angle that airlines are nickel-and-diming the flying public by charging for baggage, seat upgrades and so on and so forth. Because now that the load factor for major airlines is over 80%, those seats are filled with people who buy their tickets based solely on price. And with rising fuel costs, airlines are looking to the amount of weight they’re carrying around, and those 90 lb suitcases are coming to mind as a way to cut costs…or at least grow revenues.

As a marketer, I see this very differently. This is just the natural evolution of a marketplace bundle sold around a single value proposition — price. Read the rest of this entry »

2.0 is all about comparative advantage and nothing more. Adam Smith would be proud.

In this whole 2.0 world, I just can’t keep things straight. Was I born at 1.0 or 0.1? And where am I today? Am I in my 3.0s or just 1.9.2? Because I’d say that it looks like my 4.0s or my 5.0s are on the horizon, and I definitely feel like I’ve learned lessons from my 2.0s. And what will version 2.1.7b be like when we get there?

Unless I’m in the world of technology…which feels the need to 2.0 everything. Whatever you were doing is 1.0 and whatever you will be doing is 2.0. So according to the recent Advertising 2.0 conference, I’m destined to do tomorrow what I’ve been doing for years, which is going to conferences and looking for cellular signal. Or looking for a way to cram a day’s worth of work into the 30 minutes between sessions.

The biggest take-away from Advertising 2.0 is that, no matter what happens, the best that digital advertising can do is to grow its comparative advantage against other media. This is a difficult concept to grasp, but it’s very important. Everyone looks at Google, and they think that digital advertising is the land of milk and honey where riches abound.

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I spent a few days last week at Advertising 2.0 New York. As if virtually every advertising-related event isn’t in New York City. In my previous job, I found myself traveling the globe on a regular basis, but now that I work in digital media, it’s a trip to New York every couple of weeks.

The program was interesting, and the speakers were strong, but I found myself sitting in yet-another-basement-cum-theater-wishing-for-cellular-signal. This appears to be par for the course in New York. Theaters below ground. Poor signal. BlackBerry blackout.

The thing that amazes me about the digital advertising business is its relative size (small) and its relative impact (large). Even more interesting is the role that advertising agencies play in the process. Everyone gets paid along the way, and it’s expected that either you’re managing the client, or you’re a line-item in the budget.

So here are a few trends that appear to be surfacing:

1. Widgets are the new Flash. I’ve long said that “tapas” is Spanish for “starvation” and that “flash” is English for “a make-work project for graphic designers.” So as we send Flash sites on a brief vacation, we’re now employing graphic designers and out-of-work (as if there’s such a thing) AJAX programmers to develop advertising widgets. It’s supposed to be a really big thing because Microsoft valued Facebook at $15 billion even though everyone is losing money in social networking…including advertisers.
2. TV is important, though there’s a new generation that’s going to make their money in TV by not hoping to make their money in TV. Crazy as it may seem, the best way to get a date is to have a date. So there are all sorts of people hoping to break into television (and who will make their money in television) but who don’t appear to want to make their money in television. I still can’t figure this one out, but then again, I just watched Grey’s Anatomy for the first time (with the sound off) the other week. We have these neighbors who invite us over but who don’t turn off the television when we arrive. After 20 minutes, I start drinking Scotch in the hopes that I won’t be distracted by the flashing images.
3. Internet video is important, but “the business model” is different. As in “non existent” or “money-losing.” As in “the business model for internet video is a ‘money-losing proposition for all involved.’”
4. The canoe is small, but there’s room for others. Perhaps IPTV and satellite (which already has a small watercraft of their own design) could participate in paddling, portage or navigation. Everyone agrees that there needs to be a single set of standards for digital advertising on network-delivered television.
5. Social networks are important but nobody knows what to do with them. Agencies are willing to help. This is the perpetual pitch from the agencies. This stuff is new. Nobody has any idea why we’re talking about it. And we’re willing to help…for a fee.

And that’s the news that’s fit to print from Advertising 2.0. Thanks again to Victor Harwood, the team at Digital Hollywood. And Advertising Age for putting on an excellent show.

I seriously have to wonder whether or not most communications industry executives would ever pass Lemonade Stand 101. The reason I say this is the plague of declining average revenue per user (ARPU) that numerous bright people inflicted on the entire communications industry. It’s almost as if the industry went through a rebellious phase, partying all night, going to raves…and the rest of us have the cold sores to prove it.

Because nothing says race to the bottom like dropping prices and hoping to make it up in volume.

I bring this up, because lately, several major communications companies — that are also internet service providers (ISP, for those of you who’ve recently awakened from a 20-year slumber) — have claimed that the only way they can make money in the internet access business is by spying on their users and selling that information to marketers.

Now before we go down this absurd exercise in market valuation, let’s just remember that maybe people find this downright creepy. And I’ll add that the last thing we need (especially after all this Layer 4 switching, load balancing and everything else we’ve done in the past decade) is another set of network boxes in the data center serving absolutely no purpose other than driving additional (what I’d call meager) incremental advertising revenues at the expense of the trust of…the entire world.

I know that Andrew Jaquith will soon weigh in with his utter abhorrence of this practice. Yes. It’s creepy. And yes. It’s of arguable value. But I’ll throw in a link to the Wired blog post that mentions BT’s recent efforts in this area. I’ll leave the privacy discussion to Andy, and I’ll ask the obvious question:

Why not charge more?

’cause if you can’t make money at the current prices, you should raise them. That’s what the five year-olds on my street would do.

Last fall, we were working on our research agenda, and we thought that out of home would be an emerging category for digital advertising. Part of this was clearly a result of having seen all the cool new things that can be done with public signage, especially on things like transport. But there was something far more subtle in our research agenda. We had recently moved into the Prudential Center in Boston’s Back Bay, and the management company was in the process of upgrading the elevators.

At the time — and we had plenty of time to think about it as we waited for the two operational elevators for our bank of floors — we could only imagine what would await us in the form of new elevators with a full out-of-home media experience.

A few weeks ago, I was explaining OOH to one of my colleagues, a longtime hand in the communications industry. I finally pulled him out a meeting room, pressed the button, and finished my explanation in plain view of the two screens in the elevator powered by Captivate Network.

This is a bonus feature of working in the media industry. Back in the days when I focused on telecommunications, the most I had to show for a SONET ring was a big piece of equipment with blinky lights in a data center somewhere. Now I can send people to the train station to look at the huge ads plastered on the floor.

Look! It’s advertising!

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Every industry analyst reaches that point in time when he says to himself that he “really needs to get on top of _____ before it becomes unmanageable.” In an emerging market, it’s important to take an early position and set an agenda for market analysis. For example: the weather’s warm, and lemonade will be in demand. But without such a take on things, suddenly, there are companies coming in the door explaining about the new category of “summer refreshments” explaining how their lemonade is fundamentally different from its core components of water, lemon juice and sugar.

If you’ve ever owned a dog, it’s the same as that feeling of … I’m going to have to take the dog for a walk in the next hour, or the poor creature is going to explode. A sense of impending action that must be dealt with one way or the other.

I’ve been having that feeling for several months about targeted digital advertising. I first raised my concerns in February with my colleague Anette Schaefer. I mapped out the core of my systemic, industry-destructing argument and Anette then asked the obvious question – “do people really want targeted advertising? Or will they respond negatively?” We shelved the idea, because we had other things going on and really needed to build some internal consensus on what may be a strong position against accepted industry thinking.

So when mobile entertainment and advertising guru Linda Barrabee was working on her mobile advertising forecast, targeting reared its ugly head yet again. Linda had placeholders in her forecast to account for some form of revenue acceleration for mobile web display advertising…based upon improved ad performance because of targeting.

At that point, I again put forth the arguments for and against targeting. And I begged Linda to hold off until she and Anette and I could sit down and come to some level of consensus about where targeted digital advertising will go.

Because it’s not just about digital dollars. There are many other traditional types of advertising which offer some form of targeting, be it geographic, demographic, behavioral, psycho graphic or down to the individual and household.

The One, Two, Three Punch
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