synecdochic (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
synecdochic) wrote2008-07-20 01:36 am
synecdochic) wrote2008-07-20 01:36 am
Why Monetizing Social Media Through Advertising Is Doomed To Failure (part two)
Yesterday, we discussed part one of Why Monetizing Social Media Through Advertising Is Doomed To Failure: our premises. For a recap of the premises we're using, along with definitions, history, and background, you might want to skim back over that post; I know I dumped a lot into it, and I'm going to pile more on in this one. If you've been linked to this post specifically, and you haven't read the previous post, please do; there are some very important distinctions I make.
Now that we've got all that on the table, I'd like to take a tour through the current state of advertising on social media services, along with a discussion of how that affects a social media service's operations. I had intended to end this post with more analysis, but it got long again; tomorrow, I'll present my conclusions.
(It's also worth reiterating, for those of you who are in the industry, that I'm writing for a layperson here; there are some elisons and simplifications to make it easier for people to follow.)
The recap
When we left off yesterday, we were considering the state of the Web 2.0 economy as it stands right now. As a stopgap against the Law of Participation Inequality -- which can be extended to a Law of Cost-Bearing Inequality as well -- most social media services these days have settled on either an advertising-and-subscription model, or an advertising-only model. For most of these sites, "advertising" means "banner and text advertising", because the market doesn't encourage anything other than fractional innovation.
Advertisers want micro-targeted ads, high pageviews, and a high number of unique impressions. If a site can't deliver these things, that site's CPM (cost per thousand impressions) will go down; they'll be able to charge less for advertising on their site.
"Web 2.0", as an institution, is built on the fundamental notion of user-generated content. A service isn't selling their own content; they're selling you a home for your content, and selling other people the ability to look at your content.
Sites have two possible sources of revenue: active revenue, or the revenue that users of their site have consciously chosen to give them (subscription revenue), and passive revenue, or the revenue that they acquire from others based on the activity of their users (generally, advertising revenue).
With me so far? Good. Now let's talk about the last major concept influencing my thesis statement:
All roads lead to Google
Many people recall the heady dot.com Bubble 1.0 days, which in a lot of ways shaped our society's collective notions of what it was like to work at "a startup". One of the components of this myth is the idea that an innovator can start small and end big. The Bubble 1.0 version of that myth was "start small, go public, and make kazillions on your stock options"; the Bubble 2.0 version of that myth is "start small, get attention, get bought by Google".
(Side note: I will leave further proof to the reader, but I would argue that the "dotcom startup entrepreneur" has entered the American mythological eye as the 21st century equivalent of the 19th century Wild-West Cowboy or the 20th century rags-to-riches Local Boy Done Good -- and is just as unrealisticly romanticized. As a country, we believe, deep in our heart of hearts, not only that it's possible for a guy in a dorm room to wind up several years later selling a less than 2% stake of his company to Microsoft for $240 million -- since after all, it's obviously happened -- but also that if we try hard enough we can too.)
A company that paid an exorbitant price to acquire another company is going to damn well expect a proper rate of return for their investment, and -- since not every company can have an operating budget the size of Microsoft's or Google's, able to absorb massive expenditures like that and not care how long it takes for the profit to start to show -- they're going to want to see it soon. Investors are willing to pay bubble prices for social media services, thanks to carefully-manipulated hype, but once the bidding frenzy wears off, the cold hard facts of reality indicate: they have to make money off that service somehow, and they're going to want to see it, you guessed it, soon.
If a site's still owned by its original creator, instead of having been sold to a larger conglomerate, they're still not out of the woods: if they've taken venture capital, selling off a percentage of their company in exchange for startup funding, the venture capitalists are going to want to see an aggressive rate of return on their investment. And when do they want to see it? Soon.
I believe that nearly everyone who works in the Web 2.0 industry -- and almost certainly everyone who works at the executive level of the Web 2.0 industry -- is uncomfortably aware that this model is fundamentally unsustainable, and that sooner or later, the bottom will fall out of the market for overhyped and overvalued properties that aren't bringing in one-tenth of the revenue necessary to justify that overvaluation. I believe that nobody wants to get left holding the bag when that market craters, which means that everyone's trying to drive up their own prices so they can sell to someone else before it does.
(There are people who believe that this position is either overstated or flat-out inaccurate. I believe that these are the same people who would have been buying tulip bulbs in 1636. Or, you know, real estate in 2007. If you're one of those people, we can argue it if you'd like, but you're probably not going to change my mind. Bubble economics are a very, very distinctive pattern.)
What I believe we're experiencing, in short, is the consolidation of the detached, decentralized, frontier-web ethos of the early years of Web 2.0 and earlier into a centralized, top-down, hierarchical model: the goal of service providers is not to build something that will last for the long term. The goal is to develop or acquire a property, hold onto it for a period of time (while acquiring revenue if possible, but often operating at a loss), and then sell themselves to a bigger fish. That bigger fish will acquire several smaller companies, each of which has complementary products, and integrate them together -- and then turn around and sell that composite product to an even bigger company. The trend of Web 2.0: sooner or later, we'll all be owned by Google.
Bubble 2.0 hasn't gotten as bad as Bubble 1.0 -- when companies that hadn't actually produced a product yet were IPOing for three-digit stock prices -- yet, but I don't think we're far from it. After all, Microsoft bought a 2% share of Facebook for $240 million, valuing the entire company at over ten billion dollars. Facebook's only revenue comes from advertising and partnerships. Hands up if you don't think that's ridiculous.
The mating call of the Web 2.0 world
If you accept that premise -- and I am well prepared to stipulate that there are exceptions to that premise; there are sites that aren't interested in selling, either because their owners don't want to give up control or their owners recognize the bubble pattern, but I think those exceptions are few and far between, if for no other reason than it's rare to find a startup that doesn't take venture capital -- we have to also accept that a site's goals won't be long-term sustainability. The goal will be to drive up the company's value -- real or perceived -- as high as possible, so as to maximize the return and make the property more attractive to the (future) investor, and to do so as fast as possible, because everyone's waiting for the bubble to break and nobody wants to be the one holding the hot potato.
This means short-term profit, and more than that, easy and cheap short-term profit. It means making the product conform to all the hot trends that everyone in the industry is gossiping about. It means making absolutely sure to drive up your revenues as much as possible -- so that the numbers, when you go to sell, justify the highest prices possible.
In a lot of cases, this is putting lipstick on a pig: dressing up a site that does not have a long-term business model in place and ignoring the fact that the numbers are unsustainable. (Because there's no way the site will keep growing at the existing rate of account creation; because that time period's numbers reflect a major one-time advertising/sponsorship deal; because the site's implementation of whatever shiny new technology it's touting isn't actually as impressive as it looks, etc, etc.) Putting lipstick on a pig doesn't make the pig kissable. But in bubble haste, it may tempt people into trying anyway.
This is another reason why advertising is so prevalent in the Web 2.0 world. Subscription revenues alone might be enough to cover a service's operating costs, and they might even be able to cover operating costs + limited profit distribution, but in order to be an attractive target, a company has to demonstrate profit well over-and-above "operating costs + limited profit distribution". It has to demonstrate an insanely high profit margin -- and you don't get that from subscriptions alone.
Ten billion dollars is a lot of lipstick for that poor pig.
Remember from yesterday: subscription-only services generally only garner their subscriptions (or donations) from a small percentage of the userbase, so they're limited in the amount of revenue they'll take in. You don't get ten billion dollars' worth of lipstick out of your core 1% of your userbase.
Advertising and sponsorships can't produce ten billion dollars of lipstick, either. (But the Web 2.0 world is certainly trying to convince itself -- and its investors -- that it will.) Advertising on the Internet in general, and specifically on social media sites, is operating at a number of significant disadvantages.
Call-to-action advertising in a hang-out-and-chill context
Many people who aren't in the industry think that the recipe for success, in terms of a site that can command high prices for their advertising, is the presence of a huge userbase with broad interests and massive pageviews. To an extent, this does help: the large userbase provides a broad pool of unique visitors, which advertisers want, and the massive pageviews mean that the site will make up, on volume, any shortfall brought about by being unable to micro-target their advertising.
But remember: advertising is only successful if the people being advertised to find it relevant. Not only relevant to their wider interests, but relevant to what they are trying to do right then.
Advertisers want to show their ads to people who are going to find them interesting, useful, and relevant. For the most part, they measure their success rates by how many people click through the ad to find out more about the product or service, make a purchase, or read the thing that's being advertised, etc. Internet advertising is call-to-action advertising: the company placing the ad wants to see quantifiable results in the form of click-throughs, conversions, or other measurable actions.
This is why Google text ads on search results command (relatively) high prices: you go to Google, looking for, say, information on what kind of RAM your old G4 Mac desktop takes, and Google's ad-serving engine will show you six places you can go buy that RAM. There's a really good chance that you're going to click on one of those six ads, especially if they're carefully written to imply that you'll get a good deal there, and once you've clicked that ad, there's a really good chance you'll make a purchase.
Social media sites, though, aren't places that consumers go to find out information about products and services. They're places that people go to, to create things, interact with friends, chill out, etc. Social media sites have the lowest click-through rates of any category of site on the Internet -- because people who are using social media aren't there to buy, and don't want to get distracted from what they're really doing. [?]
'We are not eyeballs'
Advertising on the Internet is an ever-escalating war for attention. Ad-blocking technology is growing more and more commonplace, and we're in a war of attack and counterattack between advertisers and ad-blockers. But there's no technology that can be created to get around the ad-blocking capability of the human brain, no matter how much an advertiser tries.
It's a fundamental fact of the Internet: people are banner-blind. The Nielsen Norman Group, human/computer interface specialists, do massive amounts of eye-tracking research as a part of their usability studies. Some completely unsurprising conclusions arise: people who have spent any length of time on the Internet have been so saturated with advertisements that they literally stop seeing them. You don't need Adblock Plus; your eyes won't even go anywhere near anything your subconscious has identified as "probably an ad". People ignore ads so thorougly that they even ignore things that look like ads.
If someone isn't there to find out information about your product or service, they're not going to click your ad. They're not even going to see your ad.
Back in April of 1999, a couple of smart guys wrote the Cluetrain Manifesto: a screed on the future of online marketing. Reading it today, it reads as a combination of common sense, overblown hype, and unsustainable radical idealism. (At the time, it was pretty revolutionary.) The 95 Theses produced by the Cluetrain Manifesto still have a grain of truth to them, though: we are not eyeballs.
They meant it as a statement of philosophy. It's actually literal truth. Anyone who's spent any length of time on the Internet has trained their eyeballs to flat-out not notice anything that even looks like advertising, unless they're in the process of doing something where the advertising is likely to provide them extra value (such as searching for information on a product).
There is only one way around this: make your ad obtrusive enough to get past that mental filter. Pop-ups, rollovers, expanding boxes, things that make noise, things that flash and wiggle and blink. Internet advertising as it exists now rewards bad and obnoxious behavior on the part of ad designers.
So a social media site that's trying to capture advertiser dollars has to figure out a way of overcoming the human mind's inherent banner-blindness -- whether that be by getting a reputation for offering advertising that the viewer finds relevant enough to want to look for them, or by making their ads so obnoxious that the human mind can't help but see them.
They also have to figure out how to offer targeted advertising. Some sites have an advantage there, in that the site itself attracts a targeted userbase. For a site that doesn't, they have to figure out how to make advertising on their site attractive to their advertisers -- which means figuring out how to show people only the ads that those people will find relevant.
Some sites are better at this than others. I'm actually aware of one social media site that's doing it completely right, in terms of design: Ravelry. It's a yarncraft social media service. (Yes, yarn. Like knitting and crochet.) Their advertising is tasteful and unobtrusive, but the hyper-targeted nature of the service means that the users of the service are used to looking for the ads -- which means that advertisers get a really good experience with advertising on Ravelry, because they're pretty much guaranteed that the viewer will be interested in both their product and their message.
Some sites are turning to alternate forms of advertising, things that aren't centered around call-to-action banner-and-text advertising: co-branding, partnerships, sponsored features, sponsored content, etc. (You can see some of what Facebook charges for on the leaked rate card -- do note that Facebook won't admit to having a rate card, and there's no way of knowing if this is a). accurate or b). authentic.)
The problem with these alternate forms of advertising are, again, that advertisers don't know how to measure success: the only advertisers who are willing to conduct brand campaigns are ones that have advertising money to burn, because it's hard to know what your return on investment is for something so intangible.
Even the IAB, the Interactive Advertising Bureau, admits that there's a problem. In June, they held a conference on "User-Generated Content and Social Media", and the keynote speech, delivered by Seth Goldstein, CEO of SocialMedia Networks (a company dedicated to advertising on social media), was unapologetic and blunt: Social media is killing Internet advertising.
Bootstrap problem vs. downward spiral
So advertising on social media is under-performing, industry-wide, and advertisers are uncertain about what social media is and how they can broker a return on investment from it. (They're also frightened of it -- but more about that later.)
This means a social media service that's committed to reaching their revenue goals -- whatever those goals are -- via advertising or with the help of advertising is working with serious disadvantages. Implementing ads on a social media service costs money. If you use an in-house sales team and ad-serving network, you have to pay the people to sell the ads and the engineers to design and maintain the ad-serving network. If you use an external sales team and ad-serving network, you have to take a lower percentage of the ads sold, plus also pay the engineers to design and maintain the ad integration.
Once a social media service has committed to reaching their revenue goals with advertising, they have to spend some time thinking about the difference between active revenue and passive revenue. As a recap:
A service should want its active users to be drawn to the active revenue options, because the service gets more benefit out of active revenue; a greater percentage of active revenue can go directly to the site's bills, and the active revenue stream isn't subject to the same flaws and problems that advertising on social media is subject to. For long-term growth and sustainability, a service should rely on passive revenue to enhance its revenue stream, but never compose it.
A well-balanced social media business plan will reward a service's active users with something that makes the active revenue options compelling, while gently and unobtrusively implementing passive revenue-stream collection.
And that's the killer.
When passive revenue collection -- advertising -- starts to fail for a site, the service gets locked into a model of chasing the point of diminishing returns. Their ads are underperforming, so they're not reaching their revenue goals, so they have two options: get better ads, or put more ads in more places, and make up for lower CPM by serving more impressions. One ad at $1 makes the service the same amount of money as 10 ads at $.10, after all.
Those 10 ads at $.10, though, are going to be lesser-quality ads. Companies who are advertising online know about ad blindness and ad exhaustion; for them to be willing to pay for ad space, they want to know that their ads are going to be seen. The minute a service puts more than one ad on a page, the price they can charge for both those ads drops like a rock, because advertisers don't want to compete for users' attention. As a service puts ads in more and more places, the rate of people using ad blocking software -- or the rate of people just completely tuning out the ad -- will rise. The ability to target ads will go down even further, because the site will have a broader inventory, and they'll need to show those ads to users even if those ads aren't likely to be relevant to those users.
All of this, in turn, lowers the amount that an advertiser is willing to pay for ad placement on that service. Which lowers the amount of money that's coming in on the service's passive revenue stream. Once this happens, the service will be locked into a model which keeps chasing the point of diminishing returns, where the advertising prices that a service can command is languishing and therefore the service must increase impressions by serving less-relevant ads, which in turn devalues the advertising prices even further.
When a service's passive revenue stream starts to underperform to this extent, the majority of business and development resources will get thrown at it. Since targeted ads are the ads that make money, the service will put massive engineering effort into improving their targeting. Since volume can (to some extent) make up for devalued advertising prices, the service will put effort into putting more ads into more places. Since everyone's convinced that there's a better way to collect passive revenue -- other than banner and text advertising, I mean -- the service will put massive business effort into trying to innovate those methods.
The focus of the service's development begins to shift, until more and more resources start getting thrown at trying to capture passive revenue. Once a service hits that point, the money coming in from the active revenue stream begins to be put into resources for improving the passive revenue stream, instead of into resources for improving the service.
In short, over time, the service stops putting their effort into satisfying the user, and starts putting effort into monetizing the user -- even those users who are already contributing to the active revenue stream.
Web 2.0, as we discussed yesterday, isn't about creating content and selling people access to it; it's about selling people a place where they can create content of their own. That's what a social media service's active revenue stream consists of: the service sells the platform to the user. Passive revenue, though, brings a third party into this system: the third party who's giving money to the service in exchange for the ability to capitalize on the content that the service's users are creating.
An advertiser on a social media site is not buying the ability to show ads to you, the person who's creating stuff on a social media site. They're buying the ability to show ads to your readers.
Next, I'll demonstrate how this is bad for the user, bad for the advertiser, and bad for the business.
[ Part one | Part two | Part three ]
Now that we've got all that on the table, I'd like to take a tour through the current state of advertising on social media services, along with a discussion of how that affects a social media service's operations. I had intended to end this post with more analysis, but it got long again; tomorrow, I'll present my conclusions.
(It's also worth reiterating, for those of you who are in the industry, that I'm writing for a layperson here; there are some elisons and simplifications to make it easier for people to follow.)
The recap
When we left off yesterday, we were considering the state of the Web 2.0 economy as it stands right now. As a stopgap against the Law of Participation Inequality -- which can be extended to a Law of Cost-Bearing Inequality as well -- most social media services these days have settled on either an advertising-and-subscription model, or an advertising-only model. For most of these sites, "advertising" means "banner and text advertising", because the market doesn't encourage anything other than fractional innovation.
Advertisers want micro-targeted ads, high pageviews, and a high number of unique impressions. If a site can't deliver these things, that site's CPM (cost per thousand impressions) will go down; they'll be able to charge less for advertising on their site.
"Web 2.0", as an institution, is built on the fundamental notion of user-generated content. A service isn't selling their own content; they're selling you a home for your content, and selling other people the ability to look at your content.
Sites have two possible sources of revenue: active revenue, or the revenue that users of their site have consciously chosen to give them (subscription revenue), and passive revenue, or the revenue that they acquire from others based on the activity of their users (generally, advertising revenue).
With me so far? Good. Now let's talk about the last major concept influencing my thesis statement:
All roads lead to Google
Many people recall the heady dot.com Bubble 1.0 days, which in a lot of ways shaped our society's collective notions of what it was like to work at "a startup". One of the components of this myth is the idea that an innovator can start small and end big. The Bubble 1.0 version of that myth was "start small, go public, and make kazillions on your stock options"; the Bubble 2.0 version of that myth is "start small, get attention, get bought by Google".
(Side note: I will leave further proof to the reader, but I would argue that the "dotcom startup entrepreneur" has entered the American mythological eye as the 21st century equivalent of the 19th century Wild-West Cowboy or the 20th century rags-to-riches Local Boy Done Good -- and is just as unrealisticly romanticized. As a country, we believe, deep in our heart of hearts, not only that it's possible for a guy in a dorm room to wind up several years later selling a less than 2% stake of his company to Microsoft for $240 million -- since after all, it's obviously happened -- but also that if we try hard enough we can too.)
A company that paid an exorbitant price to acquire another company is going to damn well expect a proper rate of return for their investment, and -- since not every company can have an operating budget the size of Microsoft's or Google's, able to absorb massive expenditures like that and not care how long it takes for the profit to start to show -- they're going to want to see it soon. Investors are willing to pay bubble prices for social media services, thanks to carefully-manipulated hype, but once the bidding frenzy wears off, the cold hard facts of reality indicate: they have to make money off that service somehow, and they're going to want to see it, you guessed it, soon.
If a site's still owned by its original creator, instead of having been sold to a larger conglomerate, they're still not out of the woods: if they've taken venture capital, selling off a percentage of their company in exchange for startup funding, the venture capitalists are going to want to see an aggressive rate of return on their investment. And when do they want to see it? Soon.
I believe that nearly everyone who works in the Web 2.0 industry -- and almost certainly everyone who works at the executive level of the Web 2.0 industry -- is uncomfortably aware that this model is fundamentally unsustainable, and that sooner or later, the bottom will fall out of the market for overhyped and overvalued properties that aren't bringing in one-tenth of the revenue necessary to justify that overvaluation. I believe that nobody wants to get left holding the bag when that market craters, which means that everyone's trying to drive up their own prices so they can sell to someone else before it does.
(There are people who believe that this position is either overstated or flat-out inaccurate. I believe that these are the same people who would have been buying tulip bulbs in 1636. Or, you know, real estate in 2007. If you're one of those people, we can argue it if you'd like, but you're probably not going to change my mind. Bubble economics are a very, very distinctive pattern.)
What I believe we're experiencing, in short, is the consolidation of the detached, decentralized, frontier-web ethos of the early years of Web 2.0 and earlier into a centralized, top-down, hierarchical model: the goal of service providers is not to build something that will last for the long term. The goal is to develop or acquire a property, hold onto it for a period of time (while acquiring revenue if possible, but often operating at a loss), and then sell themselves to a bigger fish. That bigger fish will acquire several smaller companies, each of which has complementary products, and integrate them together -- and then turn around and sell that composite product to an even bigger company. The trend of Web 2.0: sooner or later, we'll all be owned by Google.
Bubble 2.0 hasn't gotten as bad as Bubble 1.0 -- when companies that hadn't actually produced a product yet were IPOing for three-digit stock prices -- yet, but I don't think we're far from it. After all, Microsoft bought a 2% share of Facebook for $240 million, valuing the entire company at over ten billion dollars. Facebook's only revenue comes from advertising and partnerships. Hands up if you don't think that's ridiculous.
The mating call of the Web 2.0 world
If you accept that premise -- and I am well prepared to stipulate that there are exceptions to that premise; there are sites that aren't interested in selling, either because their owners don't want to give up control or their owners recognize the bubble pattern, but I think those exceptions are few and far between, if for no other reason than it's rare to find a startup that doesn't take venture capital -- we have to also accept that a site's goals won't be long-term sustainability. The goal will be to drive up the company's value -- real or perceived -- as high as possible, so as to maximize the return and make the property more attractive to the (future) investor, and to do so as fast as possible, because everyone's waiting for the bubble to break and nobody wants to be the one holding the hot potato.
This means short-term profit, and more than that, easy and cheap short-term profit. It means making the product conform to all the hot trends that everyone in the industry is gossiping about. It means making absolutely sure to drive up your revenues as much as possible -- so that the numbers, when you go to sell, justify the highest prices possible.
In a lot of cases, this is putting lipstick on a pig: dressing up a site that does not have a long-term business model in place and ignoring the fact that the numbers are unsustainable. (Because there's no way the site will keep growing at the existing rate of account creation; because that time period's numbers reflect a major one-time advertising/sponsorship deal; because the site's implementation of whatever shiny new technology it's touting isn't actually as impressive as it looks, etc, etc.) Putting lipstick on a pig doesn't make the pig kissable. But in bubble haste, it may tempt people into trying anyway.
This is another reason why advertising is so prevalent in the Web 2.0 world. Subscription revenues alone might be enough to cover a service's operating costs, and they might even be able to cover operating costs + limited profit distribution, but in order to be an attractive target, a company has to demonstrate profit well over-and-above "operating costs + limited profit distribution". It has to demonstrate an insanely high profit margin -- and you don't get that from subscriptions alone.
Ten billion dollars is a lot of lipstick for that poor pig.
Remember from yesterday: subscription-only services generally only garner their subscriptions (or donations) from a small percentage of the userbase, so they're limited in the amount of revenue they'll take in. You don't get ten billion dollars' worth of lipstick out of your core 1% of your userbase.
Advertising and sponsorships can't produce ten billion dollars of lipstick, either. (But the Web 2.0 world is certainly trying to convince itself -- and its investors -- that it will.) Advertising on the Internet in general, and specifically on social media sites, is operating at a number of significant disadvantages.
Call-to-action advertising in a hang-out-and-chill context
Many people who aren't in the industry think that the recipe for success, in terms of a site that can command high prices for their advertising, is the presence of a huge userbase with broad interests and massive pageviews. To an extent, this does help: the large userbase provides a broad pool of unique visitors, which advertisers want, and the massive pageviews mean that the site will make up, on volume, any shortfall brought about by being unable to micro-target their advertising.
But remember: advertising is only successful if the people being advertised to find it relevant. Not only relevant to their wider interests, but relevant to what they are trying to do right then.
Advertisers want to show their ads to people who are going to find them interesting, useful, and relevant. For the most part, they measure their success rates by how many people click through the ad to find out more about the product or service, make a purchase, or read the thing that's being advertised, etc. Internet advertising is call-to-action advertising: the company placing the ad wants to see quantifiable results in the form of click-throughs, conversions, or other measurable actions.
This is why Google text ads on search results command (relatively) high prices: you go to Google, looking for, say, information on what kind of RAM your old G4 Mac desktop takes, and Google's ad-serving engine will show you six places you can go buy that RAM. There's a really good chance that you're going to click on one of those six ads, especially if they're carefully written to imply that you'll get a good deal there, and once you've clicked that ad, there's a really good chance you'll make a purchase.
Social media sites, though, aren't places that consumers go to find out information about products and services. They're places that people go to, to create things, interact with friends, chill out, etc. Social media sites have the lowest click-through rates of any category of site on the Internet -- because people who are using social media aren't there to buy, and don't want to get distracted from what they're really doing. [?]
'We are not eyeballs'
Advertising on the Internet is an ever-escalating war for attention. Ad-blocking technology is growing more and more commonplace, and we're in a war of attack and counterattack between advertisers and ad-blockers. But there's no technology that can be created to get around the ad-blocking capability of the human brain, no matter how much an advertiser tries.
It's a fundamental fact of the Internet: people are banner-blind. The Nielsen Norman Group, human/computer interface specialists, do massive amounts of eye-tracking research as a part of their usability studies. Some completely unsurprising conclusions arise: people who have spent any length of time on the Internet have been so saturated with advertisements that they literally stop seeing them. You don't need Adblock Plus; your eyes won't even go anywhere near anything your subconscious has identified as "probably an ad". People ignore ads so thorougly that they even ignore things that look like ads.
If someone isn't there to find out information about your product or service, they're not going to click your ad. They're not even going to see your ad.
Back in April of 1999, a couple of smart guys wrote the Cluetrain Manifesto: a screed on the future of online marketing. Reading it today, it reads as a combination of common sense, overblown hype, and unsustainable radical idealism. (At the time, it was pretty revolutionary.) The 95 Theses produced by the Cluetrain Manifesto still have a grain of truth to them, though: we are not eyeballs.
They meant it as a statement of philosophy. It's actually literal truth. Anyone who's spent any length of time on the Internet has trained their eyeballs to flat-out not notice anything that even looks like advertising, unless they're in the process of doing something where the advertising is likely to provide them extra value (such as searching for information on a product).
There is only one way around this: make your ad obtrusive enough to get past that mental filter. Pop-ups, rollovers, expanding boxes, things that make noise, things that flash and wiggle and blink. Internet advertising as it exists now rewards bad and obnoxious behavior on the part of ad designers.
So a social media site that's trying to capture advertiser dollars has to figure out a way of overcoming the human mind's inherent banner-blindness -- whether that be by getting a reputation for offering advertising that the viewer finds relevant enough to want to look for them, or by making their ads so obnoxious that the human mind can't help but see them.
They also have to figure out how to offer targeted advertising. Some sites have an advantage there, in that the site itself attracts a targeted userbase. For a site that doesn't, they have to figure out how to make advertising on their site attractive to their advertisers -- which means figuring out how to show people only the ads that those people will find relevant.
Some sites are better at this than others. I'm actually aware of one social media site that's doing it completely right, in terms of design: Ravelry. It's a yarncraft social media service. (Yes, yarn. Like knitting and crochet.) Their advertising is tasteful and unobtrusive, but the hyper-targeted nature of the service means that the users of the service are used to looking for the ads -- which means that advertisers get a really good experience with advertising on Ravelry, because they're pretty much guaranteed that the viewer will be interested in both their product and their message.
Some sites are turning to alternate forms of advertising, things that aren't centered around call-to-action banner-and-text advertising: co-branding, partnerships, sponsored features, sponsored content, etc. (You can see some of what Facebook charges for on the leaked rate card -- do note that Facebook won't admit to having a rate card, and there's no way of knowing if this is a). accurate or b). authentic.)
The problem with these alternate forms of advertising are, again, that advertisers don't know how to measure success: the only advertisers who are willing to conduct brand campaigns are ones that have advertising money to burn, because it's hard to know what your return on investment is for something so intangible.
Even the IAB, the Interactive Advertising Bureau, admits that there's a problem. In June, they held a conference on "User-Generated Content and Social Media", and the keynote speech, delivered by Seth Goldstein, CEO of SocialMedia Networks (a company dedicated to advertising on social media), was unapologetic and blunt: Social media is killing Internet advertising.
Bootstrap problem vs. downward spiral
So advertising on social media is under-performing, industry-wide, and advertisers are uncertain about what social media is and how they can broker a return on investment from it. (They're also frightened of it -- but more about that later.)
This means a social media service that's committed to reaching their revenue goals -- whatever those goals are -- via advertising or with the help of advertising is working with serious disadvantages. Implementing ads on a social media service costs money. If you use an in-house sales team and ad-serving network, you have to pay the people to sell the ads and the engineers to design and maintain the ad-serving network. If you use an external sales team and ad-serving network, you have to take a lower percentage of the ads sold, plus also pay the engineers to design and maintain the ad integration.
Once a social media service has committed to reaching their revenue goals with advertising, they have to spend some time thinking about the difference between active revenue and passive revenue. As a recap:
- Active revenue is revenue that a social media site user has chosen to give the site directly: subscription fees, donations, purchases, etc.
- Passive revenue is revenue that a third party has agreed to give a social media site based on the activity of their users: advertising, sponsorship fees, etc.
A service should want its active users to be drawn to the active revenue options, because the service gets more benefit out of active revenue; a greater percentage of active revenue can go directly to the site's bills, and the active revenue stream isn't subject to the same flaws and problems that advertising on social media is subject to. For long-term growth and sustainability, a service should rely on passive revenue to enhance its revenue stream, but never compose it.
A well-balanced social media business plan will reward a service's active users with something that makes the active revenue options compelling, while gently and unobtrusively implementing passive revenue-stream collection.
And that's the killer.
When passive revenue collection -- advertising -- starts to fail for a site, the service gets locked into a model of chasing the point of diminishing returns. Their ads are underperforming, so they're not reaching their revenue goals, so they have two options: get better ads, or put more ads in more places, and make up for lower CPM by serving more impressions. One ad at $1 makes the service the same amount of money as 10 ads at $.10, after all.
Those 10 ads at $.10, though, are going to be lesser-quality ads. Companies who are advertising online know about ad blindness and ad exhaustion; for them to be willing to pay for ad space, they want to know that their ads are going to be seen. The minute a service puts more than one ad on a page, the price they can charge for both those ads drops like a rock, because advertisers don't want to compete for users' attention. As a service puts ads in more and more places, the rate of people using ad blocking software -- or the rate of people just completely tuning out the ad -- will rise. The ability to target ads will go down even further, because the site will have a broader inventory, and they'll need to show those ads to users even if those ads aren't likely to be relevant to those users.
All of this, in turn, lowers the amount that an advertiser is willing to pay for ad placement on that service. Which lowers the amount of money that's coming in on the service's passive revenue stream. Once this happens, the service will be locked into a model which keeps chasing the point of diminishing returns, where the advertising prices that a service can command is languishing and therefore the service must increase impressions by serving less-relevant ads, which in turn devalues the advertising prices even further.
When a service's passive revenue stream starts to underperform to this extent, the majority of business and development resources will get thrown at it. Since targeted ads are the ads that make money, the service will put massive engineering effort into improving their targeting. Since volume can (to some extent) make up for devalued advertising prices, the service will put effort into putting more ads into more places. Since everyone's convinced that there's a better way to collect passive revenue -- other than banner and text advertising, I mean -- the service will put massive business effort into trying to innovate those methods.
The focus of the service's development begins to shift, until more and more resources start getting thrown at trying to capture passive revenue. Once a service hits that point, the money coming in from the active revenue stream begins to be put into resources for improving the passive revenue stream, instead of into resources for improving the service.
In short, over time, the service stops putting their effort into satisfying the user, and starts putting effort into monetizing the user -- even those users who are already contributing to the active revenue stream.
Web 2.0, as we discussed yesterday, isn't about creating content and selling people access to it; it's about selling people a place where they can create content of their own. That's what a social media service's active revenue stream consists of: the service sells the platform to the user. Passive revenue, though, brings a third party into this system: the third party who's giving money to the service in exchange for the ability to capitalize on the content that the service's users are creating.
An advertiser on a social media site is not buying the ability to show ads to you, the person who's creating stuff on a social media site. They're buying the ability to show ads to your readers.
Next, I'll demonstrate how this is bad for the user, bad for the advertiser, and bad for the business.
[ Part one | Part two | Part three ]
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It was in a big red box in the middle of the page. I never *saw* it until the tech physically *pointed* to it on my screen.
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i was especially struck by the difference in INTENT on the part of the users and how that affects what they will accept on different sites, like the difference between Google and Facebook. That was a cool insight for me -- noticing that Google is a much better place for info heavy ads because people are there to buy and research. Is an outfit like Consumer Reports a good model for some new companies? *ponders*
Clearly the ad people are still in the old TV model, or the ads on the side of the bus model, where people used to sit through the ads and just accept them. But with the content on demand nature of technology now, those ads just aren't effective. people are still using them, but they really don't work as well as they used to.
from reading ad textbooks and books in the field I'm amazed at how traditional and hidebound the industry really is. i think ad agencies and businesses know that advertising is an indirect way of drumming up business, but they are aware of the new challenges the internet poses, but there's still so much money floating around that they're not sure what to do. I think you may be understating the utilization of brand awareness advertising on the part of the business community; they know it's a long term proposition and the benefits are not direct, but clearly everyone's trying to figure out how the net is differerent than cable tv or magazines, and of course it is.
moving on to part three... thanks again. i'm so glad to have this survey of the field; it's very useful to me.
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That really is the core of why call-to-action advertising underperforms on pretty much anything other than search, though. If you're going to a search engine, you're likely looking for information about a product or service, and the ads can help further your quest to find out about that product or service; you're much more likely to be pre-primed to buy. On a social media site, especially an untargeted social media site, you're not there to buy or to research; you're there to just chill, and you'll be way less likely to even notice the advertising.
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but that's a tangent....thanks again.
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I think advertisers are willing to go for branding campaigns in traditional print media a lot more than they're willing to go for them online, but I'm having trouble really articulating why I believe that so vociferously.
Is there any research to support my personal theory that traditional media ads actually don't work any better than internet ads, but advertisers don't have concrete results like click-throughs (or lack thereof) to slap them in the face with that fact?
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Venture capital is truly the poisoned pill, isn't it? It's the poster child for what Jerome a Paris calls The Anglo Disease (http://www.eurotrib.com/story/2008/2/3/10253/66655).
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(Unless you're a). independently wealthy, b). good at squeezing a penny until it squeaks, or c). really fucking stubborn.)
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But now is not the time for my socialist rant, is it? :).
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*a non-fungible product
* that is consumable
* that is expensive, so it's worth spending money on ads
* that is light enough for the shipping charges to be merely exorbitant
* about which there is a genuine ability to deliver information (e.g., what the yarn looks like; what its performance capacities are).
Compare this to a fungible consumer product that's available everywhere that the ad (non)viewer already knows about and either likes or doesn't.
I always think it's funny that Dell constantly sends me ads. It's true that the computer I bought from them a year ago isn't very good, but that doesn't inspire me to buy another one FROM THEM.
Postcrossing
Their advertising (mostly for postcards) tends to check many of your boxes as well:
* non-fungible (people who send postcards often don't just want to send any old postcard; they want ones that are "better" in some way)
* consumable (you buy a pack of ten postcards, you send them, now you have to buy more)
* expensive and light
As a result, I find ads on Postcrossing much less annoying and much more useful than on many other sites.
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First, in the year I've been on Ravelry, I've seen a large decline in traffic on the LJ knitting communities that I follow (at a rough estimate, on the order of 90%).
Second, the folks who established Ravelry have a very clear vision. While anyone with two brain cells to rub together knows that they may at some point change their minds, their vision includes no subscription (including no tiered account structure—everyone gets access to everything) and no selling to Google (or anyone else!). They have three revenue streams: donations, sale of Ravelry-branded merchandise, and ads. Ads are tasteful and targeted (a yarn shop in Connecticut can advertise specifically on a forum for users in Connecticut). In addition, the pricing structure is such that home-crafters, selling through such sites as Etsy (www.etsy.com) can advertise.
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I remember back in 2000 or so when a site I used frequently (opendiary) got ads. And our reaction was so different. A lot of the users (myself included) made it a point to click on 15-20 ads a day and spend a few minutes on the website even if we didn't buy anything. We knew that the creator of opendiary got money when we did that and we felt it our duty to help support the site.
It's not something I'd be willing to do now (i don't click ads on principle unless maybe i'm searching for a product on google...). But those ads weren't very obnoxious yet and it wasn't a hassle then. It's like ads were different and our attitude towards them was different.
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*lightbulb*
That's why I hate so many custom journal layouts! Especially the ones with giant graphics across the top or side, or animated anything. I've trained myself to respond to "large rectangular graphic on the top or side of the screen" as "ad; ignore," and then I have to expend energy on ignoring it.
I've found this whole series terribly interesting. Thank you for posting it.
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One thing that annoys me about the way ads are implemented is the inability to go BACK to them (though I suspect this is probably just me). All too often at the sites I use the most (I'm looking at you, yahoo mail) I'll see an add I actually want to look at just as I click the link - and there's no way to get that ad back, or look at the ads they've hit you with recently, without 11ty-million page reloads.
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I saw this (http://seattlepi.nwsource.com/tvguide/371751_roush22.html) today and it reminded me a little of what you were saying, although obviously it's about TV where there's no user generated content:
though how can we not when entertainment chief Ben Silverman gushes about Enemy less as a kickass drama than as a "marketing platform" for General Motors, which was brought into the development process for this show from the get-go. In fact, according to Silverman, "the first things we actually shot were for General Motors with Christian Slater that are going to air at the Olympics." Yeah, why not: Promo first, show second. The show's mid-October premiere date is also timed to coincide with a new GM line being launched around the same time.
Anyone else getting Knight Rider vibes? (In a panel on the new Wednesday night series being spun from last season?s wretched car commercial of a movie, Knight Rider's new show-runner admitted, "Even Ford said it was way too much [product promotion] in the two-hour.")
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FYI, in case no one else has mentioned it, the link to part one at the top of the text points back to here, not to part one.
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