Web 2.0 and the Demise of Advertising Stocks
Web 2.0 and the Demise of Advertising Stocks
In the five years following its birth in 1998, The Intelligent Investor built its membership base by advertising in the now defunct Shares and Personal Investor magazines, supplemented by the odd newspaper advertisement. Eleven years on, we spend hardly anything on such ‘traditional media’ advertising.
We’re hardly ‘new media’ experts. We’ve simply tried new things as they’ve come along, turning our collective hand to ‘web 2.0’ through initiatives such as Twitter, YouTube, this blog (and our less active Value blog) as well as interactive Q & A forums for our paid-up members and on our sister site New2shares.
Our analysts have even managed to overcome their reservations about public speaking to produce regular podcast discussions (see the left-hand side of the home page for a free edition of Stock Take), and other special podcasts where we interview fund managers and operating managers of businesses we research.
Potential customers are now more likely to recognise The Intelligent Investor from such online initiatives than they are from any traditional display advertising. This has changed the way our – and many other – businesses work. Web 2.0 means if we do our job well, you are going to find out about it without us spending a cent on advertising. Conversely, if we make a mess of things, no amount of advertising is going to stop you learning the truth.
Obvious victim
Traditional media is an obvious victim, with The Intelligent Investor being just one example of a former Fairfax customer that is no longer spending significant money with it.
But what might all this mean for advertising agencies? In Putting the Public Back in Public Relations, Brian Solis and Deirdre Breakenridge write:
‘Many executives still view blogs as random musings, social networks as places where people troll for friends, and other social places as founts of pure narcissism. Most notably, companies fear letting go of control and acknowledging that the wisdom of the crowd can be a powerful group (sic).
'In actuality, companies lost 100% control of their communications a long time ago. People are discussing their brands, products and services right now, across multiple forms of Social Media, with or without them. Plugging their ‘ears’ and pretending none of this is taking place isn’t going to help the situation or make it go away. Quite honestly it will only make things worse for the brand. The key is to let go and embrace the chaos.’
The entire marketing sector is grappling with this issue, including listed groups such as STW Communications (SGN), Photon (PGA), Mitchell Communications (MCU) and Bluefreeway (BLU).
Symbiotic relationship
Traditional advertising agencies had a symbiotic relationship with traditional media – clipping the ticket by taking a percentage of a client’s advertising spend. So does the move away from traditional mediums such as newspapers and free-to-air television signal the demise of the advertising agency?
I suspect not. For years, STW Communications (which features in my family’s investment portfolio) has been positioning itself to clients as a partner. Rather than the traditional commission from the placement of advertising in the media, the idea is to act in a fee-based advisory capacity. Some smart clients even incentivise their agencies by paying them a percentage of any uplift in sales.
Many clients of advertising agencies are adrift in the new world. Blogs, Twitter and YouTube clips are sources of fear and trepidation. They are seeking help – and the financial results bear out the view that there is a growth business inside the broader tumult in the advertising industry.
In the year to 31 December 2008, STW’s traditional advertising agencies recorded revenue growth of 2%. Its ‘Digital, Promotion and Relationship Marketing’ businesses grew at triple that rate. Over the metaphorical road, Photon reported that its ‘Integrated Communications & Digital’ businesses grew revenue by 16% on a like-for-like basis in the half-year to 31 December (while EBITDA rose 25%). Meanwhile, relative upstart Mitchell Communications reported that its Digital operations grew revenue by 28% in the six months to 31 December 2008 (EBITDA grew by 15%).
I’m about to embark on an analysis of STW Communications for The Intelligent Investor’s members. The first question is whether the industry has a future – I suspect that the answer to that question is yes (although it may not be as profitable as it has been).
The second and much more important question – at least in the short term – is whether STW can ride out the broader advertising downturn given its debt-laden financial position. If the answer to both is in the affirmative, today’s price of approximately 3 times last year’s earnings will prove an exceptional bargain.
I’m looking forward to reviewing the situation. And I’m also looking forward to any opinions, views or ‘scuttlebutt’ from this bristling online community.
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Two items of note:
1) I changed my TII subscription to "Online Only" and had a quiet chuckle when TII sent me a window-letter extolling the virtues of the print edition for a few extra dollars. I haven't even opened the envelope of the print edition for many months.
2) A mate runs a small independant advertising/marketing/I'll do almost anything for a dollar company. He was showing me his latest projects & I was amazed at how far beyond "just placing the ads" his work encompassed. This included writing blogs, being involved in internet forums, Face Book, My Space etc. From what i could gather, this was quite profitable as the full payment went to him rather than just taking a slice of the pie from placing the copy with traditional media.
Interesting stuff Greg. As you say: "if we do our job well, you are going to find out about... no amount of advertising is going to stop you learning the truth". I'm wondering if this will tend to have a "winner takes all" outcome. And not just in 'new media'. For example, people researching products and prices before going to a bricks-and-mortar shop, ie ever increasing price transparancy. If you haven't got the lowest price or a nieche product, it's going to get harder and harder. I wonder what this means for, say, Harvey Norman?
I think you're right Mars - this gets to the core of what a business's competitive advantage is. With a completely undifferentiated product, it's much easier for consumers to find a cheaper competitor (think fuelwatch). I'm not sure whether Harvey Norman falls exactly into that category. Furniture, for example, tends to be something most people want to 'touch' before they buy and, especially in smaller communities, there may not be much showroom competition. That said, my 66-year old father began looking for a new car on eBay at the weekend, so perhaps furniture's not that much of a leap, after all.
It'll be interesting to see how these dynamics play out over a range of markets in the next decade or so.
Yes, people may want to touch - but will they choose to touch, and buy, at the cheapest seller, which they have already researched on the web? In which case, unless you are the the lowest cost distributor, are you history? I don't want to over dramatise, or simplify, as obviously there are a number of factors, apart from price, that may influence a choice of shop - but just asking the question. Also, I wonder whether or not Harvey Norman will benefit from a 'winner takes all' outcome. On the one hand, it's sheer size should assist in being the lowest cost distributor, but on the other hand its most profitable lines (consumer electronics) may be challenged by on-line shopping (???).
I dont think the ad man will go away, but what he (OK, and she) do will change. The clip-the-ticket model of placing ads will have to change, because the where-and-how of the placement will change. But the other big part of the ad agencies work is to make and massage the message. Just watch The Gruen Transer on ABC, and look at the adverts from the 1950's and 60's they show sometimes. The modern, slick look is not going to go away, but equally not everyone can prepare such material.
So to agencies will be here for a long, long time making clean, snappy, slick messages to push products. WHERE the products are pushed will change, and the companies who want to messages pushed will have far less control (though in a sense this is no different to the town crier of old, or the guy ranting on the soap box... we have more people now and its easier to have a rant.... but people still have to choose to listen to all that noise). Placement will still matter.
You will also no doubt find this fascinating:
http://www.shirky.com/weblog/2009/03/newspapers-and-thinking-the-unthink...
That's a nice summary, Ashleigh. By sheer coincidence, I just subscribed to The Gruen Transfer vodcast about 60 seconds before I read your reply! And that's probably a sign of the times.
If someone as un-technologically savvy as me is subscribing to vodcasts, then the advertisers need to re-think their placements. I would now spend more time watching shows on my iPod than I would on live TV - granted I don't watch much, but of what I do watch, much more than half is now on iPod (being Q & A, Media Watch, Lateline Business, At the Movies and, now, The Gruen Transfer). If a detailed 'visual experience' isn't crucial, then I find vodcasts terrific (particularly for shorter shows). You can watch them anywhere, anytime.
That's a great piece, thanks Ashleigh. While we're on the topic, this piece from Slate, Not all information wants to be free, also provides some interesting perspectives.
Oh, and Do you think bandwidth grows on trees? is another good, related piece from Slate.
Interesting that everything you want to watch is on ABC, where ads are not present anyhow!
The ads are there in full swing when you have the lobotomy and switch over to CSI, or Bones, or House, or whatever.
What does that tell us about the effectiveness of free markets to deliver everything to everyone? Is there an inverse correlation between intelligent media content and profitability?
Could it be that in vodcasts (or Internet catchup sites, ala ABC iView), it is easier to skip over the ads? Hence the ABC, which does not rely on advertising revenue is at the forefront of these offerings, whereas the commercial stations are still trying to protect their turf?
You might be onto something, Brendan. The ABC seems streets ahead of everyone else in Australia on the digital front. Kudos to Aunty.
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