Wednesday, 15 April 2009

Online advertising in a Free Media Future Part 1

I attended a recent event at the RSA in London on New Media Futures. I had gone to listen to Gerd Leonhard the Media Futurist, whom I have heard in the past and greatly admire. But I had a bonus listening to Richard Titus (ex-BBC, now Associated Northcliffe Digital), and chatting to him about data driven targeting. The discussions during the event triggered this 2 part article.

The Future of Media: More free than today
The advent of the internet has caused much angst in the traditional media creation world. From newspapers to music to movies, all believe they have been done badly by. It is well known that even quality papers with large circulations such as the New York Times cannot support an editorial team on online revenues alone. In the music industry, illegal music downloading has curtailed revenues for firms such as EMI. And with each new blockbuster being available on Pirate Bay within days of its release, the big movie studios are feeling the heat.

During the RSA event, Gerd laid down the case that the media industry has no choice but to experiment with different business models where content is available free and subsidized by complementary revenue streams. One example of this is Google’s agreement with major record labels, offering free downloads and streaming to consumers in China and sharing advertising revenue with the labels. This model has been hailed by the music industry for its creation of revenue streams in a region in which accessing content illegally is the norm. Read Gerd’s blog on this here. Another example is Tourdates (, a venue for bands in the UK to showcase their music, manage their profiles and connect with fans. Many up and coming bands offer their music free, and make money by touring and merchandize. Nokia’s Comes with Music is an example of an service that shares hardware revenues with media suppliers in return for limited duration free content. In all cases, the content is free, but it drives revenue in complementary areas.

What will be the impact on online advertising?

Firstly, it is important to note, as in the examples above, that advertising is not always the only or best way of monetizing content. However, advertising (search, display, affiliate etc) is versatile and can co-exist or serve to promote the retail of merchandize, paid downloads and tickets. Ad networks and exchanges have turned advertising into a market, albeit imperfect, with buyers and sellers driving demand and supply. So, when large amounts of high quality media inventory are available free and without the stigma of being illegally shared, the average unit price of advertising will certainly drop. The short term answer is that advertising rates suffer as there is a glut of inventory.

In the medium term, however media consumption increases, as more price elastic customers (and those with guilty consciences J) sample a wide range of media. And as more time is spent on the internet (as opposed to offline) viewing or listening to online media, more ad revenue starts chasing this inventory. Online advertising is still a maturing industry, and the influx of additional revenue will increase competition and speed up the pace of innovation, driving value for advertisers and publishers. Over time, the market will also adjust to absorb this new inventory, equilibrium will return, with more stable pricing.

In the second part of this series, I will look at specific trends underway in online advertising and the effect of Free Media on these.

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