« August 1998 | Main | July 1999 »

October 16, 1998

The Continued Evolution of Advertising or How To Succeed in Advertising Part II

"You know I don't believe you when you say that you don't need me."
     -Human League, Don't You Want Me?


Six months ago, I penned an article titled “How to Succeed in Advertising,” where I argued that the Internet was going to have a major impact on how advertisements are bought and sold. I argued that the Internet would lead to a shift to performance based advertising, as each advertiser could measure the actual performance of each and every ad. On the Internet, advertisers can measure not only click-through ratios (the number of people that click on an ad divided by the number of impressions) but also sell-through (actual customers divided by the number of impressions). The supposition was that if an advertiser could measure the exact response to an ad, why would they settle for under-performance?

This article generated a completely bi-polar response. The “content” providers lashed out with a fiery tongue. The standard response, which was elegant in its simplicity, was “you couldn’t be more wrong.” These artisans were quick to point out that brand, or image, advertising could not be measured using these overly analytical direct marketing techniques. Furthermore, they insisted, the public needs both Sienfeld and the Superbowl. And it’s brand advertising that allows them to exist.

On the other pole, the people that actually pay for the ads bombarded me with praise. “We knew this day would come,” they chanted, “why should we pay for something that doesn’t work!” The buyers of ads are much more supportive of this increased scrutiny than the sellers of ads. Looking towards the future, my analytical mind favors the argument of the buyers. It’s not simply that they control the dollars, or that they were more supportive of my viewpoint. Rather, it’s because the continued evolution of technology puts tremendous pressure on traditional impression based advertising.

Internet ad buyers are learning at a tremendous pace. Six-months ago, they began cross-checking their ad expenditures by analyzing simple click-through ratios. During renegotiations with ad-based sites they would point out that dollars per impressions did not matter, but rather dollars per click-through. Some sites might have many impressions, but few viewers that bothered to actually respond to the ad. On the other hand, some sites with specific context have much higher click-through rates. Ad buyers call these sites “performers,” and any smart ad buyer can recite their performers and non-performers off the tip of their tongue.

Of course, being the adaptive creatures that they are, many sites tried to game the system. They would artificially inflate their impressions using technology that “spidered” the sites at night. And as the game shifted to click-throughs, the mythical consumers began to click on the ads. However, the buyers continue to evolve as well, and now they are looking beyond the click-though and analyzing the life time behavior of customers that click over from a particular site. These e-merchants can now tell you not only which advertisers produce click-throughs, but also whether those customers actually buy, how much they buy, and what are the margins on the things they buy. This is surely information an ad sales representative never wanted to see.

Many Silicon Valley based companies are jumping in to help arm these ad buyers with detailed analytical software. Companies such as AdKnowledge, Personify, and Epiphany are developing market analysis packages, which help marketers rationalize their ad expenditures across not only the Internet, but across other media as well. This technology will result in much more rational behavior on the part of ad buyer. Privacy advocates and ad sales reps will be equally displeased with the depth of information in these customer-by-customer reports.

More radical shifts are also underway. Over the next sixth-months, ReplayTV and Tivo will hit the market with a brand new consumer electronics device that puts the control of television in the hand s of the user. These “digital VCRs” consist of a few integrated circuits, a power supply, and a massive multi-gigabyte hard drive. Advances in hard drive technology, which adhere to Moore’s law, now allow us to store hours and hours of high-quality video on a device that costs less than $1000. Two or three years out, these devices may hold 100 hours or more, and cost less than today’s tape-based VCRs.

The Digital VCR will render the traditional VCRs obsolete. It will be much easier to use, and will record shows proactively that it anticipates the user wants to see. If you are a San Francisco Giants fan, the device will proactively record every Giants game. Then you can come home and watch it when it makes sense for you. And you can even skip straight to the 9th inning, if that’s how you get your kicks. Type into the device a list of your favorite actors and directors, and magically over time, the Digital VCR will become a repository of your favorite films. Pick your favorite weekly shows, and watch them all on a roll on the weekend – no problem.

Of course, you could theoretically do this today with VCR tapes, but these things are hard to use and hard to program. This will not be the case with these new devices. They will have access to data about the programs that you want to watch and will likely suggest a few that you didn’t know about. Over time, excess cable and satellite bandwidth (such as in the middle of the night) will be used to push programs down to the device for later viewing. The concept of limitless channels will finally be a reality.

Why does this affect advertising? Television advertisers are used to a world of synchronous viewing. Shows belong in time slots, and people watch what is on at that particular time. The digital VCR allows us to watch things on our own time, in other words, asynchronously. Ad sales are typically based on Nielsen ratings, which measure how many people are watching a show at one particular time. Today’s stellar Nielsen ratings were once considered questionable, and there is no reason why this trend will not continue. The one-to-one world of the Internet will soon find its way to television.

Some people respond to this by suggesting that ad sales will simply shift to something known as an interstitial. This is an ad that is “inserted” in the asynchronous program that will be watched on the viewer’s own time. While this is possible, it ignores the fact that the viewer now has a choice, and that these devices will allow the content provider to push content directly to the end-user, potentially on a pay-per-view basis. If the consumer is willing to pay $5 to watch Sienfeld commercial free, why should they be denied?

Pay-per-views limited success to date has been caused by the lack of an easy to use interface, and not by a lack of demand. Consider what is happening on DirecTV, a wonderful product with a great user interface and four million raving customers. Pay-per-view is wildly successful on DirecTV, and we are not talking just about movies. The NFL, NBA, and NHL all have packages that they can sell directly to the consumer. Why should the leagues involve the networks if they can get directly to the consumer? Why pay for the overhead?

There is a more interesting example found on DirecTV’s channel 199. The popular soap opera, Days of Our Lives, is shown twenty-four hours a day, seven days a week. It costs $1.50 per episode, it is quite successful, and best of all -- it’s commercial free. This is the future of television, and not everyone is pleased. You can start with the local NBC affiliates who see their best content slipping out the door beneath them. But the advertisers can’t be pleased either. The soap opera was created to sell products, and something’s not right in Clarksville.

This apocalyptic viewpoint is clearly overstated. Network television will continue to thrive for years to come, and it will likely be some time before we see a commercial-free Superbowl. Moreover, consumer products companies will continue to pay millions of dollars to hawk goods on national television. However, underneath it all, a shift is happening. Consumers are increasingly getting what they want, advertisers are begining to calculate what they want, and the companies that make a living wasting your time may need to find a new gig.

Posted by Bill Gurley on October 16, 1998 at 08:00 AM | Permalink | Comments (0)

DISCLOSURE: The information contained Above the Crowd has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may have economic interests in the companies discussed herein. © J. William Gurley 2005-2006. All rights reserved.