Over at Publishing2.0, Scott Karp analyses Merrill Lynch's recent research (MediaPost) showing that for the first time media prices are no longer growing faster than the rate of inflation, and concludes that as control shifts from media gateway monopolies greater competition is driving down the costs for advertisers to reach their audience.
It's an exceptional analysis, but I'd beg to disagree with the conclusion. What I think Merrills has spotted, and what is - temporarily - going on here is a price deflation at online media while old media companies (and some pure-plays) try to shovel the media1.0 "control of the pipe" model online.
Between Mar05 and Mar06 online ad impressions purchased (not merely available) rose from 97.1 billion to 185 billion, more-or-less doubling (ZDnet). Over roughly the same period, online ad spend rose only 30% (SearchRules). That's impressions doubling, revenues rising 30%. Yields are deflating, caused mainly, I think, by the fact that impression increases are driven by webmail and social networks (MediaPlannerBuyer) with considerable unsold inventory and (therefore) diminishing CPMs.
That the old media model is breaking down online is, I think, unambiguously true - merely capturing a mass audience and putting interruptive commercial messages in front of people is a decreasingly effective strategy, and I suggest that what Scott and Merrills are seeing is the consequence of that. At PaidContent an anonymous corporate client complains "has any advertiser seen a return on their investment when it comes to online adveritsing? We have not and we have been doing it since 1997." To which I can only answer - it depends how you're doing it, and who you're doing it with. Shoveling ad spend online so that companies with a 1.0 "control of the pipe" model can mis-allocate it probably won't show a return. Targeting ad spend where media owners can demonstrate a deep understanding of the relevance of your message to a targeted subset of their users might.
Where web2.0 will recapture value for media companies (and where Google is already limitedly succeeding, if almost entirely by serendipity) is in the new barriers to entry - relevance and targeting. It is trivial to capture a mass audience online through either creative/technical ingenuity or, failing this, marketing. So far, the mass digital audiences have fallen to media companies pursuing one or another of these strategies.
But the next stage of the game - and we already well into this stage - is for revenues and profits to be captured by media companies who are able to create relevance for both audiences and advertisers, what Umair calls hyper-efficient attention allocation. At the moment barriers to entry in many online verticals are artifically low because attention is being allocated inefficiently by incumbents who associate relevance only with context or limited consumer insight. Or to put it another way; you can't compete with Craigslist on price, but you can compete on service, on ROI, on how efficiently you connect the right seller with the right buyer and the right brand message with the right prosumer. A zero price-point (and of course the prices can be driven down to zero where the barriers to merely turning up are almost nil) isn't necessarilly the point, when a better ROI or a more effective message can be achieved from a more expensive "media company" with richer audience insight. A fascination with the cheapness of some online ads is another temporary blip, and more sophisticated buying practices are on the way to overcome that problem also.
The new barrier to entry will be the far richer consumer insight that is being developed elsewhere and that will allow both content and commercial messages (as if that distinction will still mean anything by then!) to be targeted hyper-efficiently to audiences. When that starts to happen, and the media companies who do not have - or do not use - that sort of rich consumer data begin to fail...that's when we will see a return to at least historical premiums for the surviving media properties.