Tuesday, January 12, 2010

The iPad's Threat to Advertising

I'm less interested in the Apple iPad and the spate of other interactive tablet devices about to flood into the consumer marketplace than in what they represent: another in a long line of attempts to semi-privatize the Internet.

Most "device revolutions" fail. For every iPod there are scores of Nomad Jukeboxes (of which I was a proud and happy early adopter). But this new revolution just might succeed, because it's not about the devices; it's about the consumer behavior impelling their invention. And it's that real - or presumed - consumer behavior that's generating a proliferation of not-so-secret gardens on the Web, many of them device-based - a phenomenon Forrester's Josh Bernoff calls the "Splinternet." Don't look now, but your television, telephone, radio, TiVo, cable box, and even your desktop PC are or are about to become gated intranets - with significant implications for marketers, media and agencies.

The biggest issue is complexity - the bogeyman that has haunted marketing and advertising from the dawn of the ad-supported Web. Publishers are waxing hopeful that the iPad will resolve the challenges that have seen their businesses sundered; weeks before its launch, The New York Times's David Carr even labeled Apple's device a "savior," arguing that it "represents an opportunity to renew the romance between printed material and consumer." Yet it's that very romantic impulse that should serve as warning that a pre-nup is needed, for without continuing, concerted, cross-industry commitment to managing transactional complexity in the marketing-media supply chain, the iPad and its ilk might only make publishers' problems worse.

Portal Period

The semi-privatization of the Internet has been creeping up on us for a long time - almost as long as the Web has existed, in fact, and so-called portals attempted to become the controlling influence over consumers' surfing habits. The portal period is generally considered a failure -- sort of the Paleozoic Era of the Internet -- but that's unfair. Rather, the first decade-and-a-half of the Web's gestation were largely about its proliferation and diversity, with consumers seeking navigation through an unfamiliar maze. That made search engines more valuable than portals.

But the walled gardens have always been there, and they've been growing in influence. What are Facebook and Twitter, after all, if not gated communities, built on Internet Protocol (IP), that live within the confines of the larger Web? While they're generously forgiving fenced neighborhoods (anyone can move in, regardless of race, creed, color, or brand preference), they are walled gardens nonetheless. They have their own rules and regulations, codes of conduct, behaviors, mannerisms and lingo. To identify them with the vague techie term "platforms" obscures what they really are: private communities, like cooperative apartment buildings in the big city. They allow you access to the larger, opportunity-laden and riskier world outside, but you'll always have your safe haven to return to.

Changing metaphors, if the Web is a "cesspool," as Google CEO Eric Schmidt has famously put it, maybe these are country club swimming pools - bacteria-free places to swim with your own kind. But - and this is important - however removed these country clubs were from the cesspools, they were still part of the larger town. The waste water still flowed to the same place. The kids may have been richer and snootier than you, but they went to the local public school. The same has been true with the Web's country club pools - until now.


Although the new IP-fueled devices promise to infuse interactivity into the last remaining analog nooks and crannies of our daily lives, the communities guarded by them threaten to upend that earlier, comfortable symbiosis. These devices and their proprietors have the ability to lock the community gates much tighter - or, at least, make the community so self-contained that any impulse to leave is restrained. They take the dogma that still guides so many digerati - "information wants to be free" - and reveal it as little more than a silly, thoughtless mantra.

Amazon's World

While the iPhone, with its "apps economy,", is the readiest example of these device-based walled gardens, Amazon's Kindle may be a better one. The iPhone, after all, still hints at the larger world - and the larger World Wide Web; the iPad, which some first-day critics labeled "just a big iPod Touch," is even more directly a creature of the Web. The Kindle, although IP-based, is utterly removed from it. Indeed, Amazon's walled garden for literati is more akin to a company town, with everything from access to product offerings to pricing tightly managed. Even the famously controlling Apple was moved to promote its relative benevolence to the media industry, noting that the iPad will offer book publishers and readers a choice of two price points, in contrast to the (lower) one required in Kindletown.

In fact, Apple has been a paragon of openness, compared with such other walled gardens as Sony's Playstation and Microsoft's xBox. True, the music industry has complained bitterly about how Apple's pricing policy for music and forced unbundling upset the financial requirements of the major recording companies. But at the same time, I can get virtually any type of music - regardless of codec, seller, or price - onto my iPod. (To this day, I have vastly more tunes there acquired from eMusic than from the Apple Store.)

More and more, "degree of openness" is looking to be a - perhaps the - central strategic differentiator among the different walled gardens of the Web. My favorite new gated community - Netflix Streaming - is fairly closed. Although it's accessible through numerous network devices (it comes through brilliantly on my TiVo HD), its offerings are solely those Netflix makes available - one reason I believe Netflix will become a financing powerhouse in Hollywood and among independent producers before too long.

Another favorite of mine, Boxee (which I access on my 46"-inch Samsung through the ATVFlash package of Apple TV hacks), is reasonably open. It offers widgets for scores of online video purveyors, and looks like it wants to be a remote control and organizing tool for as much digital video content as exists. (Boxee's ongoing tussle with Hulu is evidence of the "openness" contests beginning to shake up the digital video marketplace.)

Open TV

Boxee, which has announced imminent plans to release a proprietary set-top box, may even be setting itself up in direct opposition to the television set manufacturers that are bringing to market network-connected HDTV's with apps built directly into the screens, in what look to be totally closed systems. This is an issue I expect Boxee CEO Avner Ronen will address in his keynote presentation next month at the IAB Annual Leadership Meeting.

"Degree of openness" is, as I suggested, a strategic decision companies will have to make. There's no morality attached to it, the information-wants-to-be-free crowd notwithstanding. Some companies will thrive by remaining as porous as possible, while others will succeed by locking their gates. Consider Citigroup analyst Mark Mahaney's recent research note on Netflix:

We believe that NFLX is benefiting from a materially improved all-in product offering with a) improved DVD-By-Mail delivery service, b) expanded Streaming selection (17,000+ titles), and c) materially improved user interfaces via gaming devices (xBox, PS3) and Web-integrated CE devices and TVs. The ongoing shuttering of DVD rental stores is also helping. And the end result is higher customer satisfaction (reduced churn) and deeper competitive moats. Add all this to a increasingly efficient biz model (rising Gross Margins), and you’ve got an Internet Core Holding.

"Deeper competitive moats" are something that, inevitably, marketers, advertisers and media will need to learn to cross. The iPad won't necessarily get them to the other side. Far from being their savior, it could turn out to be a version of Charon, ferrying them across the River Styx to Hades.

Seamless Scale

I'm not even thinking about the obvious calculations - such as, how strictly will Apple set the terms and conditions, including pricing and customer-data control, for publishers seeking to sell their goods onto the iPad? A much more serious question is this: How fragmented will the advertising supply chain become? In deeply practical terms, if you work in advertising,your future depends on how companies like Apple intend to answer that question.

Put simply, a company's opportunity to create, sell and use advertising effectively and profitably will depend on its ability to deliver it seamlessly across multiple devices. Fostering seamless delivery across multiple sites has been the rationale underlying the IAB since our founding 15 years ago. Yet as successful as we've been in standardizing advertising unit formats, measurement guidelines, work-flow processes, and the like, other central standards have proved elusive. For example, the creative agencies on the IAB Agency Advisory Board have said categorically that their single greatest obstacle to advertising effectiveness and growth is their inability to deliver the same rich-media ads to tens of millions of households across multiple sites because, as they put it, "the rich media toolkit differs too much from site to site."

The proliferation of device-based walled gardens risks making our complex supply chain even more fragmented and complicated than it's been. As Forrester's Bernoff wrote, "Web marketing has grown since 1995, based on the idea that everything is connected. Click-throughs, ad networks, analytics, search-engine optimization -- it all works because the Web is standardized. Google works because the Web is standardized. Not any more. Each new device has its own ad networks, format, and technology." The Apple iPad's lack of Adobe Flash - a core component of much interactive display advertising - only serves to underscore how splintered the advertising economy could become.

But I disagree with Bernoff's conclusion about the Splinternet. Don't "try to unify things again," he says. "The shattering cannot be undone."

Supply Chain Detente

It must be, though, if ad-supported media are to survive. This prompts two suggestions:

  • Device manufacturers and the proprietors of other walled gardens should work collaboratively to adopt consistent standards to allow the advertising and marketing economies to flourish. Beat your brains out competitively, but don't subvert the advertising economy. Join the IAB and contribute to supply chain detente.
  • To the degree that the walled gardens create impediments to scale, publishers need to find other sources of revenue. Media companies must redouble their efforts to add marketing services to their sets of offerings.

15 comments:

  1. Terrific overview and strong points, R2, thanks for sharing the thoughts!

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  2. Boy, that "no flash" thing has got you all up in a tizzy doesn't it? I hate to say it, but flash sucks and flash advertising is dead, dead, dead. Time to "think different" and find a new way, or ways, of reaching your audience. Have you heard of a thing called apps?

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  3. You are the head of the IAB, no? And the goal of the organization is to in essence help your members -- media and tech companies -- sell more advertising, no?

    The overall web -- or cesspool, as Schmitt describes it -- has proven itself a wonderful place for advertising prices to go down ... and then down further, as all eyeballs become commodities. The only beneficiary here was Google.

    The only way to differentiate audiences -- and to hold them in a way as to sell advertiisng at a premium is to create or take advantage of these walled gardens.

    What am I missing?

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  4. I am with Anonymous above.

    I think the IAB has let the internet turn into the garbage it is. They have chosen to let ad networks flourish and continue to drive down the price of online ads. There is no value is advertising online anymore. No rules or restrictions. Why spend real time creating valuable content when you can hire kids for pennies on the dollar (re: AOL's Seed) to make content for you?

    Why spend $30+ CPM on NY Times when you can spend .50 for re targeting, or through an ad network that targets the same users through 100 other crappy blogs.

    Time for you to step up Randall and take charge. The IAB, Google and others in this cesspool have created this mess. What did you think would happen?

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  5. Another vote for the Arnonymous and Anonymous p-o-v. Interruptive advertising is over. Welcome to the new century. The IAB needs to rethink or move aside.

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  6. There is more than one way to solve the complexity problem, and there is more than one mission for the IAB.

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  7. One more thing. I do think your underlying point is insightful...actually terrifically insightful...about how the web is evolving into these various walled gardens, or platforms or what not. I just think the implications you draw are off

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  8. One device does not a privatized internet make. And especially one that allows one to visit ANY Web site on the planet. Apple will never support the end of net neutrality. It's completely contrary to their culture. Comcast, on the other hand, is fighting tooth and nail to take your open internet away. I cancelled their service when I noticed that.

    Calling the App store a walled garden is overreaching when you consider that anyone can write apps for the iPhone or the iPad, or the iPod. Anyone. It's not limited to Apple programmers.

    Is the IAB for or against Net Neutrality, by the way? It's not totally clear in this article.

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  9. I thank you for getting my passion and braincells firing, Randall. I want to give this further thought and write a full response on my own blog next week. But my immediate response is that you're looking at the world of digital marketing through far too narrow of a lens.

    First, the reality of economics is that you often have to get some level of privatization for market economics to take hold. Apple has created a great deal of privatization in the music industry and now with the iPhone and apps. This has led to a real, thriving marketplace in which Apple has an incentive and ability to continually improve the user experience. The better it makes iTunes, the more music it sells. Further, consumers like that Apple is protecting them from porn and malware. Many real, thriving businesses and happy consumers have been spawned by Apple's efforts so far.

    Google has also privatized the web in a way. It has a search engine that sets rules about the content that it crawls and ranks. Its algorithm treats some content better than others. The result: A fairly well-organized tool that has made consumers' lives much better, and created billions in value for both shareholders and advertisers.

    The biggest complaint I have is with your statement of the "rationale underlying the IAB...[is to foster] seamless delivery [of ads] across multiple sites." As a former client-side marketer and current digital ad agency leader I find this mission incredibly narrow.

    Marketers want to sell their products and services. Interruptive advertising spread across many digital properties at once is but only one of many ways to achieve this goal. In fact, it is a marketing strategy that is looking worse and worse - both in the online and offline world, and whether standardization exists or not. People pay decreasing attention and trust to the growing number of interruptive advertising that we experience in our lives.

    On the other hand, tools like Google and the iPhone are allowing marketers to find and forge meaningful connections with their customers and add value to their lives. Tools like Nike+ or Kraft's iFood app are not "easy" for marketers to execute with the push of a single ad unit. But they are taking marketing to a much higher level both in terms of the impact on customers' lives and the company's bottom lines.

    Consumers and marketers will both figure out how to keep winning in new media in the years to come. It won't be easy but we have plenty of incentives to find a way to win. My question, though, is whether the IAB will survive if its only purpose is to ensure that interruptive banner advertising is standardized.

    I believe it will be impossible for the advertising tail to wag the device/technology dog, no matter how hard the good people at the IAB and its members work. I would like the IAB re-examine what its members need - and potentially renew itself to become more focused on making digital marketing work - especially in a way that has a positive impact on people's lives.

    Standardized banner ads are the absolute least interesting way to win in this exciting digital world. I think the IAB can take the bar much higher by helping us adjust to where the marketplace - and society - wants us to go.

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  10. Bob, I really appreciate not just the thoughtfulness of your comment but the fact that you're not hiding behind the cloak of anonymity. I want to respond only to one point, because you're indicating it wasn't clear: IAB's mission goes FAR beyond managing supply chain consensus. As it says on our Web site (and in every presentation we make in every venue), "The Interactive Advertising Bureau is dedicated to the growth of the interactive advertising marketplace, of interactive’s share of total marketing spend, and of our members’ share of total marketing spend." We define our three strategic platforms as "operational effectiveness" (taking cost and complexity out of the supply chain); "accountability" (continually improving upon interactive's ability to target and measure audiences better than any other medium); and "engagement" (using research,training and marketing to showcase interactive media's unique ability to encourage marketer growth by getting the right messages to the right people in the right contexts at the right time).

    The mission statement is meant to be taken literally - our activities revolve around the totality of marketing spend, from what's typically considered "above the line" to what's traditionally considered "below the line." I'm on record continually talking about the importance of media companies adding marketing services to their mix of revenue-generating activities, so they can break out of their reliance on display advertising revenues. That said, display advertising remains an enormous part of the marketing-media ecosystem, and still constitutes about 30% of total marketing spend (with the rest going to below-the-line functions like trade promotions, consumer promotions, DR, PR, etc.) And supply chain alignment and simplicity has been core to the utility of display advertising in all media.

    That's largely why IAB was founded 15 years ago. And while we're probably still best known for our work in developing industry-consensus standards, guidelines and best practices, our Web site (www.iab.net) will attest to a far broader range of accomplishments in the past year alone, from the historic consensus agreement among IAB and four other national trade associations around cross-industry self-regulatory principles to protect consumer privacy, to the groundbreaking Bain-IAB study "Building Brands Online."

    For anyone still reading these comments, the "growth story" will be the focus of our IAB Annual Leadership Meeting in La Costa, Feb. 21-23.

    Anyway, I'm really thankful for your thoughtful response. I write these things largely to provoke debate!

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  11. I think all this presupposes that one device cannibalizes web content consumption from another device. But I don't think that is reality (or if it is, it's not significant).

    Will the ipad change this? I don' think it will, but let's assume it does - publishers would take a stand, and likely win out over Apple (or reach a compromise that satisfies both publishers and their advertisers). How? Let's say the ipad is a huge success and drastically changes web content consumption. Suddenly ESPN.com's pageviews (ad inventory) are cut in half b/c consumption has shifted to the ipad. ESPN will cut off access from the ipad, and blame Apple. Consumers will go back to viewing their ESPN content on the web, and will be pissed at Apple (look at cable - when consumers can't get the tennis channel or the nfl network or whatever other channel, they blame the cable company, not the content provider). So Apple would have to make the device ad-friendly for pubs & advertisers, and net-net, there's no real impact on or threat to advertising.

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  12. You really ought to cite Jonathan Zittrain here. Most of what you say comes from him.

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  13. A great overview, but I'm surprised at many of the comments. Who knew that so many IAB-blog readers would be against free market economics?

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  14. Don't forget that Apple TV, which loves QuickTime, could be the next big thing from Cupertino, and that may be part of Apple's struggle with Flash. When ATV matures, it could be a serious competitor that pulls together television, computing, the net, music, movies, books, gaming and more.

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  15. I remember setting out in 2002 or so to be a member of every «gated community» there was at the time, following all the Web 2.0 blogs and such. Remember Tribe.net? Corante has not been updated in two years. Gone are the salad days of Clay Shirky.

    I never got to backpack Europe, so this was that. It was not long before I lost track, of course.

    When my company gave me a BlackBerry -- and me in an ediorial job requiring laser-focused attention in the midst of meatspace anarchy -- I tortured it back by hacking the bejesus out of it as best I could with my poetry major and techie friends.

    Now I only tweet one thing: The number of twits I have ignored in the past eight hours.

    What I think I resent most is the corollary to your concept: The constant nag to «publicate» my private space in order to generate «content».

    Content. Ptui. The contempt for the creative writer implicit in the very notion makes me so mad. I am not a content generator. Lorum ipsum is. Me, I try to write Brazilian badlands troubadour poetry in Portuguese, along with adjective-laden blurbs for the app economy from time to time to keep the cats in chow.

    And now, just as they are trying to tell me I need to spend money on a Kindle to read texts I can pick up for peanuts at a yard sale or from used book brokers on various sites, they are trying to tell me that if I miss a twit, I am missing out on life, and that my resume will never be read if it comes as an .ODT file rather than as a Flash gizmo.

    My business Web site is little more than html+body+p+/p+/body+/html, and a bit of CSS from some Scandinavian open-sourcer. I am one of those people who think we are still on Web 0.96c3po-dailysnapshot (beta).

    I got this way from reading 200 startup press releases a day in the 3 years leading up to 9-11 down in the Silicon Alley.

    Note to marketers (with a nod to Grandpa Simpson): I never want to hear the words «revolution», «innovation» or «this magic device» again. «Disruptive» also stinks. Thomist argumentation on the «commons» I can also do without. My next box is going to be a Chinese import from a cheap Brazilian chain store running Debian. I am willing to return to gopher:// if need be.

    Anyway, thank you for those deep thoughts, Bee! It sits well alongside Jaron Lanier's «Digital Maoism» in my bibliography. I have been thinking a lot about the real estate metaphor for n-dimensional virtual space lately as well. The astonishingly crooked real estate market in São Paulo, where I live now, is not something you want exercising eminent domain over your inner sanctum.

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