What Does Micro-HOO! Mean? It Means The ‘Ad Model’ Is Winning

4
160

If you sell content, media or applications online, I have good news, and I have bad news.

The good news is that it turns out consumers will pay for it! Woo-hooo!

The bad news is that they won’t pay money, just attention.

The media sages and digerati are all a-Twitter with commentary on the economic, social, and technical implications of Microsoft’s proposed acquisition of Yahoo!, but for those of us in the extended digital ad space, the primary implication couldn’t be more clear: In the share battle among the big three online revenue models – Purchase, Subscription, and Advertising – the advertising model is winning.

Microsoft has accepted – embraced even – what some in the newspaper, magazine, video, music, and software businesses are trying hard to ignore:

Given the choice between paying for something and getting it for free, people prefer free.

Given the above, you either need to a.) make sure your product isn’t available for free, or b.) find an economic model that doesn’t depend on people paying for it. If you choose b.), advertising is something you probably need to explore, understand and master, pronto.

Since it’s hard to argue whether the above is true, we seem intent on arguing whether or not it’s good. Advocates for “liberating” intellectual property of all kinds celebrate the “democratization” of art and commerce online, while detractors point to squandering a whole generation of people with genuine talent and insight who are now unable to make a living in the application of those gifts for the greater good of society.

If you run a software business (in the broadest sense of both terms), this argument is interesting, but largely irrelevant. You can either sit in the corner of your closet and try to go to your happy place – like the music industry has collectively chosen to do – or you can set to work re-shaping your business to the new reality. Love them or hate them, you have to give Mr. Ballmer and company credit for spotting the shovel on its way to their collective face, and for being willing to pour the fruits of their current franchise into an attempt to duck.

With Google hard at work on “free” (a.k.a., “ad supported”) online versions of the Office apps that account for a substantial share of Microsoft’s profits, how could Microsoft not allocate some substantial share of their accumulated treasure to the development of assets and expertise in the online advertising space? Among such assets Yahoo! is like a crown jewel at a yard sale, a little dusty from lack of skilled attention, but no less precious and now a relative bargain.

Setting aside the question of whether this acquisition is a good thing for John Q. Consumer, it certainly seems to be a positive development for the ad business.

First, it aligns two of the stronger players attempting to stave off an emerging Google hegemony, who as anyone who’s dealt with the advertising services team at Google can tell you, could benefit from some humility. 

Second, it means a large group of very smart grownups trying to make online advertising more valuable, if only so they can charge more for it. Advertisers have long been willing to pay twice the price for something that reliably delivers twice the result, and in this arithmetic is the foundation of an online ad business that delivers both superior results to its clients and superior returns to its shareholders.

Finally, to the extent that Google and Micro-HOO! are blazing the trail for ad-supported online applications and services, building the infrastructure to support that industry and educating the market as to its possibilities, it’s likely others will be able to draft on their success. The result could be a whole new generation of digital outlets, and an even broader buffet of highly targeted media.

We’ve been here before, of course. In the last Internet Bubble everybodyandthiermother.com talked about the ad model they’d use to “monetize eyeballs” when the money from their $100 million series B venture round ran low. Turns out that was harder than it seemed, and in the end we ended up with a lot of Ferrari’s on eBay and power concentrated in the hands of four or five online ad giants.

Still, things are different now. Broadband access is commonplace, and online’s share of total ad spend has reached critical mass well below its share of users’ media consumption. Most agencies understand the potential of the medium, and CMO’s are arguing about the right way to measure results instead of whether or not they can be achieved.

If the number of online ad giants is now to decline by one, but the competitive balance among those that remain is improved, it’s probably a net positive from the narrow perspective of the online ad business. In the short run, leverage with Google will increase and in the long run, advertisers will have more good options on the table.

Users will get more of the things they want online for “free,” at least in terms of cold hard cash. What the cost to them will be in terms of attention, choice and privacy, it’s much harder to say.

4 COMMENTS

  1. Microhoo could be a strong contender in the search space if they are able to quickly consolidate their offerings, leverage the recent AQuantive purchase and continue to innovate in the space. No easy task.

  2. That is a short sighted approach to the ad model. Just because people won’t pay for content, media or applicatons in the way it is currently being offered does NOT mean that they won’t pay for content.

    Sellers of content, media and applications need to think of another approach to sell their wares.

  3. […] Since it’s hard to argue whether the above is true, we seem intent on arguing whether or not it’s good. Advocates for “liberating” intellectual property of all kinds celebrate the “democratization” of art and commerce online, while detractors point to squandering a whole generation of people with genuine talent and insight who are now unable to make a living in the application of those gifts for the greater good of society…. continued on my column in Adotas here. […]

  4. Good article as usual from Mike. I’d agree the “ad model” is winning. Unsurprisingly, most of us would rather have someone else pay than to fork over our own cash. Also unsurprisingly, those of us who are paying to run advertising want something for our money.

    And there lies the tricky bit for people who want to sell ad space. The people with bigger ad budgets are marketers who sell through mass merchandisers like Wal-Mart. These are businesses of scale. We require millions and millions of buyers to stay in business.

    Today TV is excellent at delivering scale at a price marketers find fair. The web just isn’t. Plus, inventory is so plentiful online that the laws of supply and demand do not work in the web’s favor.

    But scale isn’t the game here, right? It’s all about being smarter.

    The promise of the web was (is?) that we don’t need to advertise to everyone: just the people we need. Paid search delivers on this promise bigtime. Display — not so much. In my limited experience, search delivers “smart” better than Behvioral Targeting at a far lower premium. In fact for me, buying big buckets of dirt-cheap, untargeted display banners has tended to outperform buying smarter, more targeted inventory. I hate that dumb outperforms smart, but… it does. The price premium more than offsets the targeting gains. If other marketers are getting similar results, this should create inexorable downward pricing pressure.

    To my eyes, the opportunity for Micro-Hoo (or anybody else who wants to be to banner ads what Google is to search) lies in two places.

    The first is in delivering scale at prices more attractive than TV.

    The second is in delivering Behvioral Targeting at prices at a much smaller premium vs. search than now exists. The truth is, mass marketers are WAY more comfortable running banners than dinky little search copy. We desperately want to be able to afford it. If MicroHoo can close that gap just enough, their merger will look like sheer genius.

    This is tough stuff to get right. But in my opinion, that IS the game for online display advertising.

    I said they were challenges. I didn’t say they were easy :-)

LEAVE A REPLY

Please enter your comment!
Please enter your name here