Storynomics

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ADVERTISING, A STORY OF ADDICTION

It started innocently enough. In the 1700s, weekly newspapers detailing local life and politics in the American colonies first sprouted everywhere, but then shriveled and died for two reasons. One, printing required a license from the Crown that specifically prohibited satire of the king’s representatives. A cartoon ridiculing the royal governor may have delighted the paper-buying public, but it bought the cartoonist a ticket to the whipping post. Two, newspaper publishers who kept their political heads down struggled nonetheless because paper and ink were costly and revenue depended on subscriptions—a luxury beyond the reach of many. Shrinking subscriber bases drove most papers out of business.

To survive, publishers needed a new business model. Advertising was virtually unknown, but each new immigrant ship brought settlers anxious to establish businesses. As they opened shop, craftsmen from coopers to clothiers tried to spread the word. Ads began to appear in the backs of newspapers, providing publishers with a critical new source of revenue.

Newspapers that advertised used the new income to lower subscription costs, and with that sell more papers. Broader reach meant greater influence, which in turn allowed publishers to charge more for advertising. As customers filled their shops, tradesmen bought more ads, papers thrived, and commerce enriched the ever-expanding colonies. Before long, advertising transformed both the publishing industry and the enterprises it served until the two became interdependent.

Benjamin Franklin, one of the most successful publishers of the day, leveraged this model with particular deftness. He personally taught business leaders the fine points of print marketing. As the back pages of his Pennsylvania Gazette filled with ads, the paper quickly became Philadelphia’s favorite. Building on this financial success, Franklin set up an intercolonial newspaper network from South Carolina to Connecticut, earning him the title Patron Saint of Advertising.¹

Throughout this era, merchants realized that the more prominent the ad, the greater the impact, but standard newspaper practice packed most advertisements cheek by jowl in the back pages with a few between articles. Businesses experimented with size, design, font, and page placement of ads, seeking new ways to impact readers with their messages. In time, they discovered that the most effective advertising strategy was interruption, placing ads directly in readers’ way as they read a story. This technique hooks the reader’s interest with a news story, then interrupts midstream with a brand message. Sudden intrusion into the reader’s flow of thought forces the brand’s message into a consumer’s consciousness.

Publishers, fearful of annoying their subscribers, resisted this tactic at first, but addicted as they were to ad income, they soon made the practice a newspaper norm, forcing readers to jump from the front page through the ads to finish a story.

With hindsight, we now realize that the instincts of those nineteenth-century newsmen were accurate—the more we interrupt consumers, the less we satisfy their overall experience. From the earliest days of advertising, the scent of annoyance has wafted between interrupt ads and interrupted context—be it news, fiction, or sports or other live events. Audiences simply learned to tolerate it.

At the end of the nineteenth century, rail lines connected cities, allowing manufacturers to reach far beyond the limits of local delivery trucks. Businesses rushed to capture rapidly expanding markets by shifting from local to regional or national campaigns. Ivory Soap was one of the first brands to launch truly nationwide advertising, with an initial ad buy of $11,000.

By 1897, surging success increased Ivory’s ad budget to $300,000 and earned an estimated 20 percent national market share at its peak. Many other recognized brands quickly followed suit.

Newspapers were just the beginning. In the early twentieth century, inventor and entrepreneur Guglielmo Marconi hoped to use his patents to control all wireless communication and create a subscription model for radio. But in 1906, an international treaty signed in Berlin decreed that no person, company, or country could monopolize the radio waves. Early broadcasters, therefore, had no choice but to establish the first completely ad-supported media.²

When commercial television began in the 1940s, broadcasting adopted radio’s interrupt advertising methods, and fast became the dominant form of media consumption. At their height, the three major networks (ABC, NBC, CBS) reached a combined fifty million viewers every night during prime time. For sixty years, the television commercial was the primary way Americans learned about new products.

Television outperformed all other media because it combined mass reach, a rich visual medium for messaging, and guaranteed audience attention. Marketers poured more and more money into television advertising over time, creating increasing demand for ad inventory.

And with that spend, ad addiction grew stronger—media companies could not get enough. They began to cram more advertising into each broadcast hour to drive their revenues and profits higher. In the 1950s, advertising accounted for four minutes of viewing time per hour. By the 1970s, commercial time had doubled. But with the growth of cable TV in the 1980s and then the open Internet in the early 1990s, audiences fragmented and advertising rates for individual shows began to fall. Ad-supported networks and cable channels scrambled to protect revenues by shoving still more advertising at an ever-shrinking audience. By 2011, cable networks were running ads for almost one minute out of every three.

CONSUMERS RESIST

By 2006, however, new technologies stepped in to help consumers skip ads. The video recording device TiVo marketed its “30 second skip” feature as a key benefit. Cable providers soon launched video on demand (VOD) so subscribers could bypass ads more easily than ever. A study by the Association of National Advertisers and Forrester Research showed that marketers watched the adoption of these services with nervous pessimism. Seventy percent of advertisers surveyed thought DVRs and VOD would “reduce or destroy the effectiveness” of the traditional thirty-second ad.³

In 2006, Advertising Age predicted this: “When DVR usage reaches 30 million households in the U.S., expected within three years, almost 60% of advertisers say they will spend less on conventional TV advertising; of those, 24% will cut their TV budgets by at least 25%.”

Time magazine reported that from 2009 to 2013, the average cost of a thirty-second prime-time TV commercial dropped 12.5 percent. When falling ad rates shrank revenues at ad-supported networks, they squeezed even more ads, albeit at a lower cost per ad, into their shows. In February 2015, the Wall Street Journal reported that cable networks were subtly speeding up the action in each broadcast hour to generate more time for ads.⁴ The Journal quoted one studio executive as saying, “It has gotten completely out of control. Actors’ performances are being seriously hurt by running shows this way.”

To continue to capture ad revenue, media companies experimented with new options, shifting content onto services like YouTube so they could “pre-roll” the ads that appeared before short videos.⁵ At Hulu, they fell back onto their old habits, recycling the same tired interrupt ad model that once worked on broadcast TV. Either way, marketers could at least guarantee that viewers saw their ads, because their media partners prevented fast-forwarding to skip ads.

These new capabilities, however, came with a price. By 2013, the cost of targeted online video ads had shot past that of television advertising, because pre-roll ads on YouTube and interrupt ads on Hulu guaranteed viewership and online delivery enabled more powerful ad targeting.⁶

In 2016, marketers were projected to have spent a record $605 billion on advertising around the world. Digital ad spending surpassed television ad spending for the first time, as budgets continued to shift to Facebook and YouTube.⁷ And advertising is projected to continue to grow, albeit at a slower pace, in 2017 as media companies, new and old, continue to work to find new ways to interrupt consumers on behalf of brand marketers, all the while denying viewers the best possible experience.⁸

But one important thing has changed.

CONSUMER’S REVOLT

Although the early Internet connected the globe and offered sufficient speed for consumers to browse and read articles, connections were not fast enough for reliable video delivery. Even short YouTube videos needed time to buffer, or they would stall during playback.

But by 2005, broadband adoption in the home surpassed dial-up in the United States. With this faster connection came a game changer for consumers: choice.

Consider Netflix, which was originally launched as a DVD subscription service in 1999, competing with Blockbuster and other video rental stores.⁹ With broadband adoption now at scale, Netflix launched a fledgling streaming service in 2007, offering consumers the ability to watch a small selection of the Netflix film library on their laptops. One year later, the company launched the service on game consoles and set-top boxes that allowed people to watch Netflix easily on their living room TVs.

Early Netflix consumers loved having instant access and enjoyed watching their favorite films and, later, television series completely ad-free. They were happy to pay a simple subscription fee of about $10 per month for unlimited viewing. Netflix invested new subscription revenues to grow its library, steadily adding films and then television shows, which the company licensed from traditional media partners.

Subscriber growth soared. In the fourth quarter of 2016, Netflix surpassed 93.8 million subscribers, dwarfing the reach of broadcast and cable networks.¹⁰ The company is expanding at an accelerating rate, adding more than two million subscribers each month in countries around the globe.

Growing subscriber revenues provides Netflix with a powerful competitive weapon. To expand and retain its subscriber base, Netflix borrowed a modus operandi from HBO and began to invest in original programming. Netflix series like House of Cards and Orange Is the New Black created rabid fans who spread word of Netflix online and off. In January 2016, the Wall Street Journal reported, “With… a $5 billion content budget for this year, Netflix is willing to outbid most any [sic] local TV network or streaming service.”¹¹

It seems simple, in hindsight. Netflix returned to the same subscription media model that drove early newspapers. But instead of succumbing to the temptation of advertising, which would have put the company’s financial incentives at odds with its customers’ desires, Netflix kept the two aligned. The company committed to delivering the best entertainment experience possible for its customers, and that meant not interrupting that experience with ads.

Their customers responded by shifting their viewing time to Netflix. In February 2017, CNBC reported that Netflix viewers consume 116 million hours of programming every day, completely ad-free.¹² From a marketer’s perspective, that’s 116 million hours each day when their customers go dark, due to Netflix alone.

Netflix inspired an industry. HBO NOW and HBO GO, over-the-top ¹³ services launched by HBO in 2015, drove audience viewership for Game of Thrones alone to over twenty-five million people in 2016.¹⁴ Spotify had fifty million ad-free subscribers for its premium music service in March 2017, after adding twenty million subscribers in the year prior.¹⁵ Apple signed up twenty-seven million subscribers to its ad-free music service in its first two years of operation and was adding more than one million subscribers monthly.¹⁶ YouTube introduced an ad-free option in September 2015.

Even Netflix’s rival Hulu, which launched a competitive streaming service one year after Netflix, has seen the light. Hulu was created as a joint venture among 21st Century Fox, NBCUniversal, and Walt Disney Co. Unlike Netflix, Hulu was established to move the traditional network advertising model online. Hulu charged a lower subscription fee than Netflix and showed commercials to users before and during programming.

But by June 2015, the market had spoken. Hulu’s audience numbered nine million, just 14 percent of Netflix’s total audience at the time. Hulu announced it was evaluating options.

Three months later, Hulu capitulated and launched an ad-free service, for just $2 more per month. The company sent a note to former subscribers, thanking them for showing Hulu the way, and inviting them back to Hulu, this time for an ad-free experience.

CBS learned a similar lesson. In November 2014, CBS launched All Access, an over-the-top subscription service that included interrupt advertising. In August 2016, the company capitulated to consumer demand and started offering an ad-free version for just $4 more per month.¹⁷

HITTING ROCK BOTTOM: THE DECLINE OF TRADITIONAL MEDIA

On January 22, 1996, the New York Times launched on the Internet, providing readers around the world with access to news the night of publication. Circulation of US newspapers fell 37 percent from 1990 to 2015 as consumers moved online, with the fastest drop in subscribers coming in 2005.¹⁸

By 2006, marketers recognized the trend. Over the next four years, they cut newspaper advertising spending by half, and it has continued to drop every year since. Newspapers have responded by trimming costs, sacrificing much of the content that their subscribers love.

Slow connectivity protected broadcasters for a time. Consumers remained captive if they wanted to watch long-form programming. But today, the Netflix phenomenon is taking a heavy toll. Traditional television advertising viewership began a rapid decline in 2010.¹⁹

Television advertising is starting to go the way of the newspaper as marketers adapt to shrinking broadcast audiences.²⁰ A decline in ad spending, felt precipitously in print in 2007, began to hammer broadcast TV in 2015.²¹

BANNER BLINDNESS AND BLOCKING

The consumer revolt against advertising is not limited to the adoption of streaming video and music services, however. Since 2008, marketers have been tracking a phenomenon called banner blindness, in which readers of a web page literally look around ads when browsing a page. Eye tracking studies, which use technology to monitor what part of a web page users actually view, initially identified the phenomenon.²²

A study by Infolinks found that “after being asked to recall the last display ad they saw, only 14% of users could name the company, the brand, or the product, suggesting that brands are wasting millions of dollars in ads that consumers don’t remember.”²³

And then the news for marketers got even worse. In September 2015, PageFair and Adobe announced that 198 million people were using ad-blocking software on their desktop devices globally. The study found that ad-blocking adoption is growing at 41 percent annually. One month later, Apple introduced an iOS software upgrade allowing Apple mobile devices to support ad blocking as well. The study estimated that $41.4 billion in advertisements would be blocked worldwide in 2016. A new front had opened in the popular revolt against interruption and emotional manipulation.

Eye tracking studies show readers ignore ads.

The rapid decline of interrupt advertising created a crisis that hit media companies first. As consumers ignore, block, and pay to avoid advertising, brands have begun to cut advertising budgets. The resulting drop in ad revenues has left media business models upside down.

The second phase of the crisis will strike brands in nearly every industry. Marketers, dependent on advertising as the primary way to connect with their customers, are suddenly unable to reach them. Their brands are already starting to fade to dark, but many CMOs have yet to realize it.

THE MARKETING CRISIS

For three centuries, most companies have used the same approach to reach, acquire, and retain customers: They advertised to them. The approach was simple and consistent. Marketers identified the news and entertainment stories that their customers enjoyed most, then interrupted those stories with ads describing their products and services. By showing those ads repeatedly to customers at scale, they built growing brand awareness. If they created ads that connected emotionally with their customers, brand awareness became brand affinity.

Today’s advertising crisis also created an unprecedented marketing crisis. Advertising has been a tried-and-true method to reach audiences since Ben Franklin published newspapers. As consumers block, ignore and pay to avoid advertisements, marketers must scramble to find a new way to reach their customers. Brands that fail to connect will surrender to challenger brands that discover the secret.