The Problem with Advertising

I am excited to dig into this Monetizing Media project not just because I see the momentum gathering behind media companies’ move to subscription models but because I want to see more of the industry move toward charging for content.

Here’s the problem with advertising-dependent media…

Misaligned Incentives

Incentives matter, they shape human behavior – individually and in organizations – even if it is subconsciously over time. If my business model is one in which my primary customer is advertisers, then at its core I’m running an advertising company. My content is just ad products, and I’ll evolve those products to better sell to advertisers. That is the basis of my bottom line and the direction my organization will naturally take, as much as I might rationalize it to myself along the way.

In journalism, the creative side has long demanded a “separation of church and state” from the business side of their company that deals with advertisers, fearing pressure from individual advertisers could influence the content they create. There was a fundamental failure over the last 20 years to account for the fact that the free, ad-dependent business model online could undermine the integrity of their work far more than one overzealous advertiser would.

Race to the Bottom

What advertising-dependent digital publishing incentivizes is a race to the bottom on quality and profitability. Here’s how the game works: my media company is getting an $x CPM (cost per mille, i.e. cost per thousand views) for the ads; most of the ads are bought programmatically through ad exchanges because major advertising agencies that represent brands want to make purchases on massive scale.

To make more money, I need more views; so I start producing more articles/videos that each take less time to make, and I start getting really smart about all the best practices for getting people to click on my content. Everything that’s posted is A/B tested so I can determine the most click-able headline, and based on analytics on the type of content that’s performing best (and the type of content I see performing well elsewhere), I iterate. I don’t need deep analysis because the headline and the first couple sentences are all that most people read and all that I need to generate an ad impression. Content that’s timely – responding to some pop culture or news event of the day – performs well, so more of that. Content that uncovers the sensation in every story gets people to share it on social media – scandals that make them angry usually perform better than heart-warming stories that make them happy, but either way the key is to stay at the extremes of emotion.

So now I’m cranking out lots of short, timely, sensational content and getting a lot more views. Except every other site has taken the same path, and the growing abundance of impressions (i.e. slots available for advertising) has caused the CPM on the ad marketplaces to drop. It’s simple supply and demand: greatly increase supply – and increasingly commoditize the supply so its interchangeable – and market prices will drop. My content is getting lower quality and more commoditized but I’m not making much more money from it because the CPM prices catch up pretty quickly. My only way to survive is to perpetually run this race, trying to stay an arm’s reach ahead of the market and falling CPMs for as long as possible.

Duopoly of Tech Giants

Social media companies are the ones earning most the advertising revenue from the content I’m creating and that my audience is sharing…its just part of the daily flow of publisher content that keeps people on their sites. Facebook and Google now collect 73% of all digital ad revenue in the US and account for 83% of market growth. Their platforms are where people actually spend time, engage with content, and engage with each other, so naturally they’re also the ones with the data to best to target ads (making them preferable to advertisers).

My audience isn’t really my audience after all. It’s just anonymous people (or bots) clicking on posts within their newsfeed, Twitter stream, etc. then moving on to the next one without much thought given to my brand or my other content. I don’t know their names and they don’t specifically come to my site to see what’s new. If I stopped publishing for a month, very few of them would notice.

And at any moment, these tech companies can change the algorithms that dictate how content spreads (the algorithms I’ve worked so hard to game to my benefit). In fact, they certainly will, again and again, because they’re companies too and their incentives are to keep figuring out how to evolve their product to make more money.

Lower Valuations

I now have a media company that’s not in control of its own fate…it’s very survival swings with changes in ad markets and the algorithms of tech companies. I don’t have much of an audience that’s truly dedicated to my brand and its hard to differentiate what I do relative to many other sites out there. I haven’t built a very attractive business from an investor standpoint. Even the most successful media companies at this game – who’ve been propped up by funding from investors focused on the audience growth rate – experience this.

Companies whose revenue is dominated by advertising income raise capital from investors on lower valuations than media companies of equivalent revenue whose income is mostly from subscriptions or transactions. That’s because subscription-based businesses have comparatively stable financials and control their relationship with the audience…they have a customer base that likes what they’re selling and would be receptive to new product offerings or even a subscription price hike.

Is advertising a universally terrible idea?

No. It can be a great secondary revenue stream for media companies who treat their audience as their customer. In fact, an engaged, loyal audience within a certain demographic niche that values my distinct brand enough to pay for it offers the type of genuine interaction that certain advertisers would value involvement in…sponsoring segments, product placement, etc. Content creators can maintain their focus on quality, and selected brands can be included in ways that are complementary.

Advertising-dependent companies, however, are a bad business to be in and not where we’ll find top quality content being produced consistently. But they will always be around providing the filler content…the daytime soaps of the digital world offering mindless distraction.


**What about TV? Top TV channels make most of their money from carriage fees the cable companies pay to them. They use the bargaining power of a large, loyal audience to get higher rates: “pay us $X or we’ll walk, and our devoted fanbase will revolt against you”). FOX News, ESPN, USA, etc. get paid the most because they focus on creating (or buying rights to) must-see shows that people follow loyally. Advertising revenue is still a very significant revenue stream, but its secondary to their carriage fees. And notably, the hottest newcomers to “TV” are the online subscription platforms like Netflix and Amazon Prime who are funded directly by their audience and benefit from all the data collected by owning that relationship themselves.**