I Lied When I Said I Would Change

Just yesterday I said I was going to try and write less. I am going to try, but I'm telling you now that I'm going to be unsuccessful.

This Nielsen report on first half 2007 advertising spend is full of interesting conundrums! For instance, it reports that H1-07 ad spend is down 0.5% from H1-06, but that spend at the top ten advertisers is down 7.3%. That means (using conservative assumptions) that the rest of the advertisers actually increased their aggregate ad spend by 0.4%. Who benefits from advertising dollars going up at small advertisers? Search, perhaps?

Another conundrum: if you take out the auto manufacturers, ad spend increased. This is interesting because, by my calculations, US auto sales fell by 2.2% in H1-07 compared to H1-06. Historically this would have meant an increase in auto advertising. Perhaps the auto manufacturers' CMOs were a little slow on the uptake, or perhaps not.

The hard part of all this for me is that this report is about advertising spend in major media, not marketing spend by companies. Lead purchases would not show up in this. Direct marketing does not show up. My argument--that marketers will move dollars from non-accountable advertising to more accountable marketing, like lead gen--is neither supported nor contradicted by this data. I would love to see total marketing spend across the US economy (or even a representative subsector, like public companies) from H1-06 and H1-07. Anyone have that data?

Anybody Have an In With the Nobel Committee?

Read in the Post this morning that Nielsen reports that advertising spend decreased in the first half of 2007 compared to the first half of 2006. Is the dreaded advertising recession upon us?

Who cares? While overall ad spend was down 0.5% in the first half, online advertising was up 23%. Twenty-three percent? 23%. That's a lot.

Blodget's take is that the sky may still fall: "we still question how long this strength can continue if the overall pool of ad dollars shrinks..." Sorry to tell you Henry, but the overall pool just did shrink... and online grew like wildfire.

In reality, both Blodget's and my arguments are completely unaffected by this report. We had no economic turbulence in the first half to speak of. Why did ad dollars go down? I doubt anybody knows, but I'm guessing it has to do with the 50% of variability that has nothing to do with overall GDP growth. I'm in the process of building a ginormous spreadsheet with all available economic data from 1900 to today. Then I'll start doing statistical analysis to find the real drivers of ad spend growth or decline. I expect--when I'm done in five or six years--to be able to answer this question.

The really surprising thing in this report, to me, is that spend in national magazines grew by 8.4% while local magazines fell by 5.2%. What's up with that?

Two Months of Blogging

There used to be an idea that to understand something you had to try and do it. I think this is true: it's impossible to understand the beauty of a pencil sketch hanging in the Met unless you've taken pencil in hand and tried to sketch something yourself. What I have usually learned from this type of activity is that doing something that looks easy well is often incredibly difficult.

I've been blogging for two months today. My initial fears--that I wouldn't have enough to write about--have faded. In fact, I'm no longer quite sure how I could possibly have thought that. My problem, I think, is quite the opposite: I write too much.

Yesterday, Henrik Torstensson saw one of my posts and blogged about it (why, I don't know, it was one of worst posts I think.) His comment was short; he simply said what needed to be said and that was it. I guess that's why he's Sweden's top blogger. He's my new role model.

So, here are my goals for the next two months:

1. Pithier;
2. More graphs, fewer numbers;
3. More conversation, less oratory;
4. Pithier.

Anything I'm missing?

Data, Data, Who's Got the Data

The Insider says that

Unlike those who argue that Google's magical business will accelerate in a recession as advertisers spend only where they know they will get a great ROI, we think Google's growth will be hit by economic weakness...

Oh, Henry, who's arguing? This is just cocktail chatter. Without the cocktails, unfortunately.

Seriously, this is a really interesting question: what are the drivers of advertising spend? Certainly GDP growth and growth in advertising expenditures are correlated. The correlation is about 0.5 since the end of World War II, according to this data. (I wonder if the correlated part is the allegorical half that's wasted...) So an economic recession would often coincide with an advertising recession. But what's the mechanism for that decline? Decline in CPMs or decline in users of media? That is, is it driven by marketing departments or consumers? Is the decline caused by the economic decline, or are they both caused by some third thing? I can't answer these. I need a lot more data.

And there isn't a lot because advertising recessions are unusual. There have been only three since 1945, in nominal terms: in 1961 (decrease of 0.8% from the previous year), 1991 (-1.6%) and 2001 (-4.9%). Clearly the last one was the most significant: it was the disappearance of the dot-com spending. (If you hadn't had 2000's stupendous growth in dot-com related advertising there would have been no decline when it disappeared.) But yes, if there's a recession, we may have another ad recession.

Everybody gets hurt in an ad recession, but not equally. According to Piper Jaffray's research (sorry, no link), 2001 saw a fall-off in advertising expenditures of 6.7% from 2000 (why can't these people get together and agree on their numbers!) The loss in spend was not evenly distributed. In 2001 direct mail and yellow pages advertising did not decline. TV was hit the worst, magazines second, internet third, then newspaper and radio.

Accountable and local advertising did not decline during the worst ad recession since 1938. Why? Because businesses still need customers; they're just not willing to take as much risk.

The riskiness of forms of advertising--and by riskiness I mean the variance of cost to acquire a customer--in decreasing order, is:

1. Buying a spot with no metrics
2. Buying a measurable impression
3. Buying a click or call
4. Buying a lead or action
5. Buying a customer

Note that the risk decreases as accountability increases (Is this necessarily so? It would seem to imply that advertising dollars are rationally allocated--laugh all you want, but it seems to be true. I'll have to noodle that.) If there is an ad recession, the riskiest forms of advertising will be hurt the worst. Guerilla Marketing and other forms of marketing with absolutely no way to infer their reach just stop. Print/TV/Radio get hurt.

But there aren't many ways to buy a customer yet, so the money can't reach up that far. Buying leads and buying actions will benefit the most, growth-wise, but off a small base. I think perhaps Google benefits the most, dollar-wise.

When I say "benefits the most" I mean, of course, "gets hurt the least." Ad recessions hit all players to some extent. If there is one, Google will grow more slowly than they would have otherwise, but they will still grow.

[BTW, I am not advocating buying Google stock. In my opinion--which is worth what you're paying for it--Google is wildly overvalued, ad recession or not.]

Garbage Out

AdWeek has an article summarizing findings from a McKinsey study on online marketing. The question posed to a bunch of marketing execs who market online was, essentially, why aren't you marketing more online?

The answers:

• 52%: insufficient metrics to measure impact;
  
• 41%: insufficient in-house capabilities;
• 33%: the difficulty of convincing management;
• 24%: limited reach of digital tools;
• 18%: insufficient capabilities at agency.

Um, what? Insufficient metrics? Compared to what? Online has metrics and that's more than you can say about almost all other media except for direct mail and telemarketing. Parsing the above answers, I think the upshot is that at least two-thirds and probably more like 80% of marketing execs simply don't know what they are doing when it comes to the internet.

From the article:

...although a majority ... find online vehicles to be more efficient than traditional advertising, the relative newness of the medium and its still developing benchmark data make it a hard sell internally to bosses who demand accountability... the multiplicity of online channels can make it difficult to isolate what's working and what's not...

I agree it's more efficient, but not accountable? The beauty of online versus most other media is that you can isolate what's working and what's not. Is TV accountable? Newspaper? Radio? This is truly an odd survey and frankly, I can't make sense of the results. Am I missing something? Do I just not get it?

My opinion? To coin a phrase, online advertising is clearly the worst form of marketing, except all the others that have been tried from time to time.

Here's an alternative survey.

You aren't increasing your online advertising spend because:

1. Janice, could you print out my email for me to read, please?
2. Do you mind closing the door? I'm working on my putting.
3. That's not going to impress my buddies at halftime during the Superbowl.
4. Accountability? You trying to get me fired?

McKinsey, feel free.

Thinking About Tomorrow

Fred Wilson is worried. He thinks that the internet industry is headed for a rough patch. He says this is a gut feeling, but coming from Fred a gut feeling can't be discounted.

I agree with Fred about the cyclicality of the venture industry. Startups start, get funded and get traction. Imitators follow. At some point, the best few in each category go public or are acquired, most of the rest fail or go sideways. This has started.

In the past month I've had many people approach me about starting companies much like those recently acquired. These entrepreneurs are looking at recent exit valuations. But the opportunity is gone. Being part of the first wave is usually pretty critical. If you're not, then you can't just compete with the early companies, you need to displace them. This requires a revolutionary change in product, not just improvement.

When startups fail, they tend to fail in tranches, soon after the choice few are acquired or go public. This is not driven by the larger economy, it's driven by the disappearance of exit opportunities, and thus funding, for these money-losing firms.

In a nutshell, here's what is and will be happening:

1. Large companies can't see where growth in their core businesses is going to come from;
2. They invest in the best of the entrepreneurial ventures, paying whatever it takes, hoping to create growth;
3. Other entrepreneurs see the crazy valuations and start me-too companies;
4. After a year or so, the acquirors realize they overpaid;
   
5. Both the companies that weren't acquired in the first go-round and the me-too companies find no buyers;
6. Investors, realizing that valuations will not be what they hoped, either fold or offer down rounds, effectively killing off the company;
   
7. Meanwhile, entrepreneurs that are focussed on disrupting the way things are done rather than on a quick exit are starting companies that will be the Tacodas of2012.

The answer isn't to worry about eventual failures, it's to encourage startups that aren't at all like the success stories of today. If you're an entrepreneur, don't start an ad network now, don't start a behavioural targetting company now. I can't even tell you what to start now: if I could tell you, then it would be something not to start, if you know what I mean.

If you start something I haven't even thought of, then you've got a shot.

MacMall Sucks

Today MacMall delivered me a new MacBook Pro. It is a brick. Won't boot, right out of the box. I called MacMall. They told me it is Apple's problem, not theirs, they're just a reseller. After complaining vociferously for half an hour, they agreed to repair it. So now I get a refurbished computer for the price of a new one. They refused to replace it, they refused to let me return it.

Their rationale? I quote:

If you asked a friend to buy something for you in a foreign country and they brought it back and it didn't work, would you blame your friend?

Dear MacMall, I am not your friend. I am a customer. Don't pretend that you are doing me a favor by selling me a computer.

Maybe I've been spoiled by companies that actually care about their customers, like Amazon.com, who--the few times I have had problems--ships me a new product before they even receive the defective one back. That's why I've been a loyal Amazon.com customer for twelve years.

Absent the "customer service" people getting a clue, I'll never buy from MacMall again.