2. Interactive advertising –a new value chain -...

digital.direction white papers: ADVERTISING

An in-depth look at the digital advertising industry

2. Interactive advertising – a new value chainDigital advertising is reshaping the value chain, we examine the changes and the new players

Property of digital.direction. www.ddrxn.com

THE PAPER IN BRIEF

A new value chain is forming in response to increasing spending on digital media. Advertisers have benefited from the wider

variety of advertising formats and the ability to target consumers more precisely. Advertising agencies and media distributors

gain when they invest in the expertise and infrastructure to develop and integrate their digital services into the overall

marketing mix. Newer intermediaries in the value chain, ad networks and exchanges, have captured a significant share of digital

ad spend by forming a crucial link between advertisers and media distributors.

We discuss the background of these changes and examine the major trends that are reshaping the industry.

Managing Director of Yahoo! SEA, where he oversaw

Yahoo!’s expansion into Singapore, Malaysia, Thailand,

Interactive advertising – a new value chain

REZA BEHNAM

CO-FOUNDER/PARTNER

Reza is a co-founder and Partner

at Digital Direction. Reza leads

our Digital Business-to-Consumer

practice.

Most recently, Reza was the

FREDERIC DE BURE

CO-FOUNDER/PARTNER

Frederic is a co-founder and

partner of Digital Direction.

Frederic leads our Digital

Business-to-Business practice.

Frederic is also a General Partner

in the IDG Ventures SEA fund and co-leads investment and

management decisions of the fund portfolio companies, and

Digital Direction is a digital consulting firm. We are strategy

architects, helping our clients CREATE, GROW and IMPROVE

their digital businesses in Southeast Asia.

We have created strategies, built services and generated

revenues at some of the biggest names in the online industry,

all of which gives us a good idea of how to create a successful

digital business. This means looking at the big picture to

provide clear answers to business challenges, as well as

focusing on implementation to deliver rapid change.

Our consulting team is passionate about its subject, creative

in its approach to problem-solving and highly skilled in its

ability to get things done quickly and efficiently.

We can apply our ideas, insight and practical knowledge to

help your business thrive.

ABOUT DIGITAL DIRECTION

Yahoo!’s expansion into Singapore, Malaysia, Thailand,

Philippines, Indonesia and Vietnam. He was in charge of

running end-to-end planning and operations including long-

term strategic planning, sales, partnerships, marketing,

distribution, product-development, and engineering for all

six markets.

Prior to joining Yahoo!’s international operating

management, Reza was the Director of Global Alliances at

Yahoo!’s headquarters in the United States where he

successfully managed a strategy, business development, and

solutions-delivery team. In this role Reza played a lead role

in devising Yahoo’s “Digital Home Strategy” which later

culminated into the “Yahoo! Go for TV” product suite. Reza

also has over nine years of experience as a management and

marketing strategy consultant to Global 500 companies and

Internet start-ups. Earlier in his career, he also worked at

Intel’s headquarters in California as a corporate marketing

strategist/scientist.

Reza is a graduate of Boston University with a BA in

Mathematics and Economics and a MA in Economics.

Property of digital.direction. www.ddrxn.com 2

management decisions of the fund portfolio companies, and

sits on the boards of on a number of boards. Frederic has

been involved in many transactions involving data centric

models, including a number of online gaming transactions

and mass storage business models.

Frederic was Managing Director for SEA for eBay, Inc., where

he was responsible for the daily operations of eBay’s business

in the region. His goals focused on building an extensive

network of relationships throughout Asia to effectively grow

the company’s operations in the region. In this capacity, he

sourced, negotiated and built all major initial partnerships for

the company. These included Yahoo, Google, MSN, and

Hardwarezone, and totalled 100% of the yearly marketing

budget. Prior to heading SEA for eBay, Frederic was

responsible for the international payments services group at

eBay. Prior to joining eBay, Frederic was a Founder and

Director of Strategy for Commonstream, Inc., the first online

wastewater treatment supply chain management company in

the US.

Frederic holds a BA in International Relations from Vassar

College, and an MBA in Finance, Marketing and Strategy from

the University of Chicago.

the UK, holding a number of positions with FT.com and other

digital businesses.

He is an experienced project manager and has completed

numerous consumer behaviour research projects. He

recently led a usability study for a US social networking site

with 100m+ users. This investigated the needs of users of the

site in key markets across Southeast Asia and resulted in a

significant re-focusing of product development strategy in

order to bring the changes highlighted to market quickly.

While at the FT, Mark led the commercial product

development team focusing on strategies to maximise digital

revenues through improved design and content. In this

ABOUT DIGITAL DIRECTION

McKinsey & Co. Greater China & Southeast Asia. As part of

the Telecom, Technology & Multimedia Practice, he

developed strategies for leading Global and Asian

companies. He served establish telecom operators and a new

entrant in Asia on corporate strategy, business building and

corporate finance issues. In addition, he helped develop the

global strategy for a leading Asian handset brand as well as

designing and implementing an operational improvement

plan for one of its components businesses. More recently,

Matt has served leading companies, such as global retailer

A.S. Watson, leading India cellular operator Bharti-Airtel and

global bank HSBC through an India-based analytics and

database services company he co-founded. In 2000, he was

the part of the original team that launched Qualcomm’s

MATTHEW AUJLA – MANAGING

DIRECTOR

Matt is the Managing Director of

Digital Direction. Matt leads client

service and internal operations.

Matt has 13 years experience as a

strategy consultant in Asia. He

was a Consultant and Manager at

MARK SUCKLING – CONSULTANT

Mark is a consultant and project

manager at Digital Direction. Mark

leads our usability service line.

Mark has 10 years experience in

the digital media industry,

primarily at the Financial Times in


revenues through improved design and content. In this

capacity, Mark also played a key role in managing the

successful transition of key advertising clients from print to

digital media.

Mark holds an MBA from INSEAD and an MSc from King’s

College, University of London.


the part of the original team that launched Qualcomm’s

wireless internet platform BREW. Matt began his career at

IDC Asia Pacific consulting clients, such as IBM, Compaq and

Intel, on distribution channel strategies across 13 markets in

Asia.

MBA from the Darden Graduate School of Business at the

University of Virginia and has a BA, through the Business

Leadership Program, from the University of Puget Sound.

SINGAPORE - MAIN OFFICE

80 Tras Street, #01-03, Singapore 079019 | Tel: +65 6549 5660 | Fax: +65 6410 9545

Please contact us with any queries at [email protected]

EXECUTIVE SUMMARY................................................................................................

OVERVIEW OF CHANGES TO THE VALUE CHAIN.........................................................

INCREASE IN CONSUMER POWER..............................................................................

NEW OPPORTUNITES AND CHALLENGES FOR ADVERTISERS.....................................

MEDIA DISTRIBUTORS – CONSOLIDATION AND FRAGMENTATION............................

ADVERTISING AGENCIES – NEW STRUCTURES AND ROLES………………………………….….

ADVERTISING ENABLERS – NEW INTERMEDIARIES………………………………………………….

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CONTENTS



thousands of sources of digital media. Accordingly,

understanding consumer behaviour and targeting advertising

continues to prove a major challenge. One exception to this is

the one digital channel that most of the internet world does

look at - Google. Google has become almost synonymous with

paid search for advertisers and media distributors. It reaches

70% of internet users, and as a result captures a third of all

advertising money spent online. Google provides only a

partial solution for advertisers, as its particular form of

advertising drives direct response which is only one objective

of advertising. The communication of brand messages

(display or graphical advertising) through digital media has

proven to be less scalable and less understood than paid

search. The success of paid search is partly due to its easy-to-

measure metrics which have yet to be replicated for other

forms of digital advertising.

Advertising agencies both gain and lose. Digital agencies,

created to service the needs of the new economy have

become more important and have been acquired by the

advertising conglomerates seeking expertise in the new skills

needed to create and execute digital campaigns. The

EXECUTIVE SUMMARY

Digital advertising has seen tremendous growth in the last

decade. The internet offers display and rich media

advertising, (which can be viewed as an equivalent to print

advertisements and television commercials), as well as new

forms and techniques of advertising unique to the medium.

Newer forms of digital media including mobile, in-game,

digital TV, and digital outdoor are also generating exciting

new opportunities for advertising. In contrast to the

established conventions of traditional media, internet

advertising is still in an emerging, evolving state, with further

innovation and growth on the way.

The increasing importance of interactive advertising means

that the landscape of the advertising industry is changing;

traditional advertising growth is slowing and players in the

advertising value chain are finding new opportunities and

challenges. Roles and activities are being redefined, and in

some cases, made redundant. We have identified the

following major changes:

• The increasing power of the consumer to choose media

channels, and to control and create content.


needed to create and execute digital campaigns. The

traditional creative agencies have been slow to adapt to

digital, but their role is to a certain extent media-

independent. While they do not gain significantly from the

changes in the value chain, their role as brand guardians and

strategic advisors to advertisers remains an important one.

Where they do lose is from the lower margins that digital

advertising offers in comparison to big-budget TV commercial

production. The role of media agencies is changing. They are

threatened by new entrants to market in the form of

intermediaries better adapted to the scale and complexity of

the digital market. Media agencies still provide an analytical

and strategic role, but the actual purchase of media space and

optimisation of advertising campaigns is becoming

increasingly automated and commoditised.

The organisations facilitating automation and

commoditisation are the advertising networks. They form a

new part of the value chain and have captured a large share

of advertising spend by forming a crucial link between

advertisers and media distributors. Ad networks help provide

a solution to the complexity of digital advertising, allowing

advertisers to find relevant audiences and media distributors

to monetise their inventory. The most successful ad network

is Google, but many other networks exist, adding liquidity to

the buying and selling of advertising. Ad networks are


channels, and to control and create content.

• Shifts in advertiser spending patterns to digital media.

• The rise of new digital media distributors and re-structuring

of traditional media distributors.

• The emergence of new types of intermediary which

facilitate the purchase and placement of advertising in

digital media

• Re-alignment of existing intermediaries such as advertising

agencies.

Interactive advertising has existed for just over a decade and

in many countries has only become a mainstream advertising

channel in the last 5 years. More changes in the value chain

will undoubtedly be seen as new practices continue to

become established.

For advertisers, digital advertising promises a solution to a

long-term problem resulting from advertising’s lack of

precision. Mass media has provided advertisers with reach,

but at a cost which is wastage of ad spend on communication

to audiences outside the target market. Digital advertising

offers the ability to target exactly the consumers most

receptive to the advertisers’ message.

The complication of digital advertising in comparison with

traditional mass media is that consumers visit hundreds of


evolving to provide greater efficiency to advertising buying,

with exchanges being created that allow advertising space to

be traded like any other commodity. For media distributors,

the outcome of this should be higher sell-through rates, while

for advertisers, better targeting of messages.

Media owners and distributors have different but often

intertwined roles. Media owners are the creators of content,

whereas distributors are the organisations who provide the

channel through which that content is consumed. For

simplicity and because the outcome of our recommendations

are not directly influenced, we treat them as one category as

the boundaries between them vary depending on the type of

media.

Traditional media distributors who fail to provide digital

services are losing power in the value chain. People are

consuming more digital media and advertising money is

changing to reflect this behaviour. Newspapers have been

most affected by the consumption shift from traditional to

digital media, which has been seen in declining circulation

and advertising revenue. Similarly, growth in audience and

advertising revenue for many TV distributors is beginning to

stall. The importance of digital media for the future of media

from the largest corporation to an individual at home. As a

result of this explosion of choice, advertising through digital

media must work a great deal harder in terms of relevance to

the target consumer, in order to attract attention and create

engagement.

The purpose of this series of papers is to examine the current

state and likely future impact of digital advertising.

Specifically, the trends, changes, threats, and opportunities

within the digital advertising industry are explored in

conjunction with their effect on traditional media.


stall. The importance of digital media for the future of media

distributors is evident by looking at the recent acquisitions of

digital companies by major media groups.

These media distributors are in competition with a new set of

digital-only media distributors who have acquired

considerable power in a short space of time. Yahoo and MSN

are amongst the most popular digital destinations around the

globe. They have been joined by services such as Bebo,

Facebook and MySpace. Advertising has supported the rise of

these players, as well as a tremendous growth of smaller

media distributors. The barriers to entry are lower in digital

than for any traditional channel, and advertising will continue

to provide the primary source of revenue for new digital

enterprises.

Finally, the consumer has gained most from the changes in

the value chain. Digital media empowers the consumer with

greater choice, participation and control over media. The

consumer always had power to choose the media they

watched, read or listened to, but this was regulated by the

number of broadcasters, newspapers or publishers that were

accessible and the content that they made available. Digital

media has greatly increased consumer choice, opening up

access to content produced anywhere in the world by anyone


OVERVIEW OF CHANGES TO THE

ADVERTISING VALUE CHAIN

This section explores the overall advertising value chain in

greater detail to understand the changes between traditional

and digital advertising. The advertising value chain consists of

the following players. The elements shaded blue represent

new players in the digital value chain.

The change which has arguably had the greatest single impact

on the advertising value chain is the rising power of the

consumer. The advertising process is no longer solely focused

on delivering content for passive consumption.

To a greater degree than ever before, the consumer is now

empowered to pick and choose the content that they wish to

receive, and interact with that content in ways that were

previously impossible.

In order to reach consumers in this new environment and

enter their mental consideration space, advertisers must

increasingly engage with consumers. The key issue here is

consumer choice. Consumers now have the ability to

consume large amounts of content, at their own convenience:

where, when, and how they want it. As a result, consumers

are bombarded with hundreds, if not thousands, of messages

on a daily basis. The diagram above depicts a framework that

highlights the differences in communication elements for a

digital approach versus a mass-market approach.

DIGITAL ADVERTISING VALUE CHAIN


The funnel below has commonly been applied to traditional

mass media, which leads from awareness to purchase in a

catch-all type of approach. The pyramid on the right

emphasises that in order to be effective at delivering a

message in a cluttered, multi-tasking, connected, and

choice-abundant society, there needs to be relevance and

fulfilment of a brand promise.

The process that advertisers must use in this environment

commences by a relevant and memorable “meeting” with a

consumer through an engaging brand message, which

ultimately leads to a deeper relationship and an advocacy of

the message that the brand wishes to promote.


Advertisers stand to benefit greatly from the increased ability

to target consumers and to understand the results of their

advertising, but face additional challenges in reaching the sort

of mass audiences to which they have become accustomed.

Digital media distributors also gain substantially, with

numerous examples of companies emerging to become multi-

billion dollar organisations in the space of just a few years.

Many traditional media distributors have come under

increasing pressure. While demand will clearly remain for

premium broadcast content, the way it is consumed is

changing and the rise of alternatives such as user-generated

content have begun to erode the power of the traditional

players. Newspaper owners in particular have suffered as a

result of increased consumer choice over news sources, niche

content and fragmented attention.

Advertising agencies are under pressure to adapt to new

market conditions, and many are now rapidly incorporating

digital capabilities as a core part of their operations. Agencies

will continue to play a vital role in providing creative and

strategic services for their clients; however, new categories of

advertising enablers have entered the value chain, reducing

the power of certain types of advertising agency. Agencies

The change in media consumption has various implications

for the businesses operating in the advertising value chain.


the power of certain types of advertising agency. Agencies

now need to provide both the creative and analytical services

required in the new engagement process to help their clients

plan and analyse the optimal integrated advertising strategy

across an increasingly complex media landscape.


The diagram below gives an indication of how a dollar of

advertising revenue is spent (at an aggregated and simplified

level). There are a number of differences between the

traditional and digital advertising value chains. A major

change is in the ad network section, where new players gain

around 21 cents in a dollar from digital advertising. Where

media agencies once handled media purchase across a

number of properties, they are unable to perform this

function as effectively in the fragmented digital value chain,

creating a space for new intermediaries better suited to this

role.

The value comes primarily from the commission that ad

networks charge to media distributors; consequently, the

media distributors’ share of the advertising dollar falls from

89 cents in the traditional value chain to 74 cents. Value

which used to be created by the media distributors, through

selling their own ads, is now created by ad networks through

employment of scalable technology. Value is also taken from

the agencies, whose share of the advertising dollar falls from

7 to 4 cents.

BREAKDOWN OF HOW AN ADVERTISING DOLLAR IS SPENT (BASED ON 2007 GLOBAL AVERAGES)


INTERNET USERS % BY REGION IN 2007

(Internet World Stats, 2008)

Broadband and mobile penetration rates around the world

have all seen rapid growth in recent years. North America and

Europe have highest rates of penetration, with mobile and

broadband in extremely common use. Asia has much lower

rates for both, but is led strongly by mobile penetration. The

18%

26%

39%

10%

3%2% 2%

North America Europe

Asia Latin America


INCREASE IN CONSUMER POWER

In the rest of this section, we will analyse each type of

player in the value chain in greater detail to understand the

changes that are occurring, starting with the most important

player, the consumer.

While total audience size in developed markets like the US

has been relatively static, the total time spent consuming

media has increased by about 8.5% since 1999 (Haven, 2007).

In developing markets, both audience size and media

consumption have grown considerably.

Numbers of consumers of digital media have increased

rapidly over the past decade. Globally, there are currently

estimated to be over 1.3bn people with some level of access

to internet services and around 2.3bn mobile phone users.

Asia has around 500mn internet users (representing 40% of

the total), while the developed markets of North America and

Europe each have around 20%.

North America has the highest penetration rate of internet

users, while Asia, which currently has the largest number of

internet users, has one of the lowest penetration rates atrate of broadband take-up also shows much more rapid

growth in North America and Europe than in Asia, although

the overall rates mask considerable diversity within the

region itself.

MOBILE AND BROADBAND SUBSCRIPTION PENETRATION % BY

REGION

(Price Waterhouse Coopers, 2007)


0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

600

No

rth

Am

eri

ca

Oce

an

ia/A

ust

ralia

Eu

rop

e

Lati

n

Am

eri

ca/C

ari

bb

ea

n

Mid

dle

Ea

st

Asi

a

Afr

ica

INT

ER

NE

T U

SER

S M

N

internet users, has one of the lowest penetration rates at

around 13%.

INTERNET USERS IN MNS AND INTERNET USAGE

PENETRATION % BY REGION

(Internet World Stats, 2008)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Bro

ad

ba

nd

Mo

bile

Bro

ad

ba

nd

Mo

bile

Bro

ad

ba

nd

Mo

bile

Bro

ad

ba

nd

Mo

bile

North

America

EMEA Latin

America

Asia

Pacific

2003

2004

2005

2006

2007

hours per year watching traditional network television, 24%

of their total media consumption. By 2006, this had fallen to

680 hours and 19%. Correspondingly, viewing of (multi-

channel) satellite and cable TV had risen from 630 hours to

870 hours per year, and time spent online had risen from 65

hours in 1999 to 176 hours in 2004.

US MEDIA CONSUMPTION PER YEAR IN HOURS

(Veronis, Suhler, & Stevenson, 2005)


4%

6%

8%

10%

12%

14%

40

60

80

100

120

140

160

180

US$

BN

TREND 1 - INCREASING CONSUMER SPENDING ON

DIGITAL MEDIA

Consumers are spending increasing amounts on digital

services. This is illustrated by the following graph showing the

amount that US consumers spend on different media

channels. Consumer spending is highest on TV subscriptions,

but this is very closely followed by internet access. The

highest rates of growth in spending are for internet access

and video games.

US CONSUMER SPENDING IN US$BN AND GROWTH RATE

% OF DIFFERENT MEDIA


0

200

400

600

800

1000

1200

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Consumers are changing how they obtain written media.

Newspaper circulation figures in many parts of the world have

shown a steady decline over a number of years with Audit

Bureau of Circulations figures for the US reporting annual

declines in circulation of 3% per year (ABC, 2007). News

content has become increasingly commoditised and available

to consumers in a more convenient and timely format from

websites. Readers are demanding digital services that

complement and enhance print products, and a number of

news organisations have responded. The New York Times,

Wall Street Journal, and the Financial Times were all early

examples of media distributors who grasped the changes in

the habits and preferences of their audiences and

correspondingly developed digital services that complement

their print products. Indeed many traditional publishers are

starting to embrace this trend and now incorporate user

comments and content within their own material. An extreme

example of this is OhMyNews in Korea, which is an entirely

user-generated online newspaper.


0%

2%

0

20

40

TV

…

Inte

rne

t …

Bo

oks

Bu

sin

ess

…

Film

Ne

wsp

ap

ers

Ma

ga

zin

es

Mu

sic

Vid

eo

…

CAGR

2007-2011

The increase in spending is occurring as people increasingly

pay for digital media and entertainment services rather than

analogue ones, broadband rather than dial-up, and 3G mobile

services rather than 2G. These upgrades provide faster

connections and better content and service delivery. The

result is that consumers gain greater levels of interactivity,

giving them greater power to choose the content and services

they want.

TREND 2 – PERCENTAGE OF TIME SPENT CONSUMING

TRADITIONAL MEDIA IS DECLINING

Overall, the amount of media consumed is increasing, but

consumption is being spread across a greater number of

channels and sources, many of which are now digital. As

recently as 1999, the average US citizen spent nearly 800

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

TV Cable/Satellite TV

Radio Newspapers

Magazines Cinema


US INTERNET CONSUMPTION - DIAL-UP VS BROADBAND

(Goldman Sachs, 2008)

In addition to the decline in TV watching hours due to the

consumption of internet, studies show that there is also a

reduction in TV-programming engagement as consumers

multi-task across a number of media formats and services. A

survey of US youth found that 58% multi-task with other

TREND 3 – HOME ACCESS TO THE INTERNET AND

BROADBAND INCREASES DIGITAL MEDIA

CONSUMPTION AT THE EXPENSE OF TRADITIONAL

MEDIA

While newspaper consumption has changed most radically,

TV consumption is likely to alter significantly as well. The

likely effect of greater digital media consumption can be seen

clearly when examining the consequences of internet access

at home. People who have home internet access show a

marked decline in the amount of TV viewed. There is some

variation in the extent across different markets, however the

trend is clear. In the most extreme example, 41% of Spaniards

reported watching less TV as a result of gaining home internet

access versus only 0.9% saying they watch more.

IMPACT OF INTERNET ACCESS ON TV CONSUMPTION

(Veronis, Suhler, & Stevenson, 2005)

30%

35%

40%

45%

0

5

10

15

20

25

2004 2005 2006 2007 2008

Ho

urs

pe

r w

ee

k sp

en

t o

nlin

eDial-up Broadband


survey of US youth found that 58% multi-task with other

media whilst watching TV (Foehr, 2006).

TREND 4 – ONLINE, CONSUMERS ARE ACTIVE IN THE

CREATION OF MEDIA

In contrast to receiving content broadcast from authoritative

sources, consumers are increasingly expecting to engage with

media sources, being able to comment and create content,

which are available from a wider variety of sources. Local

content producers have become global players, and in some

cases, small operations have become established sources

especially once they generate credibility with consumers. An

example of this is the Drudge report, a tiny operation that

aggregates news and drives a large proportion of the major

news media’s online traffic.

Broadband has increased the spectrum of digital activities

that provide an opportunity not only to consume, but to

create and share media. New platforms have enabled the rise

of a greater number of media sources, reduced the cost of

distributing content, and levelled the playing field between

traditional players and new entrants. This has shifted power

from traditional media distributors to players who enable

content consumption and sharing in an open, easily accessed,

and readily available manner.

Broadband penetration has had an additional impact on

digital media consumption. The next diagram shows US data;

which clearly indicates the increase in hours spent online

once consumers have a faster always-on connection.

0%

5%

10%

15%

20%

25%

Watch less TV Watch more TV


ACTIVITIES OF US MOBILE PHONE USERS

(AvenueA/Razorfish, 2008)

As mobile technology develops and data speeds and screen

resolutions improve, the range of services that are available

through mobile phones will increase. The trends that have

been already seen on the internet, where consumers are able

ACTIVITIES OF US INTERNET USERS

(AvenueA/Razorfish, 2008)

Digital media offers the ability to tailor content to an

individual’s own requirements and thus create a more

engaging experience. This personalisation is having an impact

on the way that advertisers are able to reach consumers,

0% 20% 40% 60% 80% 100%

Email

Local search

IM

Online purchasing

Music download

Reading blogs

Watch videos

Social networking

Video download

Writing blogs

VOIP

Podcasting

0% 10% 20% 30% 40%

Sent text message

Photo messaging

Browsed news

Purchased ringtone

Personal e-mail

Instant messenger

Work e-mail

Downloaded game

Buy wallpaper


been already seen on the internet, where consumers are able

to create and share media rather than wait for it to be

transmitted will be repeated, but with additional functionality

related to the mobility of the phone.

TREND 6 - CONSUMERS ARE INCREASINGLY EXPECTING

CONTENT AND SERVICES TO BE PROVIDED FOR FREE,

SUPPORTED BY ADVERTISING

The term that has been coined for this is ‘freeconomics’

(Anderson, 2006). The idea is that the internet, by reducing

marginal costs, encourages businesses to make money by

offering many more free goods or services. This change in

supply alters the nature of demand, with services such as

Craigslist, Skype, Wikipedia and Google creating a generation

that doesn't just resent paying, but expects things to be free.

The ad-supported model has always existed in TV and radio,

but as a result of the way digital media has evolved,

consumers have become more willing to accept advertising in

return for free services and content in all forms of media.

Consumers’ expectation of free content is leading to changes

in the way that traditional paid-for media businesses from

music to newspapers are monetised. For example, Metro

International, a Swedish media company, has seen enormous

on the way that advertisers are able to reach consumers,

effectively raising the bar in terms of quality. In order to reach

and influence consumer choice, advertisers and agencies will

increasingly have to provide content that matches with

consumers interests and encourages them to interact with

the brand messages.

TREND 5 – CONSUMERS BEGINNING TO USE WEB-STYLE

FUNCTIONALITY ON MOBILE PHONES

Globally, mobile phones are being used for a wider range of

activities than just voice. SMS is the most common activity,

followed by photo messaging. However, web-style

functionality is increasing in popularity and availability. Many

users in the US report that they have browsed for news, sent

email, and downloaded material from the mobile internet.

Much greater functionality is available in some countries,

most notably Japan and South Korea, where mobile

consumers commonly use mobile for GPS services, reading e-

books, and paying bills with electronic wallets. Japanese

consumers can also collect e-coupons, play games, update

their blogs, and make travel bookings and check-in at airports.


Within digital media, advertisers have also been slow to

follow consumer trends. For example, while some advertisers

have grasped that the amount of time that is spent reading

blogs or within social networks makes these destinations

appealing for advertising; they are less in touch with

consumers using video games, online video or mobile phones.

US CONSUMER DIGITAL MEDIA CONSUMPTION VS

ADVERTISER INTERACTIVE SPENDING %

(Haven, 2007)

success from responding to these changes by producing free

daily newspapers in more than 100 cities across Europe,

North and South America, and Asia.

While consumers generally accept that advertising is needed

to support free services, advertising has had to adapt to

remain acceptable. Consumers now have a certain level of

power to reject certain forms of advertising, for example by

blocking annoying formats. In some cases where the demands

of advertising have led invasions of privacy, they have in been

rejected. An example of this was seen with the protests from

Facebook users over the lack of consent for the data used by

SocialAds.

TREND 7 – CHANGE IN CONSUMER BEHAVIOUR IS

FASTER THAN ADVERTISING SPENDING PATTERNS

Advertisers are struggling to respond quickly enough to

changes in consumer behaviour and conduct campaigns that

are attuned to the audience’s new habits. For example, in the

US, internet advertising spending accounts for around 9% of

the total ad spend; however, Americans now spend up to 30%

of their media consumption online.

Magazines, radio and TV show a fairly consistent relationship 0% 50% 100%

Video games

Mobile phones

Online video

Blogs

Social networks

Advertisers

Consumers


The incongruence between media consumption and

advertising spend in certain media is primarily due to a lack of

understanding of digital advertising by advertisers, agencies

and media distributors. Knowledge of TV, radio, and

newspaper advertising has been built up over the last 50-100

years, and it will take time to build up detailed understanding

of digital media. As understanding and evidence are accrued

and analysed, we expect to see ad spend on digital formats

become more proportionate to their consumption.

TREND 8 - ALL AGE GROUPS ARE USING DIGITAL MEDIA,

BUT THE YOUNG ARE ADOPTING DIGITAL MOST

QUICKLY

Media consumption habits vary amongst age groups.

Substitution of media type is far higher for younger people,

for whom digital services act as a replacement for traditional

media. In older demographic groups the internet is more

often an additional channel alongside more familiar media

sources. To illustrate how certain segments of the media

audience are changing their consumption, MTV conducted a

study of the habits of Asian youth (Stewart, 2007). This study

found that the average amount of media consumption

Magazines, radio and TV show a fairly consistent relationship

between the amount of attention and the proportion of

advertising revenue that they receive. The internet receives

far less advertising money than its share of media

consumption, while newspapers receive far more.

US CONSUMPTION AND ADVERTISING SPENDING

% BY MEDIUM IN 2005

(Universal McCann, 2005; ZenithOptimedia, 2007)

0% 10% 20% 30% 40%

Online

TV

Radio

Books

Magazine

Newspaper

Ad spend Time spent

0% 50% 100%

across Asia was 9.4 hours per day split almost evenly between

internet and TV consumption.

CONSUMPTION IN HOURS PER DAY BY MEDIUM IN ASIA

(Synovate, 2007)


0

2

4

6

8

10

12

Asia Hong Kong Singapore

Radio

Internet

Magazines

Newspaper

TV

The study concluded that digital media is an integral part of

life for many younger people. They have grown up with

internet and are therefore completely comfortable with it.

The result is that the internet has now become more

important than many forms of traditional media and taken

centre stage in their media consumption.


70

80

Latin

An estimated 75% of US advertisers plan to cut spending on

TV commercials by at least 20 percent in the next five years,

while most plan to increase spending on digital media

(Forrester/ANA, 2008).

As a result of this increased activity, global interactive

advertising spend has grown to US$36bn in 2007. Spending

has risen every year since 1995, with the rate slowing only

during the ‘dot-com bust’ of the early 2000’s. Interactive

advertising spend grew at a rate of 18.5% CAGR from 2001-

2005, and is predicted to continue growing at 17.5% CAGR

from 2006-2010. This will result in a total spend of US$61bn in

2010. To date, growth has been led by the US but as the

graph below illustrates Western Europe and Asia are taking an

increasing share.

DIGITAL ADVERTISING SPENDING IN US$BN BY REGION

(ZenithOptimedia, 2009)


NEW OPPORTUNITIES & CHALLENGES

FOR ADVERTISERS

TREND 1 – DIGITAL ADVERTISING SPENDING HAS BEEN

INCREASING SUBSTANTIALLY

Advertising expenditure has been rising at an average of

5.1% annually for the last decade. Currently, spending is led

by TV advertising, which accounts for 38% of total advertising

spending globally. This is followed by newspaper and

magazine spending, which account for around 30% and 13.5%

of expenditure respectively.

The traditional spending patterns are changing with ad spend

shifting away from traditional media. There are a number of

reasons for this, which includes the declining effectiveness of

traditional media. The graph below illustrates the reducing

reach and rising cost of prime TV advertising. As an example,

the audience share that the Super Bowl (one of the premier

TV advertising opportunities in the US) commands has halved

since 1985, while the cost of placing an advert has increased

by a factor of 2.5. It has been estimated that 117 prime-time

TV slots are now required to reach 80% of adult population,

compared to just 3 to achieve the same result in 1965 (Kirby,

2006).

-

10

20

30

40

50

60

70

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

US$

BN

Latin

America

C&E

Europe

Asia

Pacific

Western

Europe

North

America

Globally, the share of advertising expenditure on interactive

channels is predicted to rise from 8% in 2007 to over 11% in

2010. The internet gained a larger share of advertising

spending than outdoor during 2007 and is predicted to

exceed radio spending in 2009. The global digital ad spend

masks an even greater shift to digital advertising in some

parts of the world. In Western Europe interactive advertising

commanded a 10% share of total ad spending in 2007, and is

predicted to rise to 16% by 2010, while in the UK digital

advertising already accounted for 18% of total advertising by

2007.


2006).

SUPERBOWL AUDIENCE SHARE %

AND ADVERTISING COST IN US$MN

(Kirby 2006)

As audiences fragment, advertisers have sought new

strategies to allow them to convey their message through the

complex media landscape. They have achieved this partly by

using digital media, which addresses the problem by offering

better targeting.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

35

37

39

41

43

45

47

49

51

53

55

1970 1975 1980 1985 1990 1995 2000 2005

US$

MN%

% of households reached

30sec ad spot cost (constant 2008 US$)


Advertisers are becoming more familiar with the increased

availability and granularity of data from digital advertising,

along with development of new metrics and analysis tools.

Within digital advertising, advertisers are moving away from

traditional methods of purchasing advertising space such as

CPM, towards more accountable methods such as CPC and

CPA. CPC and CPA offer advertisers the ability to reduce the

risk of advertising and move towards spending only on

advertising that actually generates business for them. Pay-for-

performance advertising started within online search

advertising, but is extending to display advertising. The model

has proved so successful that attempts have been made to

apply pay-for-performance to traditional media ads.

Advertisers benefit from the pay-for-performance model by

sharing the risk of advertising spend with the media

distributor, reducing wastage on advertising money that does

not generate any impact.

TREND 3 – BUYING DIGITAL ADVERTISING IS MORE

COMPLEX THAN TRADITIONAL

The complexity involved in buying advertising across multiple

properties has led to a concentration of advertisers on a

limited number of popular sites, increasing demand for such

DIGITAL ADVERTISING SPENDING AS A % OF TOTAL

ADVERTISING SPENDING BY REGION

(ZenithOptimedia, 2009)

Economic growth and advertising spend are strongly

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

North

America

Western

Europe

Asia

Pacific

C&E

Europe

Latin

America


limited number of popular sites, increasing demand for such

inventory. This has led to rising prices, especially in certain

inventory categories like automotive, technology, and

business. Methods such as behavioural targeting exist which

can increase the amount of quality inventory, but these are

not always widely implemented or understood. The

complexity of digital advertising purchase is an on-going

problem for advertisers, but is partly being addressed by

intermediaries who aggregate and segment content from

many media distributors to allow advertisers to buy digital

media space more easily. These enablers in the digital value

chain will be examined in greater detail later in this section.

TREND 4 - ADVERTISERS ARE BECOMING INCREASINGLY

EDUCATED ABOUT DIGITAL ADVERTISING

Advertisers require new and modified techniques to target

consumers through digital advertising. The manner in which

they communicate messages has required adaptation to

reflect the ever increasing array of media types that are

available. As we have discussed, in digital media, consumers

have become active rather than passive participants and

therefore advertisers need to find new ways to ensure their

messages are heard.

Economic growth and advertising spend are strongly

correlated, and the long economic boom has been a major

factor in the increasing amounts spent on all forms of

advertising, digital included. In the US, growth in total

advertising spend is now slowing as a result of economic

uncertainty. Nevertheless, less favourable economic

conditions may in fact hasten the transfer of spending to

digital media because of its measurability. Through digital

media, advertisers are able to achieve greater efficiency from

their advertising spend and consequently, digital advertising

potentially stands to gain most in the coming years.

TREND 2 – ADVERTISERS ARE INCREASINGLY NUMBERS-

DRIVEN

At the same time that spending has been increasing,

advertisers have been demanding greater accountability for

that spend. A survey of advertisers by ANA/Forrester (2008)

found that 97% of advertisers thought that the TV industry

needed more detailed audience metrics, other than reach and

frequency to report commercial ratings. The advent of more

measurable advertising on digital channels is increasing the

demand from advertisers for better accountability from all

channels.


These advertisers have embraced interactive advertising to

varying degrees. The telecommunications, IT hardware,

financial services and retail sectors show the highest spending

on interactive channels. These figures show that while some

sectors have found ways to incorporate interactive

advertising into their overall marketing strategy, it is not yet a

universal move. Many advertisers have yet to fully

understand digital media channels or have failed to adapt to

the new environment and, as a result, have not committed

significant parts of their marketing spend to interactive.

A characteristic that many of the largest online advertisers

share is the relative importance of their online sales channel.

Vonage, AT&T, Dell, HP, Verizon, TDAmeritrade, Netflix,

Scottrade, E-trade, Monster, Fidelity, and United all use

interactive advertising to drive users into their websites,

either to find additional information about products or direct

them into online transactions.

Companies such as Walt Disney and Time Warner are also

amongst the top spenders on interactive advertising. These

companies seek to drive traffic to their various internet

properties, where it may be monetised through e-commerce,

subscription services and advertising. Automotive

Globally, the corporations who spend most on advertising are

the FMCG giants, Unilever and Proctor & Gamble, the large

automotive manufacturers, and pharmaceutical companies

such as Johnson & Johnson and GlaxoSmithKline. P&G

dominates spending with an annual advertising budget of

US$8.5bn (more than the digital advertising spending by all

advertisers across the entire Asia-Pacific region in 2007).

MAJOR BRANDS’ ADVERTISING SPENDING

IN US$BN IN 2006


-15

-10

-5

0

5

10

15

1

2

3

4

5

6

7

8

9

% c

ha

ng

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rom

20

05

US$

BN


subscription services and advertising. Automotive

manufacturers such as Ford and GM have also started to shift

considerable amounts of advertising spend to digital

channels. These companies have realised that the internet

plays an increasingly important role in the decision making

process for car buyers (through websites and videos). Some

manufacturers such as BMW have attempted to follow Dell’s

model of online customisation and ordering, and are also

experimenting with video content aimed at building their

brands online.

These are examples where advertisers understand how their

brands can benefit from digital media. In many cases,

however, a combination of fear and inertia has proved a

barrier to the use of digital media. A lack of understanding

exists amongst many senior decision makers. Also, in some

cases advertising agency relationships which are based on a

traditional model, mean that advertisers are not well advised

on when and how to use digital channels. Digital media has

sometimes been viewed as a fad, with many examples of

advertisers getting their fingers burned from poorly

researched or executed advertising, particularly during the

dot-com boom of the late 1990’s and early 2000’s. Knowledge

has often been lacking about the purchase of online media

space, the effective selection of targeting, and the rapidly

By sector, the largest amounts spent are as follows:

ADVERTISING SPENDING IN US$BN BY PRODUCT

CATEGORY IN 2006


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controlled than for TV, print, radio, and outdoor media where

regulation has constrained the content of ads in the FMCG

and automotive categories. Messages that have a perceived

negative influence such as promotion of foods with high fat or

sugar content, or adverts showing the use of cars that

contravene road rules are often no longer permitted on

traditional channels. Consequently, the internet is being seen

as an outlet for creativity, with the result that advertisers

have the freedom to use digital channels to promote

messages that they could not elsewhere.

changing advertising formats. These factors have combined

to prevent many advertisers from using digital media;

however greater knowledge, well known examples of success,

and greater experimentation are combining to encourage

advertisers to spend more on digital advertising.

TREND 5 – LIGHTER GOVERNMENT REGULATION ON

DIGITAL ADVERTISING

The action of governments in many parts of the world has

placed strict limits on the content of advertising. Although the

obvious targets such as tobacco are often regulated even on

the internet, digital advertising is generally less heavily


CASE STUDIESThe following examples provide a number of illustrations of the different ways in which interactive advertising media is being used

to communicate brand messages.

BMW

BMW was an early example of a company that exploited synergies between TV and digital advertising with BMWFilms.com.

Between 2001 and 2003, the company produced a series of films directed by award-winning movie directors including Lee Ang

(Crouching Tiger, Hidden Dragon). These short films have generated over 100mn views and even after the company stopped

promoting the series; roughly 15,000 people still view the films daily.


BMW geared the campaign to online consumers with high-speed connections, and focused on its target market of males between

35 and 49 with income brackets of at least US$75,000. This audience was attracted by the DVD-like features, which included

compelling sub-stories, director commentaries, still photos, and technical specifications about the BMWs driven in the films. BMW

was able to create a similar brand experience as TV advertising, but with digital channels, it was also able to create additional

content which appealed to the target audience. Using digital channels also allowed more freedom in the content. The videos

feature cars being used in ways that would no longer be permitted on TV advertising. Instead of promoting the car’s high standards

of engineering or safety features, the films feature speeding 180-degree turns or full-speed reverse skids in a way familiar from the

movies. By allowing the directors more freedom, they produced highly compelling content resulting in great interest from online

viewers. It is a strategy that has had considerable success, as 85% of BMW buyers in the US during the campaign reported they had

been to the BMW website to either build a virtual BMW or request more information.

DOVE

An example of an FMCG campaign that made heavy use of

interactive advertising is the award-winning Unilever

“Campaign for Real Beauty” for their Dove brand. The

campaign used traditional, online and mobile initiatives to

engage consumers from all over the world in a conversation

about “real beauty” and created an online community to

facilitate an ongoing debate. The hub of the campaign was an

interactive community site, campaignforrealbeauty.com. This

was promoted as a place for discussing and breaking the pre-

set definitions of beauty.

The campaign has also made extensive use of viral video

marketing. A particularly successful example was a 75sec

video called ‘Evolution’ which was created to support the

campaign and released onto YouTube, Google Video, and

MySpace. The video was an immediate viral hit, viewed over

14mn times, and was responsible for driving more than 3

times the traffic to the campaign website than Dove’s 2006

Super Bowl TV ad.


NIKE AND APPLE

10 years ago, Nike spent 55% of its ad budget on TV.

However, by 2006, this had fallen to 33%. This shift of focus

has resulted in the development of services like Nike+, an

interactive site developed in partnership with Apple. Nike+

allows runners to track their progress via an iPod and the

Nike+ site. A sensor in the runner's shoe tracks progress and

synchronises the iPod with Nike+. The site was built to attract

both regular runners and those who workout but do not

include running as a part of their exercise. This was achieved

by providing a way to enhance workouts with goals and

challenges. The site provides group challenges, community

interaction, and also sells running gear. A dedicated

worldwide community of runners has been created, and the

fresh approach and inventive qualities of the system have

resulted in a number of imitator sites.

The success is particularly significant in that it cost relatively

little promote. ‘Evolution’ demonstrates how the creative use

of online platforms can generate huge audience exposure,

which can benefit brands that are not widely associated with

digital advertising. In some cases, digital permits advertisers

to expend more resources on the creative development of an

ad that stands out, using cheaper online channels to spread

the message, rather than spending their budget on expensive

traditional media. Creative advertising agencies have a strong

role to play in this case, maintaining their niche for

developing compelling digital video advertising.


The Nike+ site illustrates how companies are using digital to

go beyond the traditional limits of advertising and create

branded content that customers will use as if it were any

other service. Nike’s goal for the Nike+ site was to become its

own media network. By finding ways to enhance consumers'

experiences, it can use technology to sell its products without

needing to advertise in the traditional sense. However, it will

require ingenuity and the smart application of technology to

continue to find services that will create a buzz in this

manner.


MEDIA DISTRIBUTORS –

CONSOLIDATION & FRAGMENTATION

Media owners and distributors have different but often

intertwined roles. Media owners are the creators of media,

whereas distributors are the companies that provide the

channel through which consumers and advertisers can access

that media.

For the purposes of this study, we treat them as one category.

Across different media types the boundaries between media

owners and distributors vary considerably. In television,

many TV channels act as distributors, buying content from

content producers. Newspapers, on the other hand, often act

as both media owner and distributor. The picture is often

blurred with digital media; for example, YouTube is primarily

a distributor, whereas CNN is both a distributor and a media

owner. Google is a media distributor in some contexts (maps,

images, video, and books); although in search it is arguably a

media owner as it creates the search links (Google is also an

advertising network). For simplicity, we group these

organisations together.

TREND 1 – DIGITAL MEDIA REVENUES ARE DOMINATED

Between them, these conglomerates have revenues of

around US$210bn annually and revenue growth of around

3%. Slowing growth has led these companies to search for

new revenues, and resulted in a spate of acquisitions. These

continue to take place as large media organisations attempt

to capture a share of growth in the digital space.

The driver behind these moves is clear. In 2007, year-on-year

growth of revenue for Google was approximately $2bn. This

was more than twice the combined growth of advertising

revenue in all of the major offline media companies.

Media groups derive their revenues from increasingly

diversified sources of which digital media is becoming an

important component. Time Warner illustrates this in the

breakdown of its divisions:

• AOL – online portal and internet access with revenue from

subscriptions and advertising.

• Time Warner Cable – cable TV channels deriving revenue

from subscriptions


TREND 1 – DIGITAL MEDIA REVENUES ARE DOMINATED

BY A FEW CORPORATIONS

The traditional media industry is highly concentrated with

large conglomerates owning interests in many or all types of

media.

MEDIA GROUPS’ REVENUE IN US$BN AND % OF REVENUE

GENERATED FROM DIGITAL MEDIA IN 2007

(Annual Reports, 2007)

from subscriptions

• Television Networks – advertising supported broadcast TV

channels that include CNN, Turner, and HBO.

• Filmed Entertainment – movie sales and merchandising

• Magazine Publishing – magazine sales and advertising

% REVENUE FROM TIME WARNER MEDIA DIVISIONS IN 2006

(Time Warner Annual Report, 2007)

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

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US$

BN

Revenue Digital

24%

13%

7%5%

51%

Magazine

publishing

Filmed

entertainment

AOL

Time Warner

cable

Television

networks

2%

12%

22%

32%

42%

52%

62%

72%

0

100

200

300

400

500

600

700

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USER NUMBERS AND REACH % OF MAJOR GLOBAL WEBSITES

(ComScore Media Matrix, 2008)

Google is now such a dominant player in interactive

advertising that it accounts for around a third of total digital

advertising spend, and is forcing other players to seek new

strategies to compete. Evidence of this can be seen in the

recent Yahoo-Microsoft negotiations where Google’s

In none of the major media groups is revenue from digital

media yet more than 8%. Some smaller media groups have

shown quicker growth in digital media, with examples such as

the New York Times now deriving 11% of its revenues from

digital advertising, a leading figure amongst news publishers.

However, in exceptional cases, such as Schibstedt, a

Scandinavian media group, digital revenues have reached

20%.

News Corp has spent close to US$1bn in total on internet

investments including US$400mn on the highly popular

MySpace, which generated ad revenues of US$500mn in 2007

(NewsCorp annual report, 2007). The MySpace business

model is still evolving, with attempts to turn advertisers into

members of the MySpace community. Consumers can link to

the profiles set up for these goods and services, as they would

to real members of the community, allowing advertisers to

send them messages. MySpace also has the potential to

integrate with other parts of the News Corp media empire,

with users able to include clips from Fox movies and

television programs on their profile pages.

Online media has seen the rapid emergence of dominant

players who control a large percentage of audience and


recent Yahoo-Microsoft negotiations where Google’s

dominance is leading to tie-up discussions between

competitors.

REVENUE GROWTH IN US$BN FOR SELECTED WEBSITES

(Annual reports, 2007 - Google, Yahoo, eBay, Amazon)

players who control a large percentage of audience and

revenue. The three dominant players are Google, Yahoo and

MSN, who each own properties across many of the major

areas of online activity. Each of these players is able to reach

more than 50% of the entire online audience through their

various services. Hugely popular in their core offerings, this

domination has often been consolidated through the

acquisition of other successful start-ups. The success of

particular business models has driven the emergence of these

dominant players. The success of the CPC model, combined

with the successful monetisation of smaller advertisers has

led Google to its current leading position. Yahoo has also

achieved success from this business model, albeit in a more

diluted form.

0

2

4

6

8

10

12

14

16

Google Yahoo Ebay Amazon

US$

BN

2002

2003

2004

2005

2006

2007


NUMBER OF INTERNET DOMAIN HOSTS

AND INTERNET USERS IN MNS

(ISC internet domain survey; Internet World Stats, 2007)

Their total for internet domain hosts for July 2007 was

489mn; however, they acknowledge that it is impossible to

identify all domains and that the number of hosts is not equal

to the number of websites (given that there may be many

Beyond the top 3 players, the online media landscape

remains in a state of flux and varies considerably by

geography. Significant market share has been gained by

relatively recent entrants, such as Facebook, while other well

established online brands such as Amazon and Ebay feature

prominently. The current major players are predominantly

US based; however, the appearance of Baidu amongst the

global top 20 trafficked sites gives an indication that new

players from developing internet markets may gain greater

share in the future.

TREND 2 – ADVERTISING HAS BECOME THE DOMINANT

BUSINESS MODEL FOR MEDIA DISTRIBUTORS

Advertising is the primary business model supporting

interactive businesses; however, there are various different

approaches to charging for advertising. Currently advertising

is generally sold by mixture of CPM and CPC. For many

advertisers, the CPC model represents an advance over

paying by impression, but it is not without flaws and is still

open to inefficiencies such as click fraud. Technology will lead

to refinements in the way advertising can be paid for, and if

advertising budgets become tighter then the incentive will

increase to find more measurable ways to sell advertising.

Increasingly advertisers are seeking to pay only for advertising

0

500

1,000

1,500

2,000

2,500

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

MN

S

Internet hosts Internet users


to the number of websites (given that there may be many

sites under one host). What is clear is that there has been

rapid growth and if the rates seen over the last 5 years

continue, over 1 billion web hosts will exist by 2010. Not all of

these are commercial services, but services like Google’s

AdSense have enabled many of these distributors to place

and sell advertising.

Much of the growth of media distributors has come from the

participation of consumers. Technorati estimates that

175,000 new blogs are created every day (Technorati, 2006).

Blogging, in particular, represents a unique way in which the

barriers to becoming a media distributor have been

demolished by the internet, and successful bloggers are

increasingly attracting the attention of advertisers.

New content categories and emerging digital markets also

offer growth opportunities. Local players such as Baidu in

China have emerged with versions of existing products and

services geared to the specific conditions of regional markets.

Innovation has also permitted the emergence of distributors

who are quicker to leverage new business models than their

established competitors. The result is that the rapid

emergence of a few large digital media distributors has been

counter-balanced by the emergence of new players.

Increasingly advertisers are seeking to pay only for advertising

which actually generates a sale; hence CPA models are gaining

popularity. Digital media distributors who are able to deliver

the best demonstrated return for advertisers will gain power

and achieve greater share of advertising spend.

TREND 3 – ADVERTISING IS ENCOURAGING THE

GROWTH IN THE NUMBER OF DIGITAL MEDIA

DISTRIBUTORS

While the internet advertising is dominated by 3 main

players, advertising has also enabled a large number of new

publishers to distribute and monetise their content. While

the total number of digital media distributors is largely

unknown, attempts have been made to estimate the size and

growth of content on the internet. The ISC Internet Domain

Survey gives an indication by counting the number of internet

domain hosts.

TREND 4 – TRADITIONAL MEDIA OWNERS ARE SEEKING

WAYS TO OFFER THEIR ADVERTISERS COMPELLING

DIGITAL SERVICES

Traditional media distributors are seeking greater

integration of digital and traditional media in order to

encourage advertisers to spend more. Many traditional

media companies are now focusing on internet delivered TV

services. An example of this is Hulu, which distributes

content provided by NBC and NewsCorp. The popularity of

YouTube has demonstrated that that user-generated video

can command huge audiences globally. However amateur

content is only one aspect of the online video business.


Services like Hulu may prove a greater driving force to bring

brand ads online as its advertisers are more likely to be the

same marketers who currently buy TV adverting slots.

Brand advertising online may well evolve around the best

known TV shows or news sources in the same way it does

offline. This content is attractive to consumer brands because

they want to be associated with quality and also if the

advertising execution is right, influence over the consumer

can be exerted in the same way as it is on TV (or even more so

given the opportunity for interactivity).

CASE STUDY

SCHIBSTED

Schibsted is a Norwegian media group that has displayed a remarkable ability to grasp the significance of digital media and develop

a successful strategy in response. Schibsted is thriving, in stark contrast to many other regional newspaper groups who are losing

revenue, readers and advertisers. Online operations generated about 20% of the company’s revenues in 2007, while at other

newspaper publishers they only represent up to 10%. Some analysts have predicted that Schibsted’s online businesses will provide

nearly 60% of the company’s earnings by end of 2008 (LaFontaine, 2006)


nearly 60% of the company’s earnings by end of 2008 (LaFontaine, 2006)

As early as 1995, Schibsted was investing heavily in digital media and it expanded rapidly beyond Scandinavia into markets like

France and Spain, acquiring classified advertising businesses which have been migrated to the internet. Instead of trying to defend

its existing business model, it was willing to actively cannibalise existing businesses in order to develop new online services. Whilst

circulation and ad sales have fallen at many of its print publications it has had numerous online successes, for example its classified

advertising site finn.no, which has become one of the most popular sites in Norway.

Part of Schibsted’s success has been attributed to operating in a less competitive market than others in the world. However, it does

provide an example of how traditional media companies can successfully adapt to changing circumstances. Other media groups

have examined its model, not least Singapore Press Holdings, who are working in partnership with Schibsted on a number of digital

media projects to see if the same success can be repeated in South East Asia. These include rednano.sg, a search site for content

relevant to Singapore.

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ADVERTISING AGENCIES - NEW

STRUCTURES & ROLES

Advertising agencies are dedicated to creating and planning

advertising for their clients. Advertising agencies exist in

many forms, from small to medium sized independent

operations to multi-agency conglomerates such as Omnicom,

WPP, Publicis, Interpublic and Havas. Traditionally, agencies

are divided into two groups: those which specialise in 'above-

the-line' (ATL) advertising and those which focus on 'below-

the-line' (BTL) advertising. ATL agencies focus on building

brands using TV, radio, posters, the press, and the web. BTL

agencies practise direct and promotional marketing which

tends to be more print-based, such as direct mail, point of

purchase, on-pack, leaflets, competitions or offers. Over time

these divisions have become less pronounced, with a gradual

evolution towards a more holistic approach. There has been a

rising importance of media-buying, which led to the creation

of stand-alone media agencies. Traditionally, media buying

was an integrated function within an ad agency, alongside

account management and creative services; however it is now

largely un-bundled. Further re-structuring of ad agencies has

occurred with the rise of niche specialists in areas such as

brand strategy, communications planning and interactive

These organisations control a significant share of the market

for advertising services, with Omnicom and WPP (the two

largest), each controlling over 10% of total agency revenues

(Omnicom and WPP annual reports, 2007).

DIGITAL ADVERTISING AGENCIES’

REVENUE IN US$MN IN 2006

(AdWeek, 2007)

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brand strategy, communications planning and interactive

advertising.

As digital media has evolved, specialist digital agency groups

such as Aegis and Microsoft Advertising have emerged, which

offer a range of services focused specifically towards

interactive media. Most of the major advertising groups have

also established or acquired dedicated interactive business

units. These range from global advertising agencies such as

Agency.com, AtmosphereBBDO, AKQA, Avenue A/Razorfish,

Digitas and Ogilvy Interactive, to specialists catering to

specific niches within interactive advertising. Interactive

agencies are growing quickly with the combined revenue of

the 20 largest agencies in 2006 standing at US$2.62bn, an

increase of 33% over the previous year (AdWeek, 2007).

TREND 1 - ADVERTISING AGENCIES HAVE BECOME

CONSOLIDATED

The advertising industry has consolidated over the past

couple of decades, with groups emerging that cover the

entire spectrum of communication services. The leading

players have typically brought together many advertising and

marketing functions, and this has somewhat reduced the

influence of independent specialists.

The large diversified advertising groups offer an integrated

approach to advertising, with a planning process that is

designed to ensure that all brand contacts received by a

customer are relevant to that person and are consistent over

time. This integration has included the incorporation of

digital specialists and is aimed at ensuring that advertising is

managed as a whole, regardless of media channel, with each

part of the agency network contributing their own area of

expertise.

13%

12%

8%

6%

4%

3%2%2%

50%

Omnicom WPP Interpublic

Publicis Dentsu Havas

Aegis Hakuhodo Other


cutting the agency out of the loop. Certain forms of digital

advertising do not require the same services that agencies

have traditionally provided and in some cases advertisers

have acquired these new skills themselves (search engine

marketing is an example). In response, digital media

distributors have provided additional tools for advertisers

(such as Google Analytics for advertisers) in order to capture

greater value. Furthermore, new specialised intermediaries

were created, providing more appropriate services than

traditional agencies offer.

The sluggishness of the agencies has reduced their power in

the value chain. However in recent years, many of the major

advertising agency groups have responded and have actively

engaged with both advertisers and the new digital

distributors. An example of this is what Sir Martin Sorrell of

WPP group called the 'frenemy' relationship between Google

and WPP. WPP aims to be Google’s largest customer while at

the same time Google makes no secret of its intentions to

allow advertisers, whether small or large, to buy ads for

themselves without the help of an agency.

TREND 3 - AGENCIES REQUIRE NEW SKILL-SETS

The role of the advertising agency as a strategic brand advisor

ADVERTISING AGENCY GROUPS’ MARKET SHARE % IN 2005

(Advertising Age, 2006)

The driver of consolidation and re-organisation has been the

search for economies of scale and improved growth. The


The role of the advertising agency as a strategic brand advisor

to the advertiser remains important. However the challenges

posed by the digital advertising mean that the digital agencies

have developed somewhat different characteristics from

traditional ones. A partial re-invention of the full-service

integrated agency concept has been seen, with digital

agencies combining advertising creativity, technical website

building ability and media planning. Forrester (2007)

identified a number of key competencies that interactive

agencies provide to advertisers. The first is measurement and

analytics; providing both robust analytics for campaigns and

leading the development of new metrics for tracking

customer engagement in both existing and emerging

channels. Second is audience research, going beyond

demographic and transactional data to incorporate brand

monitoring analysis, ethnographic studies, and persona

development. Third is cross-channel integration - the role that

the digital agency plays in the holistic approach to the

advertisers marketing spend. Interactive agencies need to

integrate their work with wider campaigns and increasingly

take a leading role in marketing and brand strategy across

channels, executing the digital portion and outsourcing the

traditional media.

search for economies of scale and improved growth. The

move to separate the media-buying function from creative

services was due to the increasing fragmentation and

complexity of the media landscape and the increased demand

from clients for analytics. The integration of digital agencies

resulted from the need to deliver cross-media campaigns.

The emergence of the large agency groups has been to enable

the provision of global services for multi-national clients and

to protect the agency’s profit margin.

TREND 2 – TRADITIONAL AGENCIES HAVE BEEN SLOW

TO ESTABLISH THEIR ROLE IN THE DIGITAL

ADVERTISING MARKET

While there has been much activity in more recent years,

many advertising agencies were slow to capitalise on the

opportunities that digital offered. The focus of the

advertising industry has been on the more glamorous end of

the business, producing TV ads. Digital advertising on the

other hand emerged as a BTL activity alongside customer

relationship management (CRM) and other technology-

related marketing disciplines.

Initially, advertisers had to work with different partners for

digital media and therefore found new intermediaries, which

were sometimes the online media distributors themselves,

Advertisers have gained power to negotiate more favourable

rates from agencies, with some agencies offering all-in-one

packages of services for advertising, product design, strategic

consulting, and technology licensing with performance-based

remuneration based on a percentage of client’s sales or

equity. An example of this was recently agreed between the

agency Anomaly and Virgin America in which the agency is

paid based on a percentage of sales made by the airline

(Economist, 2007).

These changes mean that the production of adverts and

purchase of media space may no longer be the primary

sources of income for agency groups. WPP reports that

slightly less than half of group revenue now comes from

advertising and media and the rest from a broad mix of

marketing services which include market research, public

relations and public affairs, branding and design services,

direct, field, retail, promotion and point-of-sale services

(Johnson, 2007).

Technology is playing an increasingly important role in

advertising. Leading digital agencies have demonstrated how

these skills can be combined with an organisation and the

large agency groups are recognising the importance of

incorporating these skills.

TREND 4 - THE AGENCY BUSINESS MODEL IS CHANGING

Traditionally, advertisers were charged a 15% flat-rate

commission on their media purchases. However, as specialists

in media buying entered the market, working on the margin

they could make on the bulk price of media the commission

model was gradually eroded. Charges for creative work

became more common in the form of retainers, project fees,

and hourly rates, in addition to a mark-up charged on

production costs. With digital, the margin for agencies has

been put under pressure and although creative fees remain

the common model, there is some evidence of a shift is

occurring towards payment based on the performance of

advertising campaigns.


CASE STUDY


CASE STUDY

GroupMGroupM is the holding company for the WPP group’s media buying agencies: MAXUS, MediaCom, Mediaedge: cia and MindShare.

In 2007, the group directed where more than US$59bn or 16% of all advertising money was spent. It provides a good illustration of

how the advertising industry is changing to place increasing importance of targeting, measurement and digital channels.

What GroupM is attempting to do, in common with much of the industry, is to combine the reach of traditional media with the

data available from the web. GroupM has invested in technology that can determine the age, gender, location, income, and

ethnicity of television viewers and send targeted ads to different sets within the same house, with the aim of improving ad

targeting on any screen, whether TV, PDA or PC.

GroupM has aggregated separate media agencies in order to build scale through combining information. This scale has allowed for

new business models to be tested; in a deal with NBC Universal, a new way of paying for TV advertising has been trialled where the

popularity of a TV show is no longer a key factor. Payment is now based on the profile of consumers who actually watch the

commercials. Beyond this, GroupM is moving into the business of creating content specifically for advertisers, starting an

entertainment division to create content ranging from rock concerts to reality TV.


ADVERTISING ENABLERS - NEW

INTERMEDIARIES

Enablers have emerged as a result of the need to facilitate

the transactions between the numerous and diverse media

distributors and advertisers in the digital marketplace.

Enablers consist of ad networks, ad exchanges, and data

providers.

For advertisers, one of the biggest challenges to buying

advertising space is the complexity involved in classifying and

comparing ad inventory. Likewise, many media distributors

do not have the knowledge or resources to proactively

monetise their websites. Smaller media distributors, in

particular, benefit from the service of enablers as they can

efficiently outsource their advertising space and attract

advertisers they would otherwise be unable to reach.

TREND 1 - NEW PLAYERS ARE ENTERING IN THE

MARKET FOR INTERMEDIATION BETWEEN ADVERTISERS

AND CONTENT DISTRIBUTORS

In the traditional advertising space, advertising networks did

not exist except as resellers of advertising space. This role has

been enhanced due to the higher number of media

RELATIVE POSITIONING OF A

SELECTION OF ADVERTISING NETWORKS

While ad networks offer advertisers increased reach and

diversity of ad inventory, they lack transparency as

advertisers are often unable to see exactly where, when, and

how their ads are being served. This can result in a


been enhanced due to the higher number of media

distributors and a lack of established media buying

procedures.

It was once sufficient for advertisers to engage their media

agencies to plan their media buy. Given the tremendous

number of sites on the internet, it would be practically

impossible for an advertiser or a media agency to be aware of

all relevant places to publish its ads on, much less the traffic,

the audience characteristics, and the cost of advertising of

those sites. Ad networks specialise in dealing with those

complexities by simplifying and organising the buying process

for advertisers and agencies, and hence playing a vital role in

the growth of digital advertising.

Ad networks make their money on the margin, by buying

inventory cheaply from media distributors and selling it at a

higher price to advertisers. The success of a network depends

principally on the difference between these two prices. As an

intermediary business, there is always the danger that

advertisers will go direct to the suppliers. However, the

market is not transparent, in that advertisers do not know the

price that the media distributor is prepared to sell and the

media distributors do not know how much advertisers will

buy for.

how their ads are being served. This can result in a

considerable overlap of audience and inefficient ad spend. In

addition, there is a lack of standardisation in reporting across

networks resulting in difficulty in comparing the

performances of networks.

The most established example of the ad network principle is

Google’s AdSense, where revenue from paid search ads is

shared with media distributors who are part of Google’s

network.


inventory, focusing on specific verticals, or adding

sophisticated targeting data to the inventory to maximise

value.

ILLUSTRATION OF ROLE OF DISPLAY ADVERTISING NETWORK

ILLUSTRATION OF ROLE OF SEARCH ADVERTISING NETWORK

The primary value of ad networks is to provide liquidity. They


Key to perpetuating the ad network model is scale.

Advertisers and media agencies prefer to deal with a small

number of suppliers. Scale helps enable the optimisation of

ad delivery and provides the ability to enrich inventory with

targeting data, as with a large network it becomes possible to

track behaviour of users across that network.

The likely outcome is the emergence a few large scale players,

offering a range of inventory types and verticals, and focusing

their offerings on adding value through delivery optimisation

and behavioural targeting. The optimisation of advertising will

be increasing automated, reducing the manual difficulties of

digital media buying. The consequence for media agencies is

that their role will become more strategic, working on the

goals of advertising for the advertiser and allowing

automated optimisation technologies to continuously

manage and refine spend throughout the campaign.

The primary value of ad networks is to provide liquidity. They

help media distributors to clear inventory that would

otherwise go unsold and in turn provide this inventory to

advertisers. Ad networks perform many of the same

functions as a media agency, buying an immense amount of

inventory, but are able to do this much more efficiently. The

average media-agency buying group of 100 buyers buys from

around 200 media distributors, whereas due to automation

an ad network may buy media from as many as 20,000 media

distributors (The Rubicon Project, 2007).

The arbitrage model of many ad networks is sensitive to

downwards price pressure. If a competitor can offer a similar

solution at a better price the only way the network can

compete is on price, cutting into their profits. Given the

margins that many ad networks operate on (30% is a common

figure) there is a strong incentive for media distributors to try

to find other ways of selling their inventory. The ad networks

avoid this to an extent by buying inventory on CPM basis, and

then selling it on a CPC or CPA basis to advertisers. In this

case, the network adds some value by taking on the risk for

the conversion price. Where media distributors are prepared

to sell on a CPC basis, the best way for networks to respond is

adding extra value by providing access to specialised

TREND 2 – AD EXCHANGES FACILITATING THE

COMMODITISATION OF AD INVENTORY

Ad exchanges were created to address the issue of

inefficiency in ad networks. There is still an abundance of ad

inventory which remains unsold and many advertisers who

cannot efficiently reach inventory that is relevant to them.

Ad exchanges provide greater liquidity to the market by

aggregating the inventory and advertisers from ad networks

and providing a mechanism to match the needs of the two

more efficiently. For a media distributor, this permits more

efficient monetisation of their inventory; while for an

advertiser, this allows greater access to inventory and control

of pricing and performance. Ad exchanges employ an auction

model whereby sellers define a price for their inventory and

buyers express the amount they want to bid. The exchange

then matches the buyer’s targeting requirements with the

seller’s inventory. Ad exchanges provide advertisers with

greater levels of information about what competitors are

bidding for particular ads in the same way that eBay shows

visitors past bids. They also allow media distributors greater

opportunity to ensure that they sell their ad positions at the

highest possible price.


ILLUSTRATION OF THE ROLE OF DISPLAY ADVERTISING

EXCHANGE

RELATIVE POSITIONING OF ADVERTISING EXCHANGES

There are a variety of ad exchange models operating;

however, many limit participation in some way, being

restricted only to ad networks or to larger advertisers and

media distributors. A more open ad exchange which allows

all advertisers, media distributors and networks to participate

in the marketplace could bring greater transparency, as

participants would be able to see the price at which they and

the networks buy and sell advertising. This would allow the

value that networks add to be judged with greater accuracy.


TREND 3 – AD ENABLERS ARE BEING ACQUIRED BY

OTHER PLAYERS IN THE VALUE CHAIN

Microsoft, Google and Yahoo have recently acquired

aQuantive, DoubleClick and Right Media respectively, WPP

has acquired 24/7 Real Media. Players from other stages of

the value chain have recognised the importance and potential

of ad networks and exchanges and have acquired them to

gain greater control over the value chain. They are able to

capitalise on their existing relationships with advertisers to

boost the scale of these networks. Media distributors and

advertising agencies can provide their ad networks with a

wider supply of advertisers, hence increasing the value of the

network.

TREND 4 - DATA PROVIDERS ARE INCREASINGLY

IMPORTANT IN DIGITAL ADVERTISING

Data providers are important within the digital value chain.

Reliable and standardised data improves advertiser

confidence and knowledge and spurs the growth of digital

advertising. Where the internet differs from traditional


However off-portal traffic (people surfing mobile web sites

outside a telco’s platform) is growing quickly, making such

information much more valuable. Limitations include the

poor tracking of users and unreliability of measurements such

as mobile unique users. In the worst cases some telcos use

only a single IP address to channel traffic from a whole

country, leading to significant challenges in data collection

and analysis.

This paper has highlighted the trends in the digital advertising

value chain to understand the extent of the changes from

traditional to digital advertising. The next section will go on to

examine these trends in the context of Singapore, in order to

understand what qualities exist that will support the

development of a thriving digital advertising eco-system, and

to provide analysis of the current state of players in the value

chain.

media is in the volume of information that data providers

have to analyse and in the metrics that are used. Data

providers play a key role in demystifying digital advertising

and thus will continue to perform a valuable role supporting

future growth.

Data which provides information on audience size,

characteristics, and responses is critical to impart feedback to

advertisers and encourage digital advertising. Data providers

such as ComScore and Nielson NetRatings that measure and

aggregate websites play a significant role in providing

comparison information for players in the value chain.

Data analytics for mobile have so far been limited. The mobile

data analytics industry is comparable with the early internet

analytics industry. Data is unreliable because so far there has

been little demand for telcos to provide a similar level of

detail as is available for the internet.

CASE STUDY

RIGHT MEDIA

Right Media is one of the advertising exchanges that applies the auction model to the buying and selling of display advertising. This


Right Media is one of the advertising exchanges that applies the auction model to the buying and selling of display advertising. This

system helps online media companies, media distributors, and advertisers to achieve better value as it allows them to negotiate in a

more open system with better information about the prices that others are willing to pay and locations that adverts are published. It

can improve return on investment through dynamic pricing and the ability to use automated bidding rules to automatically set

maximum bids based on past performance.

For media distributors, Right Media offers the potential to increase the percentage of inventory that is sold. Right Media’s ad

exchange also provides tools that let media distributors see the ad content that would go on a site, refuse certain ads or companies.

Advertisers can choose at a detailed level the sites that they bid on.

In a sign of the increasing importance of advertising exchanges in the future of online advertising, Right Media was recently acquired

by Yahoo for US$650m. This followed the acquisition of DoubleClick, another ad exchange, by Google.

NOTES

This paper is one in a series of advertising white papers

produced by Digital Direction for the Media Development

Authority of Singapore (MDA). This paper is produced with

the consent of the Media Development Authority. The paper

contains extracts from an interactive advertising study

commissioned by the MDA during 2008.

The pages contained within this paper give a brief insight into

some of the major findings from the full report. If there are

any questions regarding the material contained within this

paper, please contact Digital Direction for clarification, at

[email protected].



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