punctuative! by Matt Winn

In looking back at some of my working notes from earlier this year, I thought the following worthy of a post. In particular, it seems coverage of a topic too often leaves out a framework, and a framework is often the key to understanding and then breaking down an issue. Much of what follows may seem mundane or old news for the “net native,” but it’s what’s defining moves in media today with some clarity, I hope. Please excuse out-dated statistics. The trends have held.

What’s media?

1) All media companies deal with content

2) We (at Chrysalis) slice them according to the content’s audience:

• consumer oriented vs enterprise-oriented

3) and what they’re doing with content:

• producing, aggregating (packaging), or distributing (making it available to folks)

4) and include service providers to the above, which means companies that enable them (e.g. advertising networks such as AdBrite)

The below addresses consumer-oriented media, where lots is going on to create investment opportunities.

What is happening? Well, to paraphrase Terry Semel at CES in January, mass media is becoming my media. In the 1920’s mass media was coined to describe nationwide radio networks and newspapers. Imagine a TV with 3 channels – truly content was aimed at the masses. Today, you’ve got an explosion of content. So the concept of “my media,” which really means content tailored to the consumer, is driven by an absolute overload of content which forces one to carefully pick the content one consumes. At the same time, content is largely being delivered in digital form, which means it can be organized, sifted, and embedded with information (metadata) that better informs an individual’s consumption decision. Moreover, the tools are now available online to allow for consumers to participate in the content creation, packaging, and distribution, which means content is even more tailored; eg. I may select to only look at content that is recommended to me by friends who have tagged content as “interesting to Matt.”

What does this transformation mean? Traditional walls are coming down, both on the creation and distribution side. The consumption decision becomes more about a highly selective individual decision and less about mass push-marketing (what Umair would describe as “snowballs” vs “blockbusters”). As this shift happens, real value lies in the aggregators, community creators, and content filterers that better inform that decision. Content creation and distribution are less attractive because content is democratized and closed networks of distribution have opened up with the internet; eg. most news content is available for free.

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“It’s ad-supported.”

Let’s take a look at how money is being made in the media sector. Chris Anderson has summed up the trends nicely in his “Mainstream Media Meltdown” posts. Though outdated somewhat, as of November 2005, he notes box office sales were down 7% year over year, news circ fell 3%, music sales were down 6%, and radio (Chris doesn’t offer the metric here, but I imagine it’s sales) was down 4%. Traditional media is hurting, but the Internet (or rather, IP-based media) is booming.

So what’s the model online? The vast majority of revenue is coming from advertising revenue streams – Third Screen Media’s Brian Stoller notes the ratio is estimated to be 12 to 1 (advertising vs paid for content). Consumers are willing to pay for some content, but it’s got to be particularly compelling or proprietary. Online community gaming is a great example (consumers are willing to pay $15/month to maintain their online characters - often after hundreds of hours of invested effort in building them, of course).

In fact, in the face of free, quality content, proprietary content has less demand. When the NYT was free, the big-name editorials were very popular, but with TimesSelect, which requires users to pay for those columns, the popularity has vastly diminished – people are simply willing to substitute the opinions of those editors with others who offer their content for free. It follows that people are willing to put up with a lot of advertising – there’s 8 minutes of commercials in a 30 minute TV spot, 75% of the NYT column inches are ads, and Vogue’s fall fashion issue is 90% ads (as Matt Blumberg, CEO of Return Path, notes in his “New Media Deal” post). Of course, they’re rather not be battered over the head with it; as such, content-integrated advertising models (vs contextual advertising, such as AdSense, which is more clearly an ad) fare especially well (consider Neopets sale to Viacom). In many ways, those Vogue ads ARE the content in the magazine (“magalogue”), and we’re likely to see more “Super Bowl”-like ads which will entice the consumer as content in its own right.

So what’s happening to online advertising? Unsurprisingly, it’s a big growth story:

The above chart (courtesy of DoubleClick) shows the percentage change in share of total advertising spend by consumer medium over the 2000 to 2004 interval. So, imagine two pie charts representing ad spend by medium; this graph shows the change in share. Internet’s share is up 53%, radio is flat, magazine and newspaper share is significantly down, and both TV and Other (outdoor advertising, etc.) is slightly up.

Importantly, though the Internet shows massive growth, it’s still a small part of the pie. In 2005, $12.5 bln was spent in domestic online advertising (see Interactive Advertising Bureau release here), or nearly 5% of total domestic ad spend. There’s plenty of room for growth, and what we’re really going to see is a massive move to IP – whether it’s labeled Internet, the TV you watch 5 years from now that’s being delivered via Internet Protocol will have targeted advertising.

Still, there are challenges to the digital ad model. Today, there’s a big ad rate gap in most verticals (information tech media is a significant exception) – the COO of Dow Jones mentioned some time ago that the CPM for print readers of the Wall Street Journal is $75 vs an online CPM of $25 (from a blog post which I can’t seem to locate; if anyone has updated figures, I’d appreciate it). Who knows exactly how this dynamic is going to shake out, but as one of my colleagues likes to point out, the net present value of a customer acquired through different media should converge. That will be punctuative.

And hopefully, we’ll see other models emerge. As I’ve written about before, we’re going to see some select service providers enabling success. For example, it seems, as our information/content inflows become more and more diverse, I expect “trust” initiatives/services will become especially important (note Technorati’s “authority” search filter).

Time to go back to “my media.” Hope this fit yours.