Digital advertising works less well even beyond its own clumsy presentation because all advertising works less well, and, alas, digital allows a finer measurement of this ever-falling response rate.
No one in responsible positions in digital or conventional media would, as a function of both fiduciary responsibilities and lack of imagination, openly speculate on the end of their core business basis. And yet it is possible to see most of their efforts at redefinition and future market positioning as a response to the great changes and gradual end to the advertising market as we have known it.
From virtually 100 percent ad supported, television now gets half of its revenues from non-ad businesses—subscription, licensing, foreign sales. At the same time, it retains (and can be expected to maintain) a set of special, high-profile, one-time, real-time, can’t-avoid-the-ads events (the Super Bowl first among them, but in a sense all sports), in which advertising’s value, against the trends, continues to increase. Television, in a profound sense, no longer sells mere audiences, a game now of commodity and measurement, but rather unique product and cultural currency. In quite an extraordinary development it has converted lowbrow television entertainment, supported indirectly by advertising, into something valuable enough to be directly supported by the consumer and then, as an increasingly valuable currency, traded into one of the fastest-growing business sectors, the new world market for media and entertainment (where, in these markets, it is able to benefit once again from high advertising spending).
In contrast to this model, digital media, disappointed in its efforts to attract a meaningful amount of high-margin brand advertising, has doubled down on its direct-selling advertising abilities, aping the low end of the advertising business—direct-response, call-to-action, act-now advertising.
It’s the traditional bifurcation of the media business. On the one hand, there is the influential, the prestigious, the culturally significant, a business and medium of value, need, originality, and exclusivity. On the other hand, there’s the cheap, crass, and low, a constant and immediate arbitrage between what you spend to create the medium against the short-term sales it produces. One side of the business produces content meant to stand on its own (the content is the asset), another side makes the circulars, direct mail, advertorial, freestanding inserts (the junk in Sunday papers), telemarketing calls, crap magazines, and cable ads that in the end only justify the creation of the ad rather than any independent-value content. It’s all media, but with fundamentally different models and to a different effect.
Facebook’s value as a technology company may seem high, but its actual value comes from the enormity of its meaningless, undifferentiated traffic. It has no other product it can sell than some ads next to complaints about neighbors’ dogs, party pics, and humblebrags.
There are different degrees of acknowledging advertising’s dominance over content, from a defiant pretense otherwise (travel magazines, for instance), to the direct mail business, where there is no pretense. But the spectrum forms the essence of the media business—and most everyone, at some level, knows where they fall on it.
Except when they don’t.
What would otherwise be hack publishing can, in this new environment, appear to be a great experiment in an evolving market. Unlike any other medium, generating traffic, any kind of traffic, doesn’t tarnish prestige; it creates it.
The digital media circumstance, in almost every instance where there is not meaningful subscription revenue (and there are few such instances), is a classic schlock model: advertising priced on the basis of its measurable response and immediate sales performance means low per-user revenues means cheap content—content that effectively converges into advertising (e.g., BuzzFeed’s “native content”). The only thing that truly distinguishes it from the cheap direct-response publishing model of long standing is the belief that technology has made such businesses almost infinitely scalable. BuzzFeed (or, for that matter, Facebook) may have a low-value user base, but it can grow one of almost infinite size.
There is, in entrepreneurial fashion, quite a bit of fake-it-till-we-make-it hopefulness here. BuzzFeed, with its massive traffic growth fueled by its schlock skills, nevertheless touts the journalism it also tries to produce. (It’s a kind of kids’ version of the early CBS strategy, using its “Tiffany Network” image for news to offset what was arguably the nadir of prime-time programming, including The Beverly Hillbillies and Hogan’s Heroes.) The ultimate hope here is that, at some tipping point, a different kind of advertising, one not based on immediate response but on investing in shifts of mood, opinion, desire, of creating the grand illusions and stories that propel consumer life—and big media margins—will migrate to BuzzFeed and to Facebook from television.
But the cycle is not going to be an easy one to break.
Digital media has created, perhaps inexorably, an ever-larger, ever-more-low-value audience. As a response to this, or in tandem with this, advertising agencies have de-emphasized, even hollowed out, what had been their core talent and purpose—crafting vivid and theatrical consumer fantasies—in favor of being operators that profit off the transaction of ad placement, the measurement of response, and even the facilitation of payment.
As the head of a big digital agency said to me: “We don’t do story. We facilitate the handshake by moving the cash register closer to the consumer. That’s much more economical and efficient than trying to create demand and desire.”
In other words, the ultimate result is that there will be no advertising, not advertising of the kind that believed in investing large amounts of money to transform attitudes and behavior. Instead there will be more process and efficiency, the stuff that technology is good at, but that undermines the uniqueness of media and hence its value.
11
THE NETFLIX UNREVOLUTION
The solipsism of the tech community sees Netflix as a satisfying disruption of the TV business. But that’s a striking inversion of what’s actually happening: TV is disrupting the Internet.
It is not Netflix bringing digital to television, but, quite obviously, Netflix bringing television programming and values and behavior—like passive watching—to heretofore interactive and computing-related screens.
Netflix was a commerce company delivering DVDs, no more part of the media business, or show business, than Blockbuster, the video rental company that once had outposts in strip malls everywhere. But this early origin and business model (you paid them) became the crucial difference in its efforts to break out of the fulfillment business—the need to get paid (or the habit of being paid) pushed Netflix beyond the limitations of digital media.
This was mostly a happenstance segue. Netflix initially was not going into the media business. Rather, it was a disrupter of retail models, first delivering DVDs by mail, offering a larger selection and lower cost, and then delivering the same product via new streaming technology. Both advances transformed the video rental market. But the perception in the marketplace and at Netflix that this further advance had moved it from the retail business and into the realm of HBO and premium paid television was after the fact, a dawning realization.
Mirabile dictu: Netflix was the first successful seller of content in the digital world. It proved the subscription model.
And one more unwitting breakthrough: Up until Netflix, television had always been organized on a geographical model. Networks were an association of local affiliates; cable systems, even consolidated ones, were a collection of exclusive licenses to wire specific communities; cable stations lived or died on their ability to make deals with local cable franchises. And, of course, none of this transcended national borders.
Netflix, on the other hand, implemented its streaming service—pivotally with a third-party license of content through Starz, a second-level cable pay-TV service—on a national basis overnight.
Internet protocol (IP) destroyed the myth of television localism—and that t
here were daunting hurdles in creating a television network.
There was one more crucial aspect to Netflix’s transformation into media, and its lightning rise to a competitive television network: its CEO, Reed Hastings.
Hastings is . . . a salesman. He describes himself in all the ways that tech guys like to describe themselves, as an entrepreneur, as an engineer, as someone surely with the temperament of a technical and software visionary. But really what distinguishes Hastings is that he sells. He courts; he schmoozes; he begs. He has built what he would like to characterize as a tech company not as tech companies are built, on platform functionality, but as media companies are built, on his ability to make deals and then trade up to better deals.
Curiously, among the many formative moments in the company’s development, the loss of its Starz deal, which gave it a trove of movie licenses, a seemingly certain setback, encouraged it to make a different kind of deal that would transform it once again: Netflix had to license television programs. And rather within a blink of an eye, it went from being a feature film rental site (a few million people a day go to the movies) to being a rerun television network (40 to 50 million people a night watch television).
It not only became a de facto television channel, it established the crossover market of licensing deals for television shows. Television’s major, if not singular, preoccupation—looking for downstream markets for its product—suddenly had another outlet. Not only was digital, in this regard, not competitive with television, it was a wholly unexpected expansion of ancillary revenue. Digital became part of the television business. An additional Netflix contribution was to turn heretofore ad-support network shows into paid products too.
Reed Hastings and Netflix, surprising nobody so much as themselves, woke up as a television channel. Other than being delivered via IP, Netflix had almost nothing to do with the conventions of digital media—in a sense it rejected them. It is not user generated, it is not social, it is not bite size, it is not free. It is in every way, except for its route into people’s homes—and the differences here would soon get blurry—the same as television. It was old-fashioned, passive, narrative entertainment.
When it began its move into original programming it rushed to say, in an effort to project its technology bona fides, that its user data gave it the wherewithal to more finely calibrate the market, the zeitgeist, and the chances for a hit. Many press accounts of House of Cards, its first original production, had it as the miraculous result of a big data, big brother confection of heretofore unimagined audience research. In fact, it was a project that its producer and star, Kevin Spacey, had been shopping to all the major television outlets. It landed at Netflix because it had been unsuccessful in finding another home. Its success was an example not of data, but in classic television and show business fashion, the caprice and luck of a needy buyer meeting an eager seller.
Netflix had merely recreated the premium channel television business, in its economic and narrative structure, different only in the way that it had established a third distribution track. There was broadcast, cable, and, after Netflix, IP (or OTT), but surely this was more an expanding television business rather than an expanding digital business. There was, in fact, rather little that Netflix depended on from the digital system of networked traffic and advertising revenue, whereas it was entirely dependent on its ability to license television content and to attract top writing, acting, producing, and directing talent.
And yet Netflix became a new digital standard-bearer. In 2014 a New Yorker profile effectively made Netflix the official television killer (there have been many prior television killers). Auletta, writing about the media business for many decades, is surely the voice of the establishment in the field, conferring dominance to the players he covers. Very little in this particular piece was new. Rather, the approach here—putting a lot of well-known sources on the record in support of the current and popular thesis—is meant to solidify, rather than challenge, a widespread impression, and to thereby stand as the definitive statement. It is an instructive example of a kind of Silicon Valley agitprop that is so often retailed through traditional reporters and that then becomes the conventional wisdom adopted by the financial community as well as by other journalists.
“Television,” says Auletta, as his pro forma thesis, “is undergoing a digital revolution.”
“We are to cable networks as cable networks were to broadcast networks,” Auletta quotes Hastings. And yet cable, far from overthrowing television, vastly expanded the television business. “It’s like little termites eating away,” Auletta quotes Jason Hirschhorn, a cable executive who has tried to migrate into the digital business, and who is best known as one of the last executives to run doomed Myspace. “I don’t think,” says Hirschhorn, who has not worked in either the digital or cable industry since his Myspace debacle, “the incumbents are insecure enough.”
Auletta recapitulates television history as the story of the center not holding ever since the three broadcast networks were challenged by cable (Auletta wrote a book in the 1980s about this scary moment for the networks), when in fact the story, far from old broadcast losing to new cable, was the creation of a vast new system of added revenues and cross-ownership.
First came cable-television networks, which delivered HBO, ESPN, CNN, Nickelodeon, and dozens of other channels through a coaxial cable. Cable operators and networks charged monthly fees and sold ads, and even commercial-free premium networks such as HBO made money for cable operators, because they attracted subscribers. Traditional broadcasters saw their advertising income slow, but they compensated by charging cable companies for carrying their content, a “retransmission consent” fee made possible, in 1992, by the Cable Television Consumer Protection and Competition Act. Soon after, the F.C.C. relaxed rules that restricted the networks’ ownership of prime-time programs, which opened a new stream of revenue from the syndication of their shows to local stations, cable networks, and other platforms.
This is, in tone, peculiarly cast as a negative, as a descent, or at best a holding-on by the fingernails, instead of the virtual definition of a growth business, and even a reborn industry.
“The advent of the Internet and streaming video brought new competitors,” Auletta continues, skipping over about twenty years of television growth.
He then offers a paean to YouTube: “YouTube makes money through what Robert Kyncl, a vice-president at Google and the head of content and business operations at YouTube, calls ‘frictionless’ advertising, which allows viewers to click on a TrueView button to skip ads and asks advertisers to pay only when viewers watch the ad.” In fact, YouTube, to the continuing distress of Google, has consistently failed to break into television’s advertising market.
“We now live in a world where every device is a television,” Richard Greenfield, a media and technology analyst for the New York–based B.T.I.G., told me. “TV is just becoming video. My kids watch ‘Good Luck Charlie’ on Netflix. To my ten-year-old, that’s TV.” Consumers don’t care “that a show is scheduled at eight o’clock,” he said. Paul Saffo, a Silicon Valley technology forecaster, says that couch potatoes have given way to “active hunters,” viewers who “snack” and control what they watch and when.
Beyond the fact that the experts here are two of the most promiscuous quoters, invariably on point for a given thesis, what is to be made of the notion that TV is just becoming video? Quite as truly video is TV and, clearly, digital media is becoming video, therefore digital media is TV.
Auletta then gives a poor-rich-boy treatment to CBS chairman Les Moonves, the most well-compensated executive in television. The implication is that Rome burns while Moonves is paid, and yet, as though in deadpan support of his own larger point about video undergoing a digital revolution, Auletta adds that CBS’s share price was twenty times higher than at its lowest point in 2009 and that almost half of its revenues come “from its overseas sales, which totaled $1.1 billion l
ast year, and from licensing deals with cable and digital platforms such as Verizon FiOS and Netflix; Netflix pays CBS and Fox about two hundred and fifty million dollars each to let it air programs from their archives.”
This last is something of a diss at CBS’s falling advertising market, which in fact has remained relatively stable while adding a powerful nonadvertising income stream.
Then Marc Andreessen, in his role as prominent digital proselytizer (and with his slate of investments dependent on this view of digital’s leveling of the old world), is up in Auletta’s narrative:
The venture capitalist Marc Andreessen, who co-invented Mosaic, the first commercial Internet browser—it later became Netscape—told me, “TV in ten years is going to be one hundred per cent streamed. On demand. Internet Protocol. Based on computers and based on software.” He said that the television industry has managed the transition to the digital age better than book publishers and music executives, but “software is going to eat television in the exact same way, ultimately, that software ate music and as it ate books.”
Television Is the New Television Page 7
