Some Quick + Dirty, Sloppy Notes About the Economics of Advertising + Information Markets: Then, Now + In the Future

Over the years, I have written several articles related to the economics of advertising and information markets, but over the past week or two I have come up with a rather simple way to not only think about advertising, but also (perhaps) a way to analyze it with data that might be lying around somewhere for someone to apply for free or at a very low cost.

The first step is to go back (in your mind) several decades — before the Internet. This will, of course, be difficult for so-called “millennials” and even younger folks, but perhaps they can try to imagine it. Back then, there were basically two ways businesses could get a message across: Either directly or by piggy-backing (with someone else’s help). The quintessential direct play was the vacuum-cleaner or encyclopedia salesman, who rang the doorbell and tried to sell the crap right from the doorstep or perhaps by squeezing through the doorway to perform the pitch right in the living room. All door-to-door salesmen were hated more than virtual spam.

Another less virtual kind of spam was (and perhaps still is) quite common: Direct mail, flyers, etc. In case you are familiar with such junk mail, then this is a wonderful leftover flash from the past that will serve very well as an example. If XYZ company chooses to advertise their products / services directly to you via your mailbox, then they will have some small amount to pay to do so. Beyond postage, the company will also have to pay for printing a leaflet or whatever kind of flyer they intend to use for their “offer”. This may be a quite small price to pay — but it is not zero.

In the past century, a very significant “ad-supported” media industry also developed — mainly due to two significant ways the industry could differentiate the delivery of messages. First: the ad-supported media could reap economies of scale, because the price of delivering messages was quite low per message if they could deliver many messages (so, for example: the classified advertising business model flourished throughout the 20th Century). Secondly: Advertisers could assume that the ads in ad-supported media would be paid attention to — primarily because people quite often actually still paid a nominal amount to receive an ad-supported media package (e.g. newspapers). As time went by, big businesses sought greater attention — and high-priced “full page” ads were segregated from the cheap “remnant” advertising which were shuffled off into the “back pages”.

Along came the Internet, and large parts of the advertising industry were essentially eradicated overnight — mainly due to the fact that publishing costs were all of a sudden “too cheap to meter”.

Today, we find ourselves in the midst of a period sometimes referred to as e-cunabula — in which both electronic messages and paper-based messages exist side-by-side. In the paper-based formats, it may very well be that people still pay particular attention to ads because they are paid messages (sometimes these are also referred to as “paid media“). What is particularly noteworthy here is that the very same message costs so little or practically nothing whether it is delivered as an ad (“paid media”) or whether it is delivered directly from a business’ own website (“owned media”). Why would an advertiser pay money to deliver a message that they could just as well deliver for free (i.e. “too cheap to meter”)? Perhaps they are willing to pay this extra fee simply because they are afraid that otherwise no one would pay attention to it.

This is a very precarious state for ad-supported media industries to be in. If people become aware that the ads they see in ad-supported media are not any more worthy than the same messages delivered without such payment, then all messages should move from ad-supported (“paid”) media to business-owned websites (“owned media”). Perhaps to put it the other way around makes the point more obvious: The main reason why some ads still appear in ad-supported media is because the message is so weak that otherwise no one would pay any attention to it at all. Appearing in ad-supported media would become a tell-tale sign much like a black eye is a sign of a lost fight.

In the future, successful businesses will no longer show up as the weaklings who show up in ad-supported media today. The forward-thinking business is compelled to make its authentic business pledge as compelling to the consumer as the consumer is eager to learn about the offer.