Advances in Web infrastructure and technology development has made it possible for many entrepreneurs to start highly specialized ventures in recent years. Having spent time evaluating the video, publishing, advertising, and gaming among others, it has become evident that there are many highly specialized players which are part of each ecosystem. For instance, in video, there are syndication services, production companies, video networks, ad optimizers, content management systems, etc. While many of these players have sound/compelling offerings, they will likely struggle to scale and unlock meaningful value. In many cases, these products are so specialized that no businesses can be built around them.

However, if best-in-class services where to come together, they would have a better chance to build larger and more sustainable businesses. The reason is because not only products/services portfolios will become better but also top talent will come together.

This is a big difference between today and previous eras on the Web. Web companies can now be started with very low capital. Sound products have been developed with little money. This has spread both product and talent pretty thin across many companies. Thus, making it increasingly difficult to break through the clutter with users and or customers.

As the economy tightens, scale of users or customers become increasingly important for long-term survival. Startups, which realize this quickly and move to complete their “ecosystem” puzzle, will be significantly better off than those that ignore the new reality. Don’t make your long-term strategy to be an acquisition “tuck-in”. There is a limited number of large players and they pursue only a limited number of acquisition “tuck-ins.”

This does not mean that you should pursue venture mergers at all costs. Cultural compatibility, strategic alignment and adequate allocation of incentives need to be there to make sure that you (as leader of your venture) are completing the right puzzle.

While this may work to help Yahoo mantain search query levels, this initiative signals that they have not been able to break through consumers via product improvements. Offline and online ad campaigns can help companies capture impulse-driven user behavior and given the rich economics (read margin) of search, this campaign is likely to be profitable.

Nevertheless, this model does not seem to be sustainable in this new era of digital media. Interactive Corp. tried to do this with its search property Ask.com. They reportedly spent over $100M advertising their product. While they were able to increase share during the period, most of the benefits went away when the ad campaign ended.

Years ago, Scott Ferber (founder of Advertising.com) shared with me an interesting insight. The Web is a highly “Darwinistic” medium. If your product resonates with consumers, it will easily sell and certainly makes sense to advertise for it. However, if it does not resonate with consumers, advertising this product may make little sense as response will be low and lifetime of users acquired will be low and most likely unprofitable.

In this era of digital media and consumer empowerment, good products sell themselves. If they do not, changes to the product need to be made.

Yahoo certainly has a good search product. However, their consistent declines in queries suggest that consumers want more from the product. Advertising will not help solve this issue for Yahoo. Advertising may only help slow down the decline of Yahoo search but advertising alone will most likely not drive sustainable “organic” growth.

Do you agree? What do you think of Yahoo’s decision?

I would start by saying that online display advertising is evolving into two distinct segments: performance/direct response and brand advertising. Understanding the specific nature of each of these segments will help publishers better positioned themselves to grow their ad revenues.

1) Direct Response/Performance Advertising

Today, most of the infrastructure of online advertising has been built around solutions for performance-driven advertisers. Performance ad networks (e.g., Ad.com, Tribal Fusion, Valueclick, Adconion, Specific) have led the way in building the display ad business. These solutions are systems-driven and build around algorithms.

Performance ad network offerings have attracted primarily direct response advertisers in categories such as telcos, autos, financial products, online education, online services, etc. This is not to say that some of these advertisers are not interested in building brand awareness. However, their primary goal is in getting consumers to act, to respond to their ads by filling out a form, signing up for a new service, buying a product, etc.

This segment is a well-developed one. Industry standards have been established in formats (e.g., banners, towers, etc.) and metrics (CPM, CPC and CPAs). Competition is now intense with many new networks emerging which promised to deliver “better than the competition” performance-enhancing solutions. Both advertisers and publishers are putting pressure on ad networks. Publishers are using yield optimizers (e.g., Rubicon Project, Ad melds) to get the most out of the ad network ecosystem. Advertisers are asking for same or better results at lower CPMs. Furthermore, ad exchanges threaten the overall ad network model by offering greater transparency and lower friction among publishers and advertisers. (Plan to write about Ad Networks and Exchanges battle in the next post).

In this segment, CPMs tend to reach only $2. Most publishers on average get $0.30-$0.50 CPMs from performance networks.

2) Brand Advertising

Brand advertisers have different objectives and approach from those of direct response advertisers. Traditionally, brand advertisers have relied on magazines and TV to execute their campaigns, Their objectives have evolved around context, reach and timing. In the online world, as I have discussed before (see here), brand advertisers are seeking to fulfill the same objectives but via unique interactive solutions. Brands have little interest in simple banners (they already have magazines for that) or video spots (they already have TV for that). So, they are asking for custom formats that deliver highly engage experiences. As a result of this, metrics are non-standard in online brand advertising. Every solution seems to require a unique set of metrics that prove audience engagement/delivery. Serving the specific needs of brand advertisers require a sales-force. Like with traditional media, brand advertisers want to build relationships with their media before they decide to trust them with their marketing dollars. No brand advertiser wants to risk getting fired for advertising on the wrong site. For this custom solution and high touch service, brands are willing to pay $4+ CPMs.

One problem, today, this spend comes primarily out of their “experimentation” budgets rather than their ongoing media buys. As a result, the shift in brand advertising to the Web has been slow and remains sub-scale. It certainly has not helped that the large Internet networks have de-emphasized their brand ad sales business. However, this is likely to start changing due to Vertical Ad Networks and Online Video (I will discuss this thought on a follow up post).

This is my angle on the online advertising world today. Please share your angle if is a different one.

So, obviously the on-demand capability which PCs offer makes them a compelling device. However, there was one more interesting aspect of my laptop experience that I noticed: I am ok with the ad spots shown (pre, mid and post roll format). The overall number is bearable. Four per show. They are somewhat targeted and in some cases they are entertaining.

This has led me to believe that many years from now the TV experience may ultimately end up emulating the laptop experience from an advertising perspective. TV networks will offer less spots at probably higher CPMs (given that reach will continue to be important). As is the case today, Hit shows will generate most of the value for the TV industry and non-hit shows will have to be both much more targeted and less expensive.

It will take several years before the industry adjusts to the potential economic implications of this shift. Nevertheless, this may help the TV industry more effectively address the DVR and Broadband challenges.

Note: As you may be, I am surprised that pre-rolls increasingly look like a format that is here to stay. I will discuss this on another post. In the meantime, emarketer has an interesting article on online video advertising (see here).

So, you can imagine my surprise when I came across the following ad while watching the Daily Show on Hulu a couple of weeks ago. The ad included a pre-roll spot in addition to the post-roll banners that you see below.

Encountering this ad is important because it signals that leading “brand” advertisers may have found an ad solution which they are comfortable with on the Web. More importantly, this ad solution is scalable, which means that the advertiser can easily replicate this campaign in other video aggregation platforms.

So, why would brand advertisers be comfortable with this ad solution on Hulu? The following seem to be the main reasons:

- Linked to high-quality/professional content (Proven materials; Little/no risk for advertiser)

- Predictable usage levels (There is a history for shows and their clips)

- Format similar to TV (Easy for ad agencies to explain in context of the multi-media campaigns)

Bottom line: I believe we are witnessing the beginning of the much awaited shift in brand advertising from other media to the Web.

I would appreciate your sharing other examples which may be illustrative of this trend.

However, the numbers reflect today’s higher admission prices, and “The Dark Knight” will not approach “Star Wars” or “Titanic” in terms of actual number of tickets sold. Taking inflation into account, “The Dark Knight” would need to pull in about $900 million to match the number of tickets sold for “Titanic” and about $1.2 billion to equal “Star Wars.”

Here is a more detailed analysis I put together to put The Dark Knight’s numbers in perspective.

These data (sourced from the MPAA and the AP) indicates The Dark Night has been seen by 62M people while Titanic attracted 131M and Star Wars attracted 207M.

These numbers suggests that many people are waiting for other windows (DVD, Pay Per View, etc.) to consume film content. Consumers seem to be opting to experience movies at home rather than at theaters. The home theater experience has certainly improved over the past few years with the growth in penetration of large TV sets, digital television and personal devices.

One can also suggest that audience fragmentation due to the proliferation of content and distribution platforms may also have played a role in this lower number. However, one would have to wait until the final sales figures of DVD and PPV come out for the movie to make this a conclusion. I will be paying attention.

So, if content is still king, are the traditional owners of content likely to be the main beneficiaries of the digital revolution? The answer is that they are certainly well positioned to be. However, since the media world is rapidly moving away from royal kingdoms and becoming much more of a democracy, it is important that the leading producers of content embrace change and adjust their businesses to this new reality.

Content production to-date has been built around mass-audiences and mass-marketing. As audiences fragment and brands seek greater reach efficiency, content producers will need to adjust their businesses.

Here is a list of some of capabilities that will be increasingly critical for content producers to have in a post-digital revolution environment:

- Producing content for micro-audiences

- Building micro-brands

- Developing low-cost content production models

- Leveraging Web to develop new “green-light” processes

- Building/Finding audiences on the Web through SEO, SEM, and social media

- Packaging and programming in new distribution outlests (e.g., Video Aggregators, Content Networks, Social Networks, etc.)

- Expand ancillary business infrastructure to take advantage of hits

- Develop innovative and much more tailored advertising solutions for brand/premium advertisers

Leading producers of content are likely first to focus on consolidation as a way to preserve scale and sustain growth. However, as the new digital dynamics take greater hold, developing these new capabilities will be essential for them to keep their throne.

- Ads Placed on Content Sites Raise Brand Favorability and Purchase Intent Significantly More than Ads Run on Portals

- Ads on Content Sites Provide Double the Brand Favorability and Purchase Intent than Advertising Placed with Ad Networks

- Sponsorships on Branded Content Sites are 36% More Effective than on Portals

- Video ads on content sites have greater impact — For example, brand awareness and favorability are about 40%+ greater on content sites than MarketNormsaverages

- Rich media ads are more effective at engaging content site visitors –making content sites a better platform for newer ad technologies; Rich media ads are 25% more likely to be seen when placed on  content sites than when run on ad networks; Visitors are about 66% more likely to remember advertised messages on content sites than ad networks, and more than twice as likely to develop favorable brand opinions

Since OPA’s members clearly benefit from these findings, one needs to keep this study in context.

Having said that, there is a couple of things I find interesting in the study. First, the additional measures use in the study to determine the value of a particular advertising campaign such as “Message Association”, “Brand Favorability” and “Purchase Intent.” These measures try assess the value that brands can derive from advertising on well-targeted environments. Unfortunately, these measures do not have the same simplicity as CPM, CPA and CPC which makes these metrics “scalable.”

Second, this study measure the effectiveness of online advertising in the same way that TV and print have done so to validate their value proposition. As a result, the study falls short in trying to validate the unique value proposition online media can provide via engagement and interactivity.

Nevertheless, I think this data needs to be factored in the discussion between premium and performance advertising on the Web.

“The inconvenient truth is that for all its new-media spin, display advertising is “old” media — a commercial message to be placed next to editorial or entertainment content. And we know by now that measured-media growth has pretty much ground to a halt as marketers continue to increase their dollars in unmeasured disciplines such as web development, public relations and database marketing at the expense of paid advertising. Ad spending among the top 100 U.S. advertisers last year grew a paltry 1.7%, with measured media only up 0.3%. Measured-media spending is in decline in Japan, and it’s not much better in the U.K.

Sure, dollars are shifting within those media budgets, with some moving out of traditional media into interactive. But most of the top 100 advertisers that wield the big budgets are still primarily TV and print spenders. The question is: Should the fact Procter & Gamble spends only 1.5% of its marketing budget on display ads be viewed as a warning signal by online ad sellers, or as an opportunity? (Even Unilever, Ad Age’s Digital Marketer of the Year, spends little more on display, allotting it 2% of its budget.) Instead of thinking of how much more P&G could be spending on internet advertising, sellers should be asking why it doesn’t spend more.”

As I have outlined in several posts, the online ad industry need to continue to work on creating innovative solutions for brand advertisers. These solutions need to deliver on the unique capabilities of the Web: audience engagement, virality, and measurability. These solutions need to simply deliver a different value proposition than Television and Print. The current model of display advertising does not seem to do that…and thus brand media buyers are still holding back their online spend.

While Valueclick’s performance is in part driven by internal challenges, these numbers have raised questions about the growth prospects for the overall online performance-driven advertising market.

The Web had been expected to be insulated from the economic slowdown since it is a much more efficient channel than other medial. However, it seems that two things are happening:

1. Consumers simply stop responding as they are spending less. In that sense, online is a good reflection of the general economy.

2. Advertisers are putting downward pressure on CPMs given hyper-competition among performance ad solutions.

The question that still remains for me is whether or not there is a consumer fatigue element to this growth slowdown. Like with junk mail, consumers may have gotten tired of direct response advertising (particularly display). Will keep an eye on reports.

So, what are the implications for advertising-supported businesses:

1. Ad Revenues are likely to take longer to scale for sub-scale sites than previously expected given state of the direct response market. 10-30 cent CPMs are here to stay.

2. Publishers must focus on finding ways to make their experiences attractive to brand/premium advertising revenues. Premium-focused/Vertically targeted ad networks (e.g., Glam and Gorilla Nation) will benefit from this trend.

3. Companies which delivered high-quality experiences/content and highly engaged audiences will be big winners as competition for “sponsorable” experiences increases. Companies which are not able to deliver this type of experiences will struggle.

4. We will hopefully see new innovative and scalable ad solutions - including better targeting.

5. We will likely see consolidation among performance display ad solution providers

The first one comes from Mixercast. Mixercast allows advertisers to create engaging ads using widgets. Below is an example of how Nike leveraged Mixercast’s widget creation tool for its new basketball shoe campaign. The goal is to deliver higher engagement and a richer experience than a simple banner ad.

The second one comes from Next New Networks. Alley Insider uncovered it this morning (See Here). In this example, N3 integrated an ad for Starbust as part of the content. This approach reminds me of Howard Stern’s radio ads. N3 can remove the ad at a later time when sponsorship agreement ends.

Love to hear about any other examples of creative solutions out there for brand advertisers. Please share.

Well, it now seems that Google is on its way to gain the same level of control over video content. TubeMogul has released a study about video distribution platforms.  They looked at 200K videos to determine which video platforms generated the most views for those videos. YouTube’s lead is staggering - with 4X the number of views than the nearest competitor (See Here).

YouTube is a platform just like search is. So, Google is likely to start creating features that will require video producers to start customizing the way they distribute their content specifically for YouTube (for example, how to best get categorized in YouTube channels). Once this starts to happen, other platforms will have to follow suit or fall behind. This will make sure the video ecosystem of online video on the Web is built with YouTube as the main platform. This is no different than search where most publishers optimize for Google’s sitemaps and do much less around Yahoo search, MSFT’s Live and Ask.com.

YouTube positions Google well to win the video monetization battle for performance-based advertising - which is ultimately the reason why Google paid $1.6B for this asset. This may have been obvious for a while but now there is data to back it up.

Today, 18months later, Tradedoubler is trading at 68+ SEK (Sweedish Krona). This is a major drop in value in a very short period of time.

One of the challenges with digital media companies is that they face hyper-competition and rapidly changing market dynamics. This means that companies can drop in value as fast as they rise. Revenues can come and go pretty quickly for a company. Revenue streams do not last forever for digital media companies.

Shareholders and Corporate leaders need to be aware of this “hit-like” dynamic for digital media companies and be more thoughtful when evaluating potential M&A opportunities.

The problem is simple. The Web offers advertisers an abundance of display inventory. Since the majority of the advertisers participating in the market today are direct response/performance-focused advertisers, they are relatively indifferent about the specific inventory they buy. As long as the inventory performs, they will buy it. Publishers are struggling to differentiate their inventory. As I said before, behavioral and increased transparency will help increase performance. However, pricing may still not rise given inventory abundance. If this is the case, exchanges are unlikely to drive an increase in prices.

Search has proven to be a great application to capture intent behavior and offer high response rates to ads. Other applications across the Web (social networks, mail and even content sites) not only offer levels of response rates but also generate too much undifferentiated inventory. This dynamic is not likely to change any time soon and thus prices are likely to remain low.

In addition, the more the large networks focused on performance display rather than brand premium offerings, the quicker and longer online inventory is going to get devalued.

As an industry, we would benefit if we move quickly to rethink how we package non-search inventory for “brand” advertisers rather than “performance” advertisers.

- The online ad infrastructure on the Web is being built around performance advertising - Think paid search, performance display ad networks, marketplaces.

- New products such as behavioral and contextual targeting appear to be used more for enhancing display advertising performance than improving the online’s value proposition for brand advertisers.

- Large online networks seem to be de-emphasizing their efforts to offer integrated brand campaigns given their zealot focus on systems-driven solutions for advertisers.

- Ad innovation is taking place at many startups which is great but is doing little to establish scalable solutions for advertisers

Brand marketers are demanding innovative campaign solutions for their brands which offer two key things:

- A unique value proposition, different from TV or print. Display ads next to “relevant” content is not the answer. TV and print already offer that. The Web can offer truly multi-media campaigns.

- Deliver better engagement than other media. TV is quickly losing points on engagement with marketers as people increasingly skip ads using DVRs or simply their remote controls. Please note that click-throughs does not mean engagement. Web is a great medium to drive customer participation and the solutions offered to campaign marketers should offer ways for customers to “engage” with brand experiences.

If as an industry, we are able to deliver on these two things, we will start to see brand marketers more quickly embrace the medium. Publishers will start to see higher CPMs…at scale.

Millard’s comments suggest we are still not heading in this direction. What do you think?

DVRs feel a bit like the Blackberry. While business users have lived with blackberry devices for over five years, it is only until now that mainstream audiences are having access to and falling in love with them.

When this happens, it will have a dramatic impact on TV audience viewership. The numbers outlined in the survey are already pretty dramatic. At14% penetration level (when survey was conducted), the percent of audiences for hit TV shows that opted to watch after the show’s airing ranged between 12% and 26%. If we extrapolate this numbers, we could estimate that when DVRs reached 50% penetration, >50% of the audience would likely watch the show after its airing.

Three implications of this trend which come to mind:

- The TV advertising value proposition needs to change. Delivering simultaneous audience reach becomes more difficult. Advertisers will also have to assign more value to relationship to good content rather than simply reaching mass audiences

- Live shows (e.g., sports events, award shows, etc.) will continue to increase in value as they become the only vehicle for advertisers to meaningfully get simultaneous reach

- For long-form programming, TV advertising and online ad solutions will likely start to look more similar than not. DVRs will probably enable overlays and post roll ads.

If you have other implications that come to mind, i would like to hear about them.

This belief was driven by two assumptions: 1) Television would be at the center of home entertainment, and 2) Set-top box owner would have the ability to control the services offered through that box.
Given where Internet consumption and mobile devices are heading, it seems that both of these assumptions were wrong. Internet consumption is growing at levels that are quickly matching television. Online video consumption is a major force behind that.

In addition, the emergence of the iPhone and other similar phones, which truly deliver a mobile Internet experience, have quickly positioned mobile devices (including laptops) as the ultimate personal set-top box. If you have kids, you probably know that new generations preferred personal, mobile experiences than TV-centric ones.

So, mobile devices (including laptops), not the set-top box, will be at the center of digital entertainment ecosystem. Owners of these devices and other players in the ecosystem will capture significant value as consumption patterns continue to rapidly shift.

Who would have thought that it would be Apple the company best positioned to win the battle for the set-top box? Did you?

The forces that have enabled the growth in advertising on the Web now seem to be working against it.

Direct Response advertisers have driven the growth of online advertising. These advertisers, however, put significant pressure on CPMs as they focus primarily on performance. As DR advertisers have grown more comfortable with ad networks, it is becoming harder to sell premium inventory.

Increase in usage has allowed the creation of new inventory. This has led DR advertisers to enjoy an abundance of advertising options. There is no scarcity premium on the Web, and thus DR advertisers are being able to buy inventory at lower prices.

Ultimately, this has led to little to no differentiation between premium and non-premium inventory.

To break from this depression, we need to work to find solutions that attract brand advertisers. I have written about this in the past (see here). These new ad solutions are focused on delivering guaranteed levels of engagement within the right context. Also, these ad solutions need to be custom but scalable.

In addition to ad solutions, advertising networks need to identify how to most effectively serve brand advertisers. Selling premium online advertising is very different from selling ad network solutions. Premium advertisers want customization, unique engagement metrics and transparency. Ad network sales focused primarily on performance and reach.

Lastly, we need to work quickly to create standard metrics around these new solutions for brand advertisers.

The quickly we start working on solutions for brand advertisers, the faster will be able to overcome this depression.

The Web, however, is a medium that enables the marriage of both worlds. The Web is poised to be the first truly multi-media platform (e.g., images, audio, text). Newspaper sites and some magazines appear to be embracing this trend. The New York Times and the Wall Street Journal are increasingly incorporating video as part of their offering. Another good example is Las Vegas Sun (Check out their cool high def video player).

Interesting enough, bloggers (as well as most Web sites) have been less aggressive in embracing video as part of their offering. Most blogs add a video from time to time as part of their offering. Part of the reason for this lack of video in blogs is that videos while engaging do not generate revenues for bloggers today. So, any time spent in producing or choosing videos from the Web for their audiences generate little (if any) revenues.
As online video monetization emerges, I would expect this to change. Bloggers and Web sites in generally will increasingly work to provide audiences with videos that engage their community of enthusiasts. The same way that bloggers curate/select interesting articles from other/3rd party sources.

Clearly, publishing platform and tools to drive video integration have to further evolve to make the process more efficient for editorial teams. Check out what Magnify.net is trying to do on this front (see here).

We know video works on the Web. We know need to figure out how to use it in conjunction with other forms of media to create unique experiences on the Web.

Update: Today Disqus announced another cool tool to integrate video into the Web ecosystem (see here)

Even though most players are recognizing the growing importance of acquisitions in digital media, they do not seem to have taken the necessary steps to maximizing the value and ensure the sustainability of this strategy.
For media players, institutionalizing acquisitions as a corporate capability requires re-designing the overall organization and operational approach. For example, functional (highly centralized) environments will prove inadequate in dealing with acquisitions. Organization needs to recognize the need for independence for acquired companies to be successful as well as clearly identified the key support layers they need to extract the benefits from belonging to a larger organization. This does not mean I am advocating a holding company approach but rather to rethink what is the right “operating” company approach to manage digital enterprises.

Corporate media players should consider some of the following principles as they organize their digital efforts:

- Design organization to enable acquired companies to remain independent and to enable successful internal products to flourish.
- Establish support organizations with a focus on service
- Create a “titling” hierarchy, which allows talent to co-exist with corporate management
- Set up an integration team to manage integration process
- Organize your talent recruiting efforts around backfilling exiting personnel from acquired companies (e.g., have a strong bench of engineers/developers, stable of General Managers, etc.)
- To the extent possible, allow business units to serve both internal and external constituencies. Similarly, allow business units to use both internal and external resources. (e.g., a publisher should be able to use a sister ad network as well as third party ad networks; optimal way to optimize monetization and ensure competitiveness)
- Create a thin corporate layer to stimulate interaction among business units and ensure strategic cohesiveness
- Always be concerned with too much integration. There is always a tendency to consolidate companies with similar capabilities. Yet, this may reduce overall competitiveness for an acquired business. I would always lean on the side of enabling businesses to remain independent (I am not talking about incremental product acquisitions but rather business that have the potential to scale on their own).
- The collorary of the above is focus on “fostering collaboration” among business units
The better companies prepare to absorb acquisitions, the more successful their digital businesses will be. These principles are not easy to follow and may be considered counter-intuitive to current organizational principles. However, I have seen them work.

Although these types of tools have not become mainstream yet, they most likely will. It may not to be specifically Twitter or Friendfeed that do so. It could be a similar tool or the next generation version. The reason for this assertion is that I see these tools representing a new breed of “discovery” tools for the Web. These tools help empower users to become broadcasters of content (by way of sharing their activity and messages with their community). These broadcasters could be a user’s “friends” but also could be influential figures, experts, journalists and even brands. As followers or audiences , we are able to use the activity of these broadcasters as a new way to filter and discover new content on the Web.

The need for discovering information efficiently on the Web is increasingly important given the Web’s rapid rate of expansion. Current discovery tools such as search or topical blogs seem to be less efficient nowadays in helping us discover new content. Aggregator tools such as Digg and Stumbleupon have certainly enjoyed some success in leveraging communities to help us discover new information and sites. However, their reach has remained somewhat subscale.

I expect this new generation of people-driven discovery tools to prove more effective long-term given their ability to tailor to specific individual interests. These tools take “sharing” to the major leagues. Twitter and Friendfeed have some way to go. Yet, they seem to be the first manifestations of a new way to discover content on the Web. I expect many new companies to emerge that seek to further build on these capabilities.

It used to be that past generations rely on the broadcast news anchors to help them learn about new topics of interest. These new discovery tools will likely provide this service for the Web generation.

As a result, setting up a model that uses low cost paid search marketing to aggregate audiences that can be sold to premium advertisers appears to be smart approach. Critics may call this strategy an arbitrage game. Yet, it is not necessarily that. Premium advertisers care about “context” and high quality content provide that needed “context”. If high quality content providers are able to break through the clutter on the Web by using SEM techniques (obviously in addition to optimal SEO), brand/premium advertisers benefit because they are able to reach those audiences that increasingly avoid them on other media but they do so in a context that they deem appropriate.

Broadband Enterprises (a Velocity portfolio company) recently launched a content syndication engine that uses a similar strategy but through display banners. Broadband Enterprises buys display ad inventory designed to generate video views. That way they are able to guarantee a certain amount of views to their premium clients (which is what they have been asking for).

The role of high quality content providers has always been to deliver a product that aggregates compelling audiences for advertisers. Online SEM increasingly is becoming a critical tool to be able to do that in the online world.

Interesting implication: Google has some additional paid search growth coming his way.

I am not saying the Gossip Girl is not like any other show that deserves cancellation in the face of poor ratings. However, assuming that the show is not pulling audiences on TV because the show is also being streamed online suggests to me that broadcasters still have much to learn about how to deal with new digital media outlets.

I remember that the show “24” was almost cancelled for poor ratings in its first season. Yet, it was the DVD format that helped the show find audiences and eventually become a major television franchise.
If Gossip Girl has the potential to be a hit, the show should be available in as many distribution outlets as possible. This would enable audiences to easily find and consume the show. Forcing audiences to return to the days of appointment television only reduces the show’s chances for success.

I could certainly understand if the CW may not be able to afford waiting for audiences to find the show. If that is the case, let it be a lesson for broadcasters and content producers. A new economic model is needed for television in which highly targeted shows (which developed engaged and valuable audiences) can work. The model may include download economics, ad-supported streaming, pay VOD and DVD.

Finding audiences is increasingly difficult and thus maximizing distribution is ever more critical.

Hopefully Gossip Girl won’t have to become a case study. We already have Jericho or Friday Night Lights for that.

Update: Happy to report that the show is still available via iTunes for $1.99 per episode. 

As consumers preferences shift away from appointment television and channel affiliation to on-demand programming, content producers as well as MSOs have an ability to change the current economic model of cable television. This is something MSOs would love to do.

In this context, original and “hit” programming become a key element for long-term survival. Channels without these elements would seem to face the most exposure – even a powerhouse channel like HBO could be threatened by this potential trend.

Programming and packaging will remain important in digital environments. Consumers will rely on certain branded channels to enable them to discover new content. However, consumers would expect these channels to be highly specialized and knowledgeable about their audiences/communities. Most generic channels that rely on only one or two signature shows to anchor their entire offering may find challenging to survive long-term.
Content producers should rejoice given the growing power of hit content. Content Packagers (e.g., cable networks) focus…focus…focus on developing a highly targeted offering.

Please keep in mind these changes take 5-10 years to take hold…but preparing for that change may take players just as long.

The Web provides an opportunity to aggregate smaller but high value audiences with whom advertisers will be seeking to build relationships. If you think about it, cable networks created significant value in the 1990s and early 2000s. The middle of the Web can be thought of as the next level of audience targeting.

The middle will enable advertisers an ability to more precisely reach attractive audiences. More importantly, they will be able to reach high-quality audiences that are engaged given the 2-way nature of the Web. Advertisers will not be able to reach these audiences with the level of precision and efficiency that the Web offers anywhere else. It will take some time before content providers in the “middle” can win over advertisers. It took quite some time for cable networks to do so. Nevertheless, they finally will as these audiences begin to use less traditional media and more the Web.

I expect many models that have been tried for the Web at large to focus on being tailored for the “middle.” High quality-only news aggregation services, tailored/invite-only social networks, search (such as Mahalo.com) and discovery services etc. The middle of the Web is not new. It has been there for quite some time. Yet, it is about to get further momentum as the Web increasingly needs to be further organized and packaged for consumers. Traditional talent is finally committing to the Web and see the middle as the place that can change current economic dynamics. This will ultimately help make the middle mainstream.

This is not to say that long-tail businesses will not create/capture value. They will. Yet, the middle is where I expect most of the action will be in the coming years.

The Web will increasingly become “Fat”….which in some cultures is a sign of wealth. My father says it better: Fat is the best part.

Digital media companies are founded and scaled around a particular “set of beliefs.” These beliefs reflect a particular way to look at the world, insights on how the market dynamics will evolve, and vision on how to serve the specific needs of a market in the future. These beliefs shape a company’s product development, organizational culture, business approach, and acquisition strategy.

Sets of beliefs are becoming increasingly critical to succeed for digital media companies. In a hypercompetitive environment, companies need to be laser-focused on what they are trying to accomplish. A clear set of beliefs allows companies to do that. It also enables them to move fast and avoid pitfalls (e.g., copying competition, misunderstanding market dynamics, etc.) In a world where the difference between achieving success or becoming a failure has become increasingly hard to identify, a clear set of beliefs becomes even more critical. It allows all essential constituencies (management, employees, investors, partners) to be on the same page and work jointly towards the same vision. It also allows companies to simplify their interaction with their existing customers and potential new ones.

Many businesses and companies that I have seen fail because they fail to have a clear set of beliefs. A CEO articulating a vision that is different from a company’s product or services is the clearest example of that phenomenon. Partnering with companies that do not share similar sets of beliefs is another. Recruiting talent whose experience has been built around other sets of beliefs is another.
Needless to say, one has to have the “right” set of beliefs. However, I find that in today’s digital media market at least having one improve your odds of long-term success.

Realities:
– Consumers’ online usage will continue to increase at a significant rate. The Internet is positioned to become the most pervasive medium in people’s lives (surpassing TV); As consumers decide to reduce their spending, they will likely seek greater amounts of “free” entertainment on the Web.
– Video consumption will continue to grow as traditional content providers continue to move their content online; they need to stay relevant in world where they only account for an increasingly smaller sliver of content
– Direct response advertising spending will given online’s cost efficiency and measurability; However, overall DR spending may slowdown a bit given slower consumer demand (i.e., less users may be interested in signing up for online courses)
– Online publishing will continue to flourish as talent from newspapers and magazines, whose advertising is likely to be impacted by the economic slowdown and thus continue to reduce organizations, begin to migrate online and start taking advantage of the existing tools such blog platforms, niche networks, etc.

Potential Benefits:
– Innovation will focus on “mainstreaming” existing technologies and products rather than on complex, cutting edge technologies; this will lead to larger audiences and better outlets for advertisers
– M&A activity will continue as traditional media players will face increased pressure in their core businesses (which are likely to be affected by advertising) and will need to reconstitute their portfolio of assets. Also, traditional media and large Web networks are still flushed with cash.
– Valuations will likely increase for startups that have achieved success – e.g., aggregated large audiences, and build scale in