US media – only those with the right digital strategy will survive

Today's online advertising market in the US: a snapshot
Globally just under 10% of all advertising budgets now go online, but the US remains the largest internet advertising market in the world. Media planning has become smart and integrated, behavioural targeting has pushed up the value for brands, media owners have trail-blazed ever larger formats. While the rest of the media sector is in turmoil, the web is – and will continue to be – remarkably resilient. We're only part of the way to a new balance of marketing, with no slowdown in the pace of change.

Economies of innovation
There’s a massive economy of scale in the US that reduces the risk for new businesses and gives a large potential audience on day one. The world’s largest advertising market is lucrative place to start out, and with high volumes of advertising in all media, there was little resistance to the arrival of a new kid in town.

Many of the global digital brands started out here: Yahoo, Amazon, Ebay, MSN, YouTube, Google and Facebook have all broken new ground in marketing. Yahoo showed the media value of links and navigation, Amazon created affiliate marketing, Ebay helped every micro business gain a storefront online, MSN pioneered research that put web branding on the map, YouTube forced TV directors to think again, Google wrote the new rulebook on valuing sales leads, and Facebook gave us all the tools to advertise the brands we love to the people we love. It’s not just that the US has an economy of scale; it has an economy of innovation.

The rise and rise of search
Whether the advertising climate is strong or in recession, migration to the web is unstoppable. And within digital media there’s little as seductive as search engine marketing. About 45% of the online ad market goes into search engine pay par click and that doesn’t even touch the massive investment every business makes in search engine optimisation.

Classifieds migrate; revenues evaporate
Classified advertising has now shifted from print to the web, with jobs, accommodation, cars, travel, personals etc all finding a more efficient home online for both the buyer and seller. But while the ads may have shifted, the revenues didn’t. Newspaper ad rates were artificially high because they sold a scarce resource: audiences. Since 1995 when Craig Newmark launched the now legendary CraigsList in California, the fate of print publishing classified rates was sealed: remove the scarcity and the costs of production, and the price collapses. Newmark’s understated model drained hundreds of millions out of the newspaper industry which lacked the innovation to change. 95% of classifieds will end up on the web, but the yields will be less than 10% of what the print industry grew fat on.

Forecast: continued migration, worse to come for TV
The regional newspaper industry will survive, but at a tiny fraction of its current size, with many cities only having a quality weekly printed paper, but large and lean web operations. In the 90s analysts talked of newspapers suffering ‘death by a thousand knives’ as classified ads stopped one by one. Long before Craigs List went mainstream, the newspaper model had been undermined, but weak responses from leadership teams who failed to lead sealed the fate. Recession simply sped up the changes. At Digital we forecast a closure of 10% of regional newspapers by 2011; we’re now updating this to 20-23%, with additional losses in pagination and publishing frequency. The media model moved on; newspapers didn’t.

Our 3 year medium term forecast is that the web will account for a quarter of all advertising spend in the US (by the end of 2012). Our short term forecasts are that in spite of recession online ad growth will continue with search and social media advertising balancing the short term contractions in the display market. That said, for an industry that’s enjoyed almost a decade of growth three or four times the size of any other channel, this pain will be strong.

Ad rates will continue falling in all media, and in a buyer’s market the biggest effects of recession are yet to be felt offline. TV, newspaper, magazine and printed directory ads will all continue sharp decline through 2009. With the exception of a seasonal bounce at Christmas the market will be flat till summer 2010 making it uneconomic for many offline media owners to continue. The market capitalisation of media groups will continue to tumble and closures and consolidations will be the headlines throughout the second half of 09 and first half 2010.

Three year outlook: trends though 2012
Here are ten key trends we've been tracking, that we continue to be critical drivers for online advertising growth and the migration of marketing throughout our medium term forecast:

1. Search swells further
In spite of the massive size already, the switch to search engine marketing continues, with high emphasis on both paid-for clicks and position in natural search results
2. Video and television migrate
A rapid increase in the volume of video content online as key demographic groups migrate to web-based viewing rather than traditional television; within this mobile will play a significant role as new generation handsets roll out
3. Smarter social media marketing
Strong migration away from classic advertising to smarter and more engaging social media formats from branded content to sponsorships and social applications
4. Mobile web arrives in North America
The new generation phones and apps stores finally unlock the long awaited step-change in the use of mobile content, mobile web and mobile social media. With this comes mobile direct marketing and geo-location based advertising
5. Affiliates evolve
Individuals becoming affiliates within expanded affiliate and social networks
6. Ad-effectiveness falls
Continued erosion in advertising effectiveness as consumers become even more adept at ad avoidance
7. Retail consolidation and structural change
The natural consolidation of a cluttered retail market with fewer, more globalised stores and strategies
8. Classified migration
Completion of the migration process to a stable level where 85% of classified volumes are web-based
9. Analytics-driven pricing
Widespread adoption of more effective trading mechanisms based on the real and long term value of leads
10. Auction based trading and transparent pricing models
The structural change triggered by Google's self-service and auction models will finally spill over into the wider online media market, with highly transparent pricing and a critical mass of auction-based trading platforms

Takeout? A digital strategy is the only strategy
The survival of media properties now rests on their digital strategy.

• US newspapers need to finally take the ‘paper’ out of newspaper and switch their news to digital channels and their analysis to weekly printed lifestyle publications.


• The real local players should go hyper-local with the richest and deepest of street-by-street citizen publishing to transfer their franchise into the one digital space left for them to compete in.


• Magazines and TV broadcasters should team up to deliver one brand across the two channels with the economies of scope and scope that will make their businesses more robust. As TV converges with the web, the audience contraction will make most magazines unprofitable, so partnerships are their only route forwards.


• For the small independents selling the family publishing business may feel unthinkable, but as the bar for technology and content gets raised, and the cash cow of local advertising dries up, there’s little else out there.

The right digital strategy is the only strategy left.