“New models are destroying the old order”. Hugo Drayton is no stranger to disruptive business models and their implications. He headed up Advertising.com’s European network sales business and InSkin Media, where he is CEO, is creating new web ad propositions and smart, patented technology solutions. Because success stories in internet stocks are all about new product approaches and new business models, well-backed InSkin Media is one to watch.

On the surface, InSkin is unlocking new types of revenue for publishers by creating new types of ad slots for brands. But scratch deeper and there’s a structural weakness in the whole sector: inventory. Beyond YouTube there simply isn’t enough high quality video inventory available, and publishers have been reluctant to create or buy-in costly short-form video content. Drayton believes that some publishers are consistently putting their commercial energies in the wrong places.

The recession proved catastrophic for the media market. Regional press is hemorrhaging money with the economics of their business model permanently challenged; the freesheet wars drained reserves at News International and DMGT; The Guardian is selling the family silver; and TV networks are only now starting to monetise time-shifted audiences. Fat cost bases; thin ad revenues; fragmented viewing – post recession Britain does not mean easy recovery for the media sector. And of course, the changes to the media industry are not just cyclical this time - there are huge systemic changes, promoted by technology and giving consumers control, while removing the barriers to entry to new media models.

With massive oversupply of banner inventory in the consumer sectors, yields have tumbled across Europe and North America, and look set to stay permanently low. Publishers banking on the banner market replacing the luxurious full pages of the 90s are facing up to a bitter truth: web ads won’t bridge the gap between their costs and income. Against that background there’s a desperate need for new sources of revenue.

Drayton sees the problem as psychological as well as commercial. “Most newspapers just don’t get it”, says the former MD of The Daily Telegraph. “They are still important - though they were used to being more so - to the local, national and international economic, social and political infrastructure. But the role of newspapers as sole gatekeepers for news and classifieds is over. Yet their size and cost-bases don’t reflect this change. Take Craigslist: effective, ideally tailored to those who are looking to buy or sell; take Google’s ability to find anything; take Gumtree for local London classifieds - these are all in the heartland of newspapers’ historic turf, yet their business models deliver similar – or enhanced - end-user value on a fraction of the cost base.”

Paid content won’t deliver

The crusade to paid-for content has dominated the hopes of finance managers and CEOs for eighteen months. Championed by Murdoch and validated by the FT, most print chiefs seem obsessed with applying cover-price thinking to mainstream consumer markets. This is a wholly reasonable position – delivering high quality news and comment is an expensive business: but there is a large element of wishful thinking; the product of a group-think culture telling shareholders what they want to hear rather than understanding with their teams what will actually work.

“The New York Times is trying again with paid-for content – subscribers get everything, while non-subscribers get some… and are then invited to pay. They’re trying to keep search engines active on the site, yet they tried and failed several years ago with TimesSelect. There’s no reason to believe it will work better this time round, except through the lens of their desperation,” reflects Drayton.

“News International’s intention to charge for content – apparently ‘tabloid’ as well as ‘broadsheet’ – misreads how the business model works. Newspaper executives see only newspaper models, and the expensive, bold flirtation with MySpace has illuminated fundamental differences between old and new media. Facebook and others have stolen MySpace’s lunch – no fault of MySpace, it was a ground-breaking phenomena; but sadly, its youthful exuberance, married to lottery-winning investment from News Corp meant that it took on too many costs, and lost focus on its core triumph as a music specialist.”

Drayton describes traditional news and entertainment publishers as being top-heavy, with an institutionalised reluctance to innovate and test. For the online video sector this is proving frustrating. “We have a new, but proven, revenue stream for them – yet many publishers can’t effectively prioritise web video content, around which we can hang the highest value they can access.”.

CPMs a hundred times greater – and defensible

Oddly, the appeal about the cash doesn’t seem to have reached many finance directors’ inboxes. Maybe digital teams are so busy looking for the sexy new models, they overlook established wins. Video works: it tells stories, creates engagement, delivers powerful branding and, thanks to technology, can unlock clicks and users.

“We’re seeing click rates 50 times higher than banner buys, and we don’t even market as a direct response tool. This is delivering what television used to, and we have generations of consumers who have grown up knowing that TV and ads go together.”

Commercially, the differences are not simply an adjustment of the display ad model, they are a step-change. Web video ads can deliver a hundred times greater CPMs than banners which, in a banner-blind consumer culture, can blend into the page templates like wallpaper. Smart publishers have reduced the number of ad slots per page to give their advertiser brands better share of voice, but the attention web video gets is different altogether. Even the simplest pre-roll can’t be missed: no clicking the stop button, no scrolling away before they’ve loaded..

In a ‘banner-blind’ culture, video is the value-growth area

Drayton joined InSkin one year ago, just as the video market began to gather momentum. But while the quality of the ads and their value to brands is clear, the constraint on supply is taxing. “There is still a dearth of high quality video content. Unlike the online display market, where unlimited supply has heralded the dominance of ad networks and driven down the price (and value) of web inventory, video is still a value-growth area. High dwell times, high click-throughs and measurable user engagement justify a worthwhile ad-funded model. “

One of the drivers of InSkin Media’s models is to provide a better video ad technique, avoiding what Drayton calls “the potential damage that today’s blunt pre-roll advertising can do - drop-off rates some publishers witness are a huge concern and our more informative, interactive model gets around that”.

i-Roll – InSkin Media’s patented pre-roll format - aims to solve several of the existing issues with pre-roll: ensure that the consumer understands they are seeing advertising, provide a count-down to their chosen content; and most importantly offer simple interactivity – the ability to engage with the advertiser’s content, while pausing the chosen content.

InSkin Media is also developing solutions for long-form video, but for Drayton the challenge here is different: “So far agencies have not worked out the best way to pitch it to advertisers or present it to consumers. Video online is a fantastic opportunity for both the brand and publisher – but, as with a newspaper audience, we need to nurture and respect how people use the medium.”

Stick to a Hybrid Model – don’t give up on advertising

“The only viable route for general news publishers (outside the FT, WSJ, and the specialist business-focused publishers) is a hybrid model that blends ads and paid content”, says Drayton..

“Some publishers are giving up too quickly on digital advertising; it took longer than we hoped to achieve ubiquitous, always-on broadband, and the inbuilt measurability and effectiveness of digital advertising is only now starting to be realised. Because press advertising will continue to fall away, publishers need to exploit and develop digital models. Betting the bank on a paid-for model is high-risk: in the halcyon, simple days of newspapers, there were two key sources of income: cover price and advertising; the balance between the two changed,, depending on current markets, type of publication, competitive activity, etc. – but everyone understood the model”.

“Agencies remain too focused on price, with a short-termism that’s gone crazy. If they’re merely impression stock exchanges, seeking the lowest price for their clients (or simply filling up pre-agreed trading deals), they will not add value to their clients and they, in turn, will be usurped. If they are not seen to be innovative and creative, they will be by-passed. Big trading blocks and ad-network pricing can certainly enable bigger uptake and drive usage, but there is also a risk to the long-term health of our industry, which needs innovation, real planning and risk taking”.

www.inskinmedia.com