Borrell’s Blog

By Colby Atwood

Imagine you are an entrepreneur setting up an advertiser-supported Web site in your community. Now imagine that you are in a meeting with some prospective investors and you tell them, “We’re going to sell ads only to those businesses that happen to be advertising in the newspaper these days.” You’d be crushed in the stampede for the door.

In effect, though, that’s exactly what many local media companies are telling themselves when they base their online strategy on “convergence sales,” “upsells,” “joint sales,” or “packages.” By whatever name, this strategy is, at best, transitional, and at worst, doomed.

Selling to your existing advertisers is a seductive strategy because it generates quick, high-margin sales. It makes sense to go after the proverbial low-hanging fruit, harvested from the folks you already know, who already trust you. Online revenue growth looks good, and the temptation is to stick with a proven formula – especially when times are getting tough for the core medium.

But as we explained in our 2002 report, “Disruptive Technology and Local Media,” it is essential for long-term growth that local media companies resist that temptation. They must force themselves to invest in the future of their online operations by going after new business – online-only business – before those easy sales have been exhausted.

The conclusions we reached in 2002 are still valid – and widely unheeded. The commitment shown by local media companies to extending their online businesses has been uneven. Some have actually taken a step backwards in the past couple of years by reigning in their fledgling online-only sales staffs and putting online sales back on the plates of the core medium’s salespeople.

We’re concerned about this tendency for two reasons. First, it sends the message that the online operation exists primarily to support the core medium, rather than to evolve into its own business. Second, it limits the site’s growth potential by neglecting new classes of customers in favor of “over-serving” existing customers. All of this is taking place in an environment of unfettered competition. You can bet that the entrepreneurs running the “pure-play” Internet firms active in your local market are looking for ways to serve anyone who might possibly be a prospect, not just people who happen to be advertising in the newspaper these days.
- Colby Atwood

By Kip Cassino
Borrell Associates, VP Research

Two headlines caught the attention of Wall Street during the past week:

1. Newspaper revenue continued to slide, the victim of faltering classified ad sales.
2. Google’s revenues, though stellar, were below investment community expectations.

The former was really no surprise to any media industry observer. The latter was mildly surprising, unless you are a Borrell subscriber. If you are, you have known it was going to happen since this time last year, if not before.
Newspapers have been losing share of real estate spending for some time – since 2002 at least. However, the strong market for home sales masked the drop in share, since the revenue continued to rise. Only when real estate sales declined did the loss of share reveal itself. This same scenario has been played out twice before in the last decade: in 1998 with recruitment advertising, and in 2000 with department stores. Yet the newspapers continue to remain stubbornly surprised when it occurs. Online ad sales do not have the remedial effect they have had in past years, either. Spending on the “standard” online formats has slowed and will decline in many markets this year, as online advertisers turn to paid search engine placement, e-mail marketing, streaming audio/video, and online promotions instead.
That should be great news for Google. Indeed, it has been in the past few years. But paid search is changing, too. National paid search has reached its peak, and will now begin to degrade in favor of other online marketing choices. Local paid search is still very much on the rise, but brings less revenue with it. A local business seldom gets as many “hits” as a national brand. As localized search replaces unfocussed/”national” paid search, Google and others who rely upon this particular flavor of online marketing expenditures will see growth rates drop. That is, unless things change.
Change is endemic in online marketing. Trends that used to take years to appear offline erupt in months on the web. At Borrell, we spend most of our time examining and projecting the impact of these changes. It helped us get these numbers right, a year or more before they became headlines.
KC

by Kip Cassino

The rapid increase of online advertising has taken its toll on most legacy media. Newspapers have seen classified volume plummet. TV audiences continue to decline, and the upfront is no longer the happy time it once was. Directories continue to shrink as local businesses reconsider their historic dependence, and magazines rush to develop online solutions to shore up steadily declining revenues.
Through all of this, direct mail has continued to grow as a marketing force. This year, direct mail expenditures are expected to hit a new high. The 2008 elections promise to bring in even higher levels next year. But all is not rosy in the world of list and stamp. There are major trends building which – by the end of this decade – have the potential to end direct mail’s growth and even reduce expenditures considerably.
Direct mail’s growth is inexorably tied to the Postal Service. By giving volume mailers substantial postage discounts for doing their work for them, the Postal Service has underwritten mail as a marketing channel. A look at historic trends will show that, as the volume of direct mail has increased, the cost of postage for everybody has grown apace. This is because the money not collected from direct mailers is subsidized by the rates charged to the rest of us – the consumers, who pay the highest rates for our letters, postcards, and payments.
The volume of private party “snail mail” has fallen rapidly since the mid ‘90’s. Now that long distance calls cost pennies and more than two of every three US households own computers that send and get e-mail, there’s less reason every year to sit down and write that letter. Most people still pay some or all of their monthly bills by mail, but even this is changing. As online banking popularity grows, postage revenue drops more quickly yet. At what point will the ratio of personal mail to “spam” diminish to the point where the Postal Service has become, virtually, a full-time ad medium?
Some state legislatures believe the time has come already. More than 40 different “do not mail” laws are under consideration across the nation, and the number continues to grow. Eventually, has was the case with telemarketing, these separate voices will gain a national hearing.
In the meantime, postal rates continue to rise. Entire lines of the Postal Service’s complex and expensive OCR sorting equipment have been taken offline as mail volume diminishes, but the heavily unionized workforce is much slower to shrink. What will the outcome of all these converging negatives be?
We believe that, by 2010, the combination of decreased mail volume, increasing postal rates, declining discounts for mass mailings, and “do not mail” legislation will cause many direct mailers to find other ways to get their message to consumers. Many will opt for an online solution, bringing their catalogs and offers online. Catalogs remaining in print will be delivered by newspaper, or as inserts to magazines. The decline in direct mail will be rapid.

by Kip Cassino, Borrell Associates VP Research

Online ad spending won’t grow forever. The rate of growth for “legacy” online ad formats (pop-ups, banners, etc.) has already slowed in many markets. In general, local ad spending lags non-directed spending online by about two years. So, look for pop-ups and banner spending to go negative in your market about two years from now.
Is this the end of online marketing growth? By no means. Paid search engine placement is still growing like topsy, and growth here looks to continue through the decade. Audio and video streaming – the new kids on the block – are just now entering a period of explosive annual increases. By 2012, they look to surpass current levels of online ad expenditures.
All of this is part of a larger, world-wide trend. Marketers demand measurability. Offline media resist. The old saying, “I know half of my ads don’t work, I just don’t know which half!” is no longer said with a smile. The inability of newspapers, magazines, radio, and TV to prove return on advertising investment has led to a swing toward promotional spending.
Promotions spending have historically surpassed ad expenditures by a healthy margin. In most markets, fifty cents or more of every marketing dollar is not spent on ad programs. Promotions hold many advantages. They are eminently measurable, and can be used tactically as well as strategically. They are great for increasing sales in a single, targeted market – and so have become the primary tools of brand or product managers.
Online, this trend has led to a number of “quasi-ad” formats, which are used like ads but are really promotional in nature. The confusion between online advertising and promotions is well illustrated by the results of a recent survey of B2B magazine readers. When asked what part of their ad budgets they intended to increase this year, 45 percent said “spending on our website.”
The trend will continue, both online and offline. Examine your online ad budget. Are your formats pure advertising? Chances are, if you can measure results, they’re not.

AUTOMOTIVE – INSTALLMENT III

Gordon Borrell was recently interviewed by a trade journal about trends in automotive advertising.  We are posting excerpts from that interview over the next several days.  Here is the third and final installment:

Q:  One key finding from your report: 'The near future looks a lot like an  interactive video screen, rather than a text-based search of cars for  sale.'  Can you say a little more about this intriguing prediction?

The first decade of the Internet was really nothing but interactive text and pictures, so it's no wonder most of the Web sites out there look like the front page of a newspaper with a masthead at the top, an index down the left side, and lots of words in the middle.  Now that broadband is at the tipping point — it's almost in 50 percent of all households — video will proliferate.  Home pages will start looking a lot more like television screens, and people will come to expect video with everything.  That's important for the automotive world, because video really sells cars and, like I said, dealers basically have their own TV stations at their disposal with their Web sites.

Q: Online video advertising is a pretty new concept for franchised dealers…Where do you think local online video advertising for dealers  is at now? will go in the future–the next 5 years?

I think the manufacturers have gotten pretty busy developing some terrific video libraries, and I think the dealers should clamor to have that content on their own Web sites.  Sites like Vehix are building out their own libraries of automotive programming. Dealers should look at this and find out how to participate in sites that are figuring out how to deliver quality video information to the consumer. Dealers should also look at their Web sites as their own medium and give potential buyers a chance to hear a message from the owner, or hear one of the salespeople discuss how much she cares about finding the right vehicle at the best value for anybody who steps in the door.  A lot of this is experimental, of course, with no discernible ROI.  So I'd suggest incremental expenditures and a lot of testing.  What's in vogue and expensive today might be old hat and cheap in a few years.

Q:  Should dealers be considering local online video advertising now? Best ad venues or options for dealers to show commercials or video content ? What formats or venues would you recommend? What kind of cost investment does this entail?

Experimenting with online video is fine, but the audience isn't quite there. For 15-second pre-roll, plenty of TV sites now offer video programming. Newspapers do as well.  But those audiences are very small, so they're often sold with packages of banner ads or sponsorship logos on the video player to get the price a bit higher.  They don't look like good deals to me unless the CPM (cost per thousand impressions) is reasonable.  The local expenditure on video advertising is extremely small, well south of $400 million nationwide this year.  So we're not seeing huge amounts of money being demanded or paid for this.  The highest rates we've seen is for "on-demand" commercials that typically run about a minute and sit on an automotive section of a newspaper or TV site.  The consumer can select to view the commercial.  The rates have been in the $250 to $350 per week range on a 13-week campaign.  But that's on the high end, and I seriously doubt that the number of actual viewers of those commercials comes anywhere near 100,000 — which is about what you'd need to have a fair CPM.

Q:  Dealer search marketing has had a big buzz since last year. Do you have any data on what % of dealers are now using SEM. Do you expect that to grow this year? Over next 5 years?

According to a J.D. Powers study, about one-third of the dealers were using search advertising, and 80 percent of them said it was effective in driving traffic. We don't have any forecasts on this, but we do have forecasts for spending on search advertising in general.  And it's huge.  Let's face it, we're all a bit lazy when it comes to looking up stuff, and Google has solved that problem for us.  Loads of people Google things like "Lexus dealership in Cincinnati" or "hybrid cars for sale in San Diego."  I suspect that more and more dealers will understand this phenomenon and participate in this sort of advertising, and I strongly suspect they will view it as better than the yellow pages ads and thus cut back on big directory ads. SEM is a slippery slope.  Its a very technical task, and we're finding that these people selling SEM can sometimes be snake oil salesmen. We highly advocate investing money in SEM, but we also advise that it be done with specific goals that can be measured against the dollars spent.

Q:  You read about how, as more dealers are getting into search marketing at the big engines like Google,  that local auto keyword costs are spiking, and dealers are increasingly duking it out for those geo-specific 'dealer' keywords in their markets. Any words of advice on a wise local search spend? Any advice about what % of franchised dealer ad budgets or online budgets should be devoted to search? Or what they are now typically spending on search?

Again, I'd be careful here. You'll have to find someone you trust, and start with experimental amounts of maybe $250 per month for a small dealership, or $1,000 for a large.  I've often advocated that the advertising director at any business set up an account on Google or Yahoo and devote an hour or two per week buying keywords and seeing how the whole program operates. It's a terrific education on the future of advertising, and if you think it's a silly thing, consider the fact that Google will make about $16 billion (that's billion with a B) in revenue this year, making it the largest media company in the world….and it didn't even exist 10 years ago.  So there must be something to this search engine advertising stuff.  The other thing to consider is Search Engine Optimization (SEO), which is basically hiring someone to ensure that your Web site is recognized by the search engines in the first place and placed near the top of their result pages.  If your dealership sells VWs in Albuquerque and you type in "Albuquerque VW dealership" and your site doesn't appear anywhere on the page, you need to find someone who can fix that.  SEO experts might charge a few thousand dollars at most to optimize your site.  It's worth the investment…but again, make sure you pick a reputable one with references.

Q:  Are there any new research/studies Borrell Associates is doing this year that dealers and dealer groups should especially look forward to? That will provide other new insights on their ad strategy and business?

We'll be publishing a report over the summer on promotions spending that will contain a lot of information about automotive. We're finding an overall compression in ad spending due to the fact that retailers are finding that they can reach consumers directly through the Internet.  So they put more money into things that don't look like traditional advertising at all.  Things like Search Engine Optimization, Web site design, video production, contests, promotions, and programming inserts (Tony Soprano driving up in a Lexus). This is a fascinating trend and one that advertisers should be aware of.  Procter & Gamble has reorganized its entire marketing division around the concept of FMOTS — or "First Moment of Truth — which is based on the idea that people make a decision to buy P&G products in six seconds.  In those six seconds, a coupon is flashing in front of them, the packaging looks attractive, or an interesting shelf display catches their eye. So P&G is cutting back on traditional commercials because the more important place to be is right there with their message in front of the consumer in the store aisle.  We're seeing the same thing with the Internet, which is basically digital shelf space for the automotive category.