Posted By
Eric Anderson on 03/24/2010
The following is an excerpt from Chapter Three of my
forthcoming book: Social Media Marketing: A Game Theory Perspective, to be
published by Springer in July 2010.
It all began innocently enough,
with a fuzzy rectangular graphic perched atop a Hotwired.com page on October
25, 1994. The world’s first display ad read, “Have you ever clicked your mouse
right here? YOU WILL.”With stunning prescience, AT&T had extended to the
Web its popular “You Will” campaign, which predicted future consumer
technology, into a prediction that users would blindly click on a display ad
that offered nothing specific in return. Remarkably, users did click, and that first click set Web marketing down a path from
which it is only now recovering. For nearly a decade, the click was all that
mattered.
Marketers’ myopic focus on the
click turned display advertising into a zero-sum game, in which every gain by
one player is equaled by the other player’s loss. Marketers sought to maximize
clicks on ads at the expense of the consumer’s attention and goodwill, and
consumers sought to minimize the attention they paid to display ads, by
ignoring them, blocking them, and general learning to hate them. The more
consumers ignored the ads, the more intrusive they became, in a downward spiral
of mutual dissatisfaction. In this way, display advertising followed by the
path created by its equally derided cousin, direct mail.
The obvious problem is that display
ads are only partly like direct mail. For the most part, direct mail’s
practical purpose is simply to get consumers to respond. If the consumer throws
the envelope unopened in the trash, it accomplishes nothing. But displays could
do more. As with print and broadcast advertising, the display appears alongside
free or subsidized consumer content and helps to offset its cost. As in these
other media, consumers can absorb a “brand impression” while they focus on
other content.
And marketers generally agree, though
they may lack the game theory framework to describe it, that a brand impression
sits outside of the zero-sum game. Branding is not directly transactional; it
demands no immediate action by the consumer, allowing instead for the
cumulative impact of repeat exposure. In its purest form, branding is a form of
cooperation, inviting the consumer to participate emotionally in defining the
product’s meaning. The brand marketer seeks a long-term relationship that
depends on consumer goodwill in a way that direct response marketing does not.
So display advertising stood at
those divergent paths from the start, and it took the path more travelled,
consigning itself, perhaps forever, to the realm of direct response. The allure
was irresistible: here was a medium that offered immediate, highly measurable
feedback on its effectiveness, allowing the marketer to track the actual value
of a given ad and media placement.
If marketers had known how that
value would fluctuate, they might have chosen a different path for the medium
from the start. Recall the previous axiom that any single direct market
technique over a long enough span of time will produce an inexorable shift in
the equilibrium point toward the consumer. It’s also axiomatic that marketers
will chase their losses with more aggressive direct response tactics, producing
short-term gains but ultimately making a bad situation worse.
And that is, in essence, what
happened to display advertising. Fearful of missing out on the next big thing,
advertisers threw money at the Web. Publishers, trying to gain dominance
quickly in the race to monetize content online, obligingly raised rates. In
1998, advertisers could expect to pay an average of $37 for every 1,000
impressions, which was made digestible only by the 1–2% response rates that the
ads still commanded.
But from 1998 onward, that
response rate slid like corn through a goose. To sate advertisers’ appetite for
impressions, publishers began saturating their content with ads. When
Microsoft’s car-shopping portal, Carpoint, debuted in 1997, there were no ads
on its home page. By 2001, there were at least eight, not including sponsored
links and pop-ups. As a matter of simple mathematics—even the most willing user
can only click on one ad at a time—click-through rates declined accordingly.
But there were other factors
that hastened the decline. The most obvious is the axiomatic one: consumers in
a zero-sum game become inured to marketer’s tactics over time. Tactics that
produced incremental gains quickly become overused dogma, whereupon they become
ineffective. Because advertisers now had to compete for eyeballs in much bigger
arenas, their methods became increasingly intrusive and deceptive: strobing
ads, fake interfaces, and ads camouflaged as real content.
The most notorious example,
still spoken of ruefully among Web marketers, is Treeloot.com’s “PUNCH THE
MONKEY AND WIN 20 BUCKS” ad, which invited the user to brandish a virtual
boxing glove to punch a virtual monkey. Millions of users were duped into
clicking, only to discover that they’d won 20 “banana bucks” that could be
parlayed into real money only by playing even more games. The ad was so often
decried by the industry’s doomsayers that some still hold it accountable for
the near-death of the medium.
The truly tragic aspect of the
direction that Web advertising went is that marketers saw the writing on the
wall very quickly. From its debut in 1999, the Web marketing forum ClickZ began
fretting about the industry’s over-emphasis on direct response, believing it would
lead to a crash. Topics covered the first year included “Escaping the Cult of the Click-Through,”
“Tracking Non-Click Conversions,” and “Between a Rock and a Hard Place,” which
contained the quaint observation that click-through rates were “at an all-time
low.” (The average response has since declined another 500%.)
It’s easy to be smug about the
inevitable consequences of the new medium’s direct-response myopia, but in
truth individual marketers were simply powerless to invert the widely accepted
perception that display advertising’s primary function was as a direct response
medium. The industry produced study after study showing how exposure to display
ads increased brand awareness by some measurable delta. The Interactive Advertising Bureau was formed mainly
to advance that agenda, by standardizing ad sizes around more brand-friendly
specifications and running studies on the impact of rich media. Certainly the
evidence was persuasive, but it didn’t matter, because of another axiom: given
the choice between hard and soft data, marketers will always choose hard. So
unless the entire industry simultaneously stopped measuring click-throughs, it
remained the only metric universally accepted as an indicator of campaign
performance.
Then the crash came. Advertisers
were more or less content to throw bad money after good in display advertising
as long as the Internet economy was strong. But when dot-coms started to bomb
with greater intensity in late 2000, dragging the rest of the economy with
them, online ad money dried up overnight. Start-up online media companies
canceled IPOs, and public ones like rivals Avenue A and DoubleClick watched
their value vanish. The mainstream media wasted no time in declaring the era of
online advertising well over, and the Web’s ad volume shrank for the first time
since its inception. It remained in decline for nearly two years.
In retrospect, it seems unfair
that Web marketing was sent into the desert like a scapegoat, carrying
marketers’ sins on its back. To this day Web marketers still complain, and
quite justifiably, that the level of accountability between online and offline
advertising is badly misaligned. We still argue about brand impact and still
tout statistics to persuade advertisers to accept other metrics. But none of
that really matters when we look at this story through the coolly objective
eyes of the game theorist. Web advertising went the zero-sum route, and
zero-sum is what it got. Its zero-sum mathematics went the only direction such
mathematics can: the minimax point shifted toward the consumer. But it’s also
true in game theory that that which does not kill us helps us find equilibrium,
and that’s what happened here.
Interestingly, at least one
business journalist observed the relationship between game theory and display
advertising’s race to the bottom early on. In a piece for Business World entitled, “The Unbearable Lightness of Ad Revenue,” Frank Yu declared, “Ad budgets are a zero-sum game and so
are users’ attention spans.” He predicted that as “jaded, cynical consumers”
learned to tune ads out, only the top content providers could afford to stay in
the game and severe “clustering” of content and media revenue would occur. He
further predicted that new platforms like PDAs would challenge the Web and
force new content monetization models.
Yu was at least partly prescient,
if too cynical. Web traffic did indeed cluster around top content providers,
but smaller players were able to stay in the game as a result of the Web’s
transparency. Media planning tools like Nielsen NetRatings were able to
ascertain the dimensions of the audience on more niche sites and allow
advertisers to trade volume for relevance. The predicted changes brought on by
new platforms are only now beginning to occur, with marketers taking notice of
the growth of mobile applications as a small but rising threat to the
now-traditional display advertising model. But the fundamental problem Wu
raises—that of consumers tuning out—remains the industry’s greatest challenge.
What truly saved display
advertising was the equilibrium that occurred between response rates and media
costs. The cost has stabilized around a proportional rate of return that
direct-response marketers can live with; in other words, the cost of
impressions dropped alongside the rate of response. This has, in turn,
eradicated most of the least tolerable tactics. Pop-under ads are largely a
thing of the past, and fake interactions are mostly passé.
The limitations of this outcome
are obvious: a more stable zero-sum game is still a zero-sum game. It leaves
marketers with the basic problem of trying to eke out performance gains from a
medium that is shifting inexorably away from direct consumer engagement. The
stark reality of this marketer-consumer relationship was made plain by a 2007
study that sent shock waves through the digital marketing community. A joint
study by media research company comScore and media agency Starcom showed that a
stunning 50% of all clicks on display ads came from one small slice of the Web
population: Web users aged 25-44 with a household income of less than $40,000 per
year. Dubbed “Natural Born Clickers,” these users spend four times more time
online than average users, but purchase products at significantly lower
frequency. Such users tend to favor gambling, employment, and auction sites—a
much narrower pattern of surfing behavior than the Web population as a whole. A 2009 update to the “Natural Born Clickers” study showed that the minimax
point was continuing to slide. The percentage of monthly clickers fell from 32
percent in July 2007 to 16 percent in March 2009, with only 8% of Web users
accounting for 85% of clicks.
From a game theory perspective,
the implication of the “Natural Born Clickers” phenomenon is that it undermines
the precarious equilibrium in click-based display advertising. That equilibrium
is based on the idea that the cost of finding and prompting action from the
right targets compensates for display advertising’s low response rate. If,
however, that low rate of response also falls short of finding the right
targets, the advertiser is no longer in equilibrium. Advertisers are then
paying too much for the wrong kind of results.
Obviously the industry is in
need of a game-changer—a shift in the use of the medium that moves it outside
of the stark give-and-take of zero-sum. Fortunately for the display ad medium,
that game-changer has come in the form of more advanced metrics that account
for the effects of advertising beyond direct response. Any of us can recall an
instance of having seen an ad or a series of ads and having some later
decision, e.g., which cars to research, informed by those previous impressions.
This is, in fact, the way that advertising has always been understood to work:
as one of many factors that add up to a purchase decision. Display advertising,
by contrast, had been operating under the fallacy that only a direct and
immediate action, irrespective of whatever else the user might be doing, is the
only way to account for the ad’s impact. Such an outrageous supposition easily
leads to the “Natural Born Clickers” phenomenon, as clicking on an ad bears the
lowest cost for a user who is at their leisure and has no intention of
purchasing.
But the advent of advanced
metrics disposes of this fallacy. Advertisers can now account for
“view-throughs” of an ad, i.e., the perfectly natural phenomenon of a user
seeing an ad and responding later. In rich media advertising, one can now
account for interaction with the ad—certainly important in making a brand
impression—as well as the brand impact of the ad. And display advertising can
be evaluated for its contribution to sales rather than to the fallacious clicks
metric.
The digital marketer might
rightfully protest that no other advertising medium is required to justify its
existence in this way; it is the equivalent of demanding that billboard advertising
account for consumers that spotted the sign and then later went to the store
and purchased the advertised item. But again, game theory provides a ready
explanation: once the payoffs in a game have been established, no single player
can unilaterally change the rules. No bottom-line focused marketer wishes to
give up hard metrics in favor of more logically persuasive, but softer
arguments concerning brand impact.
This is precisely why the advent
of social media
marketing is so important to the health of digital marketing as a whole: it
provides the game-changer that demands different metrics, none of them easily
obtainable, for how online conversations with consumers impact brand relationships. When viewed in the
context of (as opposed to in conflict with) now-traditional tactics like display advertising, social media marketing becomes a way of continuing a conversation
that may be initiated in traditional ways.
How precisely social media
marketing works in symbiosis with other forms of advertising is a topic for a
later chapter. The main point of recounting display advertising’s tumultuous
journey is that its evolution away from direct response and toward a more
nuanced role has led the way for more radical evolutionary stages represented
by social media. And that evolution is reflected in the numbers: while
marketers’ investment in display advertising dipped, then stabilized, at a
fraction of its former value, their total investment in the Web has grown year
over year. This has occurred because interactive media has begun, albeit slowly
and with no shortage of false starts, to offer a way out of the zero-sum game
of direct-response marketing. The more cooperative forms of marketing available
to us in the social media era may provide the alternate path that marketers
need. But that is a subject for another blog post.
Tags: Media Planning & Buying, Rich Media Advertising, Display Advertising, CPA Programs
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