Gustav von Sydow on digital advertising, online media and tech start-ups

It’s not easy being in advertising these days. Not only does our industry consist of professionals with an exceptionally high level of existential anxiety – being paid to sell out to the highest bidder will do that to you – but we’re also under constant attack from people in other parts of the value chain. Not that this is anything new, advertising has been under siege both from the inside out for the last fifty years.

This time, it’s Jorge over at Spectator Bytes asking “Will Advertising Spending Be Another Victim of the Digital Media Transformation?“. More specifically, Jorge brings up the idea that many Internet services have reached broad adoption with little or no ad spend and asks:

What if this formula of success extended beyond Web products into other types of businesses (e.g., autos, food, appliances, toys, hardware devices, etc.).

It’s a interesting notion, which I suppose could be killed off just by pointing out that a web company’s capital and operations management is a tad easier than that of a say, electronics manufacturer. A web site can increase the “product inventory” by adding a new server (or just launching a new instance on EC2), an electronic manufacturer have to build a new server. And this is a luxury problem of course, since this implies that demand overshoots supply. The Internet industry learned the hard way how bad things can get if we have the inverse situation, that supply overshoots demand… capacity planning is a bitch, anyone from the dot-com-crash will tell you that. And the rest of the world still don’t have commodity hardware, VPS hosting, cloud computing etc. to decrease the risk of scale. But they do have advertising, that decrease the risk of scale by ensuring that demand meets supply. And that’s worth a lot.

But let’s say that open source hardware, just-in-time production, 3d-printing or whatever solves this dilemma, so that every industry have the same elasticity in scale that we do. We could kill the whole notion of “advertising is no longer needed since we have cracked the WOM-formula” by pointing out that Apple – the most buzzed up company on the entire planet – spent about 500MUSD on advertising last year. On a sidenote, this is (roughly) on par with what Microsoft normally spends in a fiscal year (in relation to revenues). But that would be somewhat unfair and I do think that Jose has a point. Relying on a blanket of ads clearly isn’t the most efficient go-to-market strategy for launching new products, or – even more so – new brands and companies. Using a PR- and WOM-driven strategy is.

Relying on PR and WOM in the initial stages of a launch makes sense from a trust perspective – the new ideas (products, brands, companies etc.) are coming from someone you “know” – but also they make complete sense from the perspective of allocating scarce resources. When an idea is new, there is a natural “story” to sell to press/bloggers and for people to talk about. It’s an opportunity that you only have when your idea is new. So naturally, resources should be allocated to leverage that “newness”. The problem starts when you’re not new any more. And with the velocity of media attention and social objects these days, this is a matter of days, or hours. And this is where advertising comes in.

Advertising leverages and accelerates the initial platform of awareness and trust that we’ve created thru PR and WOM.

But sure, for advertising to be really effective, it needs that initial platform. And to create that platform we need to have a product that walks the talk. It needs to be really, really good. But the increased pressure on product quality that information transparency has brought upon us doesn’t mean that the corporate budget will shift to product development and customer service – for the most part they already have a large chunk of the budget. Advertising actually accounts for quite a small part of the corporate budget in comparison to what it’s supposed to accomplish (sell a lot for a high price).

So it’s not a matter of advertising OR product, it’s advertising AND product. My guess is that if someone is going to get squeezed it’s the product guys: “we’re spending so much money with you, and this is all you have to show?”. So instead of advertising becoming more like product development – the in-meme right now – maybe it’s a matter of product development becoming more like advertising?