In 1998, Internet advertising revenue passed the $1 billion mark, more than double its 1997 level. Indeed, although the Internet entered the media fray barely four years ago, its revenues from national advertisers already surpass those of two rival media categories, network radio and billboards. Beset by changes on several fronts, the media industry, traditionally comprising the familiar print and broadcast channels of mass communication, has been undergoing a major transformation in recent years, change that appears certain to continue apace.
What forces are driving this volatile area, and how are they likely to shape the future for media competitors, advertisers, and their agencies?
HBS professor Alvin Silk has long studied such issues, and his latest findings, presented in a new working paper, "Restructuring in the U.S. Advertising Media Industry," coauthored by HBS doctoral candidate Lisa R. Klein and MIT professor Ernst R. Berndt, offer some important insights. The researchers begin by identifying forces both inside and outside the media industry that are influencing its rapid evolution. Then, within the context of these findings, they explore the structural impact of Internet advertising on the industry as a whole.
According to Silk and his colleagues, changes in the industry's external environment fit into three broad categories: technical, regulatory, and economic. Advances in technology reach well beyond the Internet to include sophisticated data management systems used by direct marketers; software for creating and managing graphics, video, and sound; and convergence technologies such as broadband that provide simultaneous, high-speed transmission of sound, video, and data through a single connection.
On the regulatory front, the deregulation permitted by the Telecommunications Act of 1996 is realigning media ownership. Among other changes, the Federal Communications Commission recently relaxed restrictions on ownership of multiple television stations in larger markets, paving the way for future consolidation.
Changes in the economic arena arise primarily from the wave of mergers and acquisitions that continue to alter the balance of power among media firms. The Walt Disney Company, for instance, in addition to owning the American Broadcasting Company and ESPN through the purchase of Capital Cities/ABC, recently acquired a 43 percent stake in Infoseek, the Internet search firm. Disney, once merely an entertainment provider, has thus become a multimedia giant able to shape and deliver news, information, and other content through a variety of channels. "Companies are attempting to expand their market power through vertical and horizontal integration," Silk explains.
To better understand the dynamics that mold the media industry from within, Silk and his coauthors adapted the "five forces" model of competitiveness developed by HBS professor Michael E. Porter. At the heart of the model are the myriad media rivals — including radio and television stations, magazine and newspaper publishers, billboard and direct marketing firms — that compete for bigger pieces of the advertising pie. That pie, however, which represents national advertisers' aggregate media spending, is growing slowly in real terms these days, because consumers' demand for information about goods and services tends to be inelastic.
As the model illustrates, additional forces drive industry change as well. Alternatives to advertising, known as substitutes in Porter's framework, include options like publicity, product sampling, and sales promotion. These substitutes compete directly with traditional media for advertisers' marketing dollars. Similarly, mergers between media providers and content suppliers such as news and entertainment programming also influence industry structure, as illustrated by the merger that produced Time Warner. Yet another factor — one Porter labeled new entrants — is identified in the working paper's model as new media. The emergence of broadband exemplifies these kinds of threats.
Media buying itself has been affected by important changes in advertising agency-client relations. In a departure from the long-standing "full service" industry norm, there has been a growing trend toward agencies unbundling the media function from creative and other services provided to clients. At the same time, multiproduct advertisers have sought to increase their bargaining power by consolidating their media purchases with one or a few agencies or independent media buying firms. This combination of unbundling and consolidation has been accompanied by greater cost consciousness and downward pressure on agency compensation, including abandonment of the agency practice of receiving a 15 percent commission on advertisers' outlays for media time and space. As the working paper points out, buying media time and space is a two-step process. The first, which the researchers refer to as the intermedia decision, involves selecting the type, or types, of media to be used — with primary reliance being placed on, say, network television or magazines, with newspapers or radio serving as adjunct or complementary media. "Traditionally, advertising agencies have played a key role in such decisions," Silk notes, "and media mix choices were often preempted in the early stages of campaign planning by judgments about the fit between creative strategy and different types of media. Not surprisingly, we found price sensitivity to be relatively weak at this stage." The second step, however, which involves choosing specific vehicles — a particular television network or magazine, for instance — is what the researchers call the intramedia decision. Here there is considerably more price sensitivity and a greater willingness to reallocate expenditures.
A fundamental question bearing on rivalry in the advertising industry focuses on the factors that influence whether different types of media are complements to one another or close substitutes. For example, will the Internet eventually replace television as a major consumer-advertising medium, or will it remain a secondary choice of advertisers, used as an adjunct to television? The researchers identified three major determinants of intermedia substitutability and complementarity. The first, audience addressability, is the ability of a selected medium to reach an advertiser's target audience efficiently. The second determinant, audience control, refers to consumers' ability to "tune out" advertising by means of a mouse click or a remote control device. And the third, contractual flexibility, describes the nature of the demands the various media place on advertisers. The contractual requirements associated with network television advertising with respect to lead time, for example, are quite different from those of newspapers. Although the Internet is relatively new on the scene, it already represents a major long-term threat to established patterns of intermedia rivalry, the researchers say. "The Internet is emerging as an adaptive, hybrid medium with respect to audience addressability, audience control, and contractual flexibility," they maintain. "Thus it looms as a potential complement or substitute for all of the major categories of existing media and appears capable of serving a wide range of communications objectives for a broad array of advertisers."
Silk, Klein, and Berndt note that their research points to an industry future fraught with increasing rivalry and change. The media planner's task will become more complex as the number of options available for reaching target audiences expands. With rampant corporate and agency consolidations, the demise of media-based compensation, and the rise of media buying services, the authors also foresee continued downward pressure on advertising rates.
Nobel Laureate Herbert A. Simon once said, "A wealth of information creates a poverty of attention." "That has always been advertising's problem," Silk concludes, "and in an age of new media, it will continue to loom large."