According to news reports last week, online ad spending has risen to $16 billion per year, and it's expected to continue rising indefinitely. One online ad firm sold for 20 times its annual revenue, indicating its buyer expects massive growth. For those who normally just skim the business section, "who cares" is a natural reaction. But ad revenue performs a surprisingly important public service function in our society. It largely determines the way we get informed and entertained. Unlike most civilized countries, we finance almost all of our media industries with ad revenue.
While the consumer is supposed to be king -- and readers, viewers, listeners, and browsers certainly think TV shows and newspapers are for them -- content is actually just a by-product (or, more accurately, an intermediate input) in the production and sales of eyeballs and ears to advertisers. News stories and episodes of The Simpsons are just the flypaper used to attract your attention -- sorry, you're the insects in this analogy - for Ford Motor Company and Proctor & Gamble.
The reason the rise in online ad revenue matters is that it comes at a cost to traditional media. As attention drifts away from old media, the advertising returns to creating good programming for old media decline. It cost millions per episode to produce the last season of Friends. That only works when the audience is large enough to keep the ad dollars flowing in.
Nowhere is the threat of new media to old more evident than in newspapers. Local newspapers used to be a main source of information -- local, national and international -- for people with a serious interest in current events. Trained journalists produced reporting and informative copy which provided citizens with the information they needed to conduct their personal and civic lives. Newspaper managers knew that most revenue came from advertisers, and costly news gathering was valuable only inasmuch as it helped attract readers. But journalists thought they were producing content for users.
The Jakarta bureau probably never generated enough additional interest in the paper among readers to produce ad dollars to cover its cost. Still, journalistic standards required its maintenance. And because the newspaper was essentially the only way to reach many local consumers, the model worked. Revenue from all over the paper -- the classified ads and all of the separate sections were pooled to finance the reporting that journalists deemed important.
But technological change -- the Internet -- has made it possible to unbundle the paper and cherry-pick some of the ways it attracts readers and, ultimately, revenue. National news available free on the web (at CNN, the New York Times, and elsewhere) provides a superior alternative to the national and international coverage in almost all local papers. And Craigslist undermines the papers' classified section as a revenue source. The cross-subsidization of news gathering by other parts of the paper is no longer feasible. With every tub on its own bottom, the Jakarta bureau (and the Washington beat and lots of other stuff) has to go.
In some industries, a contraction is no big deal for consumers. If interest in dining out declines, some restaurants will go away. But many will remain. And the dining experience available to customers at the surviving restaurants will be unaffected. But with daily newspapers, it's different. Most places have few or just one major newspaper. When ad demand is off, the paper needs to reduce costs, which means fewer reporters writing fewer, or cheaper, stories. Even for people who keep buying, the product is now different. Why the difference between newspapers and restaurants? Newspapers -- and other media products -- have high fixed costs (incurred to make the first copy). Continued production of a high-quality product requires lots of buyers. For products like this, what I get depends not just on what I want but also on what others want. I term this the "who benefits whom" phenomenon in product markets, and I discuss it at length in my forthcoming book, The Tyranny of the Market: Why You Can't Always Get What You Want.
If you've taken Economics 101, your reaction is probably that content providers need to provide wares distinctive enough that they can charge consumers for it directly. And indeed, some already do. Think of HBO, the Wall Street Journal, and the premium services of the New York Times. But most papers are still struggling to find ways to cover the high fixed costs of producing a decent paper. Meanwhile the subsidy to news gathering from other parts of the paper is going away, which means lousier local papers and fewer people informed about local affairs.
It's not all gloom and doom in the media industry. Local suburban weekly papers are growing, and their appearance as the best access to local eyeballs for advertisers may allow them subsidize responsible journalism that readers might not willingly buy, article by article. It's possible that the unbundling of the major metro area papers will usher in a golden age of interest and knowledge about very local affairs (school and zoning board hearings).
It's wonderful news for someone that online ad revenue is up and rising. But, for a while anyway, it may not be good news for you. Indeed, for a while, there may not be much of any news for you.