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The Message and the Media: Advertising's Brave New World
Long defined almost exclusively in terms of print and broadcast outlets, mass media as an industry has been undergoing a major transformation - and that means big changes for the advertising industry, too. The Internet, for example, which doubled its advertising revenues between 1997 and 1998, now generates more than $1 billion annually in ad revenues. That puts the Internet ahead of two long-established media sectors, network radio and billboards.
In a new working paper titled "Restructuring in the U.S. Advertising Media Industry" (coauthored with HBS doctoral candidate Lisa R. Klein and MIT professor Ernest R. Berndt), HBS professor Alvin J. Silk looks at both internal and external forces affecting the industry, with particular attention to the impact of the Internet. 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, which enhance existing advertising capabilities and create new ones, reach well beyond the Internet and include things such as innovative new software, sophisticated data management systems, and convergence technologies such as broadband. On the regulatory front, the Telecommunications Act of 1996 and a relaxation of restrictions on multiple ownership of media outlets are realigning and consolidating the power of media ownership. Lastly, in the economic arena, a wave of mergers and acquisitions has reshaped the industry with companies strengthening themselves across several media activities. Thus Disney, which began as an entertainment provider before adding network and cable television companies, now owns a 43 percent stake in Infoseek, the Internet search firm, and has become a true multimedia giant. "Companies are attempting to expand their market power through vertical and horizontal integration," Silk explains.
Within the media industry, a central fact is that its many actors, from venerable big-city dailies to the hottest Internet sites, are competing for a limited pool of dollars as spending by national advertisers increases only modestly. The traditional face of the industry has changed, with "full-service" agency-client relationships giving way to cost cutting, streamlining, and consolidation. Outright alternatives to advertising - including options such as publicity, product sampling, and sales promotion - are on the increase. 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.
Technology-driven new entrants are also changing the industry and none more so than the Internet. 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 answer, according to Silk and his colleagues, lies in a given medium's ability to reach efficiently - and hold onto - an advertiser's target audience and to be flexible and responsive to the advertiser's requirements and demands. Because of its ability to do these three things, Silk says, "the Internet 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 and his colleagues note that their research points to an industry whose future is fraught with increasing rivalry and change and one that will be characterized by continued downward pressure on advertising rates. As 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."
(Adapted from articles that appeared in the Summer 1999 edition of Working Knowledge, a publication of the HBS Division of Research.)
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