Q&A: Denuo’s Tobaccowala

NEW YORK As CEO of new media consultancy Denuo and chief innovation officer of Publicis Groupe Media, Rishad Tobaccowala is tasked with helping clients “get to the future first.” In order to do so, he believes agencies need to be more collaborative and act as a filter for clients.

Tobaccowala has established himself as a leader in thinking about digital media. He founded SMG Next, the futures practice of Starcom MediaVest Group, and Leo Burnett’s interactive media group.

He talks about why agencies have nothing to fear from Google, how mapping will become a killer app and why the Internet still has a ways to go before proving its value proposition to many brand advertisers.

Q: What hot new media platform will take the industry by storm next year?
A: I don’t know if it’s going to be next year, but there are two things that I am very excited about: The first is mapping as a way to get local advertising and targeting. Look at Google Maps. One of the devices I use is an Apple iPhone, and I no longer call 411 because I use Google Maps to type in what I am looking for. That interface is very interesting. It allows marketers to populate it with interesting marketing messages. Mapping as an interface will not only be mobile, it can go to car devices and personal laptop computers and it’s one of the reasons why Nokia spent $8 billion buying Navteq. The second thing I’m excited about is: How do you actually find ways to leverage social media in a way that marketers feel comfortable with it? There’s so much opportunity to leverage, but they’re also scared of it, scared of consumer stalking. The reality is there are technologies that allow you to do interesting stuff.

Will next year be the breakout year for mobile as a marketing platform?
In the U.S. it may take a little more time, but there are two things I’m positive about in regard to mobile. My underlying belief is nobody wants advertising on their phone. What they are interested in is marketing services on their phone. . . . Today 70 percent of what people do is all SMS-related. The two big opportunities: No. 1, when there are more and more intelligent phones being used out there, and No. 2, as people use mapping services, which will take some time to get used to since it is a very new interface. I’m watching mobile with a hawk’s eye.

Is it any clearer now whether Google is a friend or an enemy?
I believe they are a friend. In many ways, what they are doing is creating operating systems for advertising. If you’re a businessperson, if someone asked you whether applications like Windows is a friend or an enemy, I think you would say “friend.”

Denuo has operated for 18 months now. What have you learned?
We have learned that, No. 1, there is a huge demand from clients for innovation. As evidence of that: I was supposed to turn profitable next year, but I’ve turned double-digit margin profitable this year. No. 2, clients are sick and tired of agencies competing with each other when they truly believe collaboration is critical. We come in and collaborate with whomever they want. No. 3, they are very interested in what I call “pragmatic risk taking,” which is: Clients are willing to do new and innovative things, but they want to make sure they are doing it for a business reason, a consumer insight reason and with some knowledge of some sort of metrics that come back in return. And they are less and less likely to do something because it’s cool. For instance, our company has strongly encouraged a lot of clients not to do anything like Second Life, and it has been fantastic for us because when they were willing to spend lots of money, we said “What are you doing? There’s no one there.” If you’re the porn business or you’re trying to pick up someone, yes, but otherwise there’s nobody there. It was a data-driven recommendation which saves clients a lot of money and a lot of what clients are looking for is “Tell me what not to do,” because there’s a hysterical herd-like behavior. We say, “Calm yourself down.”

Facebook recently backtracked on Beacon. Is there a risk that advertising is courting a privacy backlash?
To a certain extent, the reality of it is that the most important thing to recognize is that consumers are people and need to have three key realities for them to be happy. The first is: They need to know what you know about them. The second: They need to correct or eliminate the stuff you know about them. And three, they need to find some way, either directly or indirectly, to financially or in some other way take advantage of their information. What happened with Beacon when they did it in the first version—no one knew what was being used, you couldn’t opt out and in effect what they were saying was: I was enhancing advertising by giving it my word of mouth or my buying behavior credibility, but I was not partaking of any of the financial benefit of that. It was all going to Facebook, and that seems to be unfair. The fact that you bought [something] is far more important than the fact I heard about it on Facebook. But the benefit of that doesn’t go to you, it goes to Facebook. Look at search advertising: When I go in and search for something, I do not benefit from the advertising people click on but what I have benefitted from is I got the world simplified because I was able to find things because of search—an amazing piece of technology offered to me for free and it makes all the advertising around it extremely targeted for me.

For Denuo, how has your making investments in start-ups helped you?
Denuo, which is a smaller company, takes stakes in start-ups, but those tend to be not cash related. We advise start-ups and get equity in return; we are not an M&A investment company like others. It helps in three ways: It helps the companies in which we invest in that we are bringing in a pragmatic reality as to how marketing and advertising works, so we provide an opinion, point of view and perspective. We also help them hone their products and services, regardless of who they sell it to, because our basic belief is that those companies have to become more valuable, so we don’t hone their products and services just for Publicis clients. For us, we advise our clients that we are aware of a lot of new and interesting technologies, which gives us a certain credibility when we advise our more traditional, larger established clients, and often we can say there are these really interesting companies and you should ask your agencies to talk to them. We don’t tell our clients to hire these companies because there would be a conflict of interest there, but we can set up meetings for them. These companies [we invest in] have solutions to problems, whether they be in media distribution, targeting problems or research issues that their technology and their services might solve. It’s a win for us, intellectually, a win for our clients in that we can provide perspectives and a win for the companies we help with in that we know about marketing and advertising.

It’s often noted that the Internet occupies more than 20 percent of media time but still has just 6-7 percent of media spending. Is that an important metric? When will the gap close?
Two things: It is an important metric in that it shows people are ahead of marketers at least in the way they utilize their time and so it does say, to a certain extent, you might believe there is an under-investment on the Internet. That being said, I would nuance my answer with two other things: A lot of marketers actually spend much more than 20 percent. Certain industries, like technology, finance, travel, automobiles, are coming close to or are exceeding 20 percent, so in some categories they are ahead. In some categories like food, packaged goods, etc., they are spending very little. When you average it out, it looks like very little but what it does say is: If consumers have switched their buying and a lot of other behaviors online-which they have in finance, travel, auto, technology—marketers are following. Where they have not changed their behavior, their purchasing and comparison behavior—people don’t search for toothpaste and they don’t spend time on toothpaste sites—marketers have not. So the issue is: What’s happening in your category and with what your consumers are doing versus what’s happening around the world? Second, that gap—again in some categories it’s already closed and been exceeded—overall, it’s not going to close for three reasons: First, that 20 percent includes a lot of things where you can’t do any marketing—so when people say they spend 20 percent of their time online, they include chat, e-mail, Facebook, lots of things where advertising doesn’t make sense. The second reason is that for a lot of categories—not auto, tech, finance—what marketers are struggling with is: What is a large scalable solution that makes economic sense? If I’m a packaged-goods marketer and I’m used to a business model where I’m pay $10 or $12 cost per thousand for my advertising and I move to a model where if I go to clicks—search—and it’s not an exposure, it’s a click and the average cost of a click is 50 cents which is $500 a thousand. If I go to broadband video at very heavily trafficked sites, it costs two times prime-time television. So in effect you’re asking me to go from something that has at least traditionally proven to work and is less expensive to something that is far more expensive that hasn’t yet been proven to work.

Publicis has made several digital acquisitions in the past year. Is it playing catch-up?
My belief overall is all the holding companies and definitely Publicis, pre-recent purchases including the big purchase of Digitas, were behind in this category and clearly by bringing in assets like Digitas and others we now have assets in the category that are somewhat scalable versus a few people or small companies here and there. Phase one clearly was catch-up for us and I’m sure it was catch-up for other people. That being said, the fact that we have embraced this is significant in a couple of ways: One, we did not bring in Digitas and say to them: “You’re going to do what we tell you to do.” We said, “Digitas, you are a central part of Publicis’ strategy,” so it was not like buying a company and putting them in some little corner somewhere. The second thing is: The head of Digitas, David Kenny, has been the digital czar not just for Digitas but for the Publicis Groupe from the day he came into the company and he is now one of only five people on [Publicis Groupe’s] board. So yes, it’s a clear indication that bringing in things like Digitas was “step one” catch-up, but if you look at the centrality of both the people who have come in from Digitas as well as other digital people, you are seeing in some ways we are intellectually, emotionally, financially making it a key focus of our future. In that way we’re hoping to make it a leap ahead.

You sit on the board of Revenue Science, a behavioral targeting firm. How important will behavioral targeting be in the future?
Behavioral targeting will be a very critical component of advertising and marketing for a couple of reasons: First, to a certain extent you’re already seeing it in a different form—you’re already seeing it in search. Search is a form of behavioral marketing in that you are raising your hand and saying you’re interested in a particular product and it is your search behavior we are targeting. When you think about ad networks, to a certain extent there’s a skill part of it, but certain ad networks look at what you’re reading and what you’re interested in. What is beginning to happen affect economic interests. There are three solutions: If you’re a publisher of content, how do you monetize your content in a world where people are not willing to pay for content and how do you do it in a way that makes economic sense to you? The way it makes economic sense is to give clients very highly targeted audiences because clients will pay more for them than non-targeted audiences. But how do you make as much of your inventory highly targeted versus just some of your niche inventory or your home page highly coveted by advertisers? So behavioral targeting brings intelligence to publishers’ inventory, which allows them to make more money and publish more content. Because it does that it obviously is good for consumers in two ways: 1) they get better and better content for free because there’s a monetization engine; 2) since behavioral targeting—at least by most of the better companies tends to bethey don’t know who you are, they just know there is an eyeball on the page—what it does do makes the advertising much more relevant. Think of it as: The advertising appearing as relevant as in a targeted magazine than on a broadband or broadcast television show. People pay a lot of attention to niche publication magazine adverts. They consider it to be content. For a consumer, I get more good content for free and more relevant advertising. For a marketer, it’s an interesting arbitrage opportunity which is: How do I scale large audiences and how do I do it besides doing it in search or home page portals or broadband video, all of which are very expensive? There’s this gap between that and run-of-site advertising which is very, very cheap but which is very untargeted. So behavioral targeting takes some of the behaviors about you and then adds intelligence to other pages, which makes marketers buy more targeted advertising at a lower cost. It’s a very interesting triple win for clients, consumers, content publishers, and obviously there are lots of ways to do it, so it’s a big part of future success.

What is the outlook for the Internet ad model? Will pre-rolls remain dominant?
If you ask consumers, they say they would prefer not to have pre-roll advertising. On the other hand they’re not going to watch post-roll advertising, and someone has to underwrite what is very expensive video. Delivering video online is far more expensive than delivering video on television because you have buy it stream-by-stream. The question is: What are the different types of economic models? According to eMarketer, the total of video advertising in the US is $1.2 billion, and according to one of my colleagues, the major networks are getting $120 million from their broadband efforts. Whether it’s $120 million or $1.2 billion, it pales in comparison to the almost $20 billion to be spent this year, across all forms of online advertising. I think the reason is there are three components people are still trying to sell for: How do you buy enough of this at scale? What are some of the measurements and metrics of how you can make it easy to buy? And the real big challenge facing marketers and advertisers is, what exactly are the right creative components? Right now the easy creative component is to take a 15-second commercial and use it as pre-roll. Often what happens is that if you do more creative or interesting things, you eventually find the cost of production is high relative to the number of people who see it, and that becomes a big issue. It’s unlike search, which is easy to buy and easy to sell, very easy to measure and the inventory is basically a text link. Search gets $10 billion out of the $20 billion (in total online), and the other video stuff gets $1 billion, if that. So while you’ll see it increasing, it will be increasing slowly because just the back-end economics of all this need to work. Right now the stuff that is working is the obvious: Take a 15-second commercial you’ve already got and put it in a pre-roll before the stuff. It sort of works like a television model.

What’s your view of the major TV networks and the role they play in driving new media platforms?
They are far more intelligent and far more sophisticated than people make them out to be. The reason I say this is that all of them have hired very smart people and they spend a lot of their time evaluating, meeting with and trying to leverage different stuff. ABC has done a lot of stuff on ABC.com, etc. NBC has partnered with News Corp., etc. and does stuff like Hulu. CBS is doing anything from [acquiring U.K. social networking Web site] Last.fm to doing snack-size stuff. I’m not talking about sales forces selling television today. I’m talking about management and other groups within the television industry. What is particularly interesting is that they recognize the world is changing rapidly, so they are hiring people and investing in this new world, much more —with the exception of something like a Google-than the online world is paying attention to the television world. That is fascinating because the future is going to be a mash-up between the two, at least for quite a few years. The one side that is being told they’re “not there” is paying a lot more attention than the other side.

Do you think Facebook is worth $15 billion?
Nobody knows what it’s worth because there isn’t a stock exchange marketplace valuation as you have with Google. Some very smart people have decided for some reason to put money in there and for that they’ve got stakes that supposedly value the company at this valuation. In a few years from now we’ll look back, people will say they’ve paid too much and people will say they’ve gotten a good deal.