The Shrinking Pie

Nowadays, the importance of digital is a given. Clients and agencies alike are scrambling to build talent and resources to take advantage of this media revolution in our midst. The power of digital to transform brands and drive growth is well proven through myriad case studies, from Subservient Chicken to Fiat’s eco:Drive. What’s less understood is how digital impacts marketing investments.

The investment model of mass media is so well understood that it has formed the paradigm of thinking about all marketing investments. Yet, this is one of the sources of confusion about digital — and one that continues to make it difficult for clients to understand what they are buying when they hire a digital agency.

The mass media model is simple: media + agency fee + production = total cost of marketing investment. While there are three components to this equation, the lion’s share of the money is spent on paid media — somewhere in the vicinity of 80 percent in most cases, with the remaining 20 percent split between increasingly commoditized agencies and production companies, with client procurement teams knocking down these costs every day.

The major cost in mass media is, of course, the media itself, and the cost continues to rise as the elusive mass audience affordable to the Super Bowls and World Cups and handful of hit shows like American Idol becomes the only game in town amid a fragmented, digitally enabled world. In fact, the cost of 30 seconds during the Super Bowl rises every year, and the 2011 upfront market seems to indicate single-digit increases for the mass markets generated by television.

So the analog media model boils down to a substantial investment in paid media — a rather big pie that clients must buy to chase the mass audience. In fact, when digital first appeared on the scene in the 1990s and early 2000s, agencies simply annexed it onto the mass media model — a new audience channel that required more investments in paid media. Rather than shrinking the pie, it simply added to it. Clients wanting to participate in digital either had to grow the pie to accommodate this new paid media channel or pull money from some other part of it.

It wasn’t until the Web 2.0 revolution that the real power of digital became apparent: through user participation and social media, we can actually shrink the pie. As a result, digital today represents an investment model that’s entirely different from mass media. In fact, the paid media portion of the digital ecosystem is perhaps the least interesting (with the exception of paid search).

As we write this article, Nike’s “Write the Future” spot for the FIFA World Cup, produced by Wieden + Kennedy, has been viewed tens of millions of times on YouTube. The post-Web 2.0 digital age has spawned two new concepts that turn the investment model of marketing on its head: owned and earned media.

When a brand creates its own media properties that consumers use over and over again, such as a popular video on YouTube or a popular digital platform like Nike+, this is “owned” media. When consumers share these media properties with each other-as when one person passes along a viral link to another, or blogs or tweets about a brand, or “likes” a brand on Facebook-this is “earned” media.

In each of these examples, the idea of purchasing media space and running interruptive display advertising is nonexistent. Instead, brands are tapping the participative power of digital technology to gain audiences without paid media.

Quite likely, the people opting in for participation are exactly the consumers marketers want to reach-the ones most engaged in the brand or the category.

On the other hand, mass media is still tremendously inefficient at targeting an intended audience. The next time you watch a popular television show, count how many of the ads are for products or services that are relevant to you. The rest are a waste of the marketer’s money.

The investment model for owned and earned media is the inverse of mass media. It requires a more substantial investment in producing innovative content and ideas, and a much smaller (or nonexistent) investment in paid media to create the initial awareness. But the real point is that the entire investment pie is substantially smaller than the mass media paradigm described above.

Digital agencies can build popular platforms or create viral games or videos that reach millions of consumers for a fraction of the cost that it takes to reach a mass audience through television. Sure, clients may pay more for the production of high-value content or software technologies that consumers seek out on their own (or share with each other), but the overall marketing investment is smaller and more targeted the further away a brand gets from mass media.

Indeed, there are paid media investments occurring in the digital space, which make sense for all marketers. Any brand that hasn’t optimized its search results or purchased relevant key words is missing one of the greatest online opportunities to directly reach hand raisers. And online display advertising is still a great bargain, plus more highly targeted than most print or television.

But the real opportunity of the digital age, for clients and agencies alike, is the shrinking pie of investment afforded in owned and earned media. The only losers in this new investment equation are the mass media companies that controlled access to audiences for decades.

Bob Greenberg is chairman, CEO and global CCO of R/GA. Barry Wacksman is evp, chief growth officer at R/GA.