Why Silicon Valley Can't Sell

Or, why luring big brands to platforms is its next big problem

Photo Composite : Zuckerberg face : Christian Alminana/WireImage ; body: Ross Anania/Getty Images


Drive up and down the 101 Freeway in Silicon Valley, or cast your gaze north toward Seattle, and media companies, which expect to book over $20 billion in advertising in 2011, appear to be everywhere. But visit the biggest of these companies and ask them to define themselves, and you’ll be hard-pressed to get them to say they’re the new generation of media, attracting audiences for the purpose of selling advertising.

“We’re a core technology company,” says Nikesh Arora, Google’s chief business officer, whose team netted $10 billion in U.S. ad sales for the search giant last year.

“I don’t know [if we’re a media company], and to be honest, I’m not that interested in the answer,” says a slightly annoyed David Fischer, Facebook’s vice president of advertising, who sold $1.8 billion.

“Microsoft is first a technology company,” says Keith Lorizio, the head of sales for the software giant’s advertising unit.

The exceptions? Yahoo and, on the East Coast, AOL—both once seen as tech leaders, but now laggards, trying to remake themselves as media companies. “I embrace it,” Ross Levinsohn, who joined Yahoo last November to run its Americas operations, says about the media label. “The media business is the most exciting business in the world.” But you won’t find any tech platform worth a few billion or more that admires Yahoo, AOL, or, for that matter, anybody else in the media business.

Advertisers and other publishers have pointed out for years now that assembling audiences, and selling advertising against them, makes these companies, ipso facto, media businesses. And that to survive when the inevitable next big innovation makes mass selling even cheaper, they have to lure big brand dollars onto their platforms, something they’ve struggled to accomplish so far. To do this, they may finally be forced not only to embrace the media label, but actually act like media companies, building context as naturally as they build functionality. It’s a need the technology companies are just beginning to grasp.

Premium brands have always depended on the context that media provides to get their messages across. And they want partners who recognize this too. As Levinsohn notes, it’s why Thursday nights have historically been big programming nights on television: The networks know they can get their biggest premiums if they put their best programs—or at least the ones most popular with audiences who have disposable incomes—on that night because movie studios and the auto industry and every major retailer want to prime the pump of weekend shopping and entertainment. It’s why David Ogilvy ran his most memorable ads in the pages of The New Yorker in the ’50s and ’60s, when that magazine was the lifestyle bible of every sophisticated suburban housewife. It’s why corn lobbyists buy Sunday talk shows and not soap operas. Context is all.

And if the digital world is ever going to build a $200 billion digital advertising market (which Google’s Eric Schmidt has declared as the industry-wide target in the next 10 years), it needs to create the 21st-century version of that context—environments that can help build brand identities.

Underneath a veneer of success, the digital media industry as a whole has masked a growing existential crisis. CPMs on the Internet continue to drop like a stone, and most brand advertisers have resisted moving their dollars into digital, to the point that a now infamous $60 billion gap has opened up—the amount of additional money that, given the amount of time consumers spend with the medium, say industry analysts, advertisers should be spending on interactive media today.

The existence of the gap raises an uncomfortable question. How committed to the advertising business can the management at any of these companies be if they’re letting $60 billion in potential revenue fall through the cracks?

Advertisers are used to having a symbiotic relationship with traditional media partners, and each side understands the other’s roles. The media partners build content and charge premium prices to appear alongside it; the marketers get their desired audience(s)—consumers willing to pay for their brands. That symbiosis hasn’t developed yet in digital, however, and agency executives can sometimes sound like they’ve reached a breaking point in their frustration with Silicon Valley’s refusal to claim the media mantle and fully embrace advertising as their raison d’être. “[They’re] the new media owners, masquerading as technology companies,” WPP chairman Martin Sorrell recently told Adweek.

The reason they haven’t behaved like media companies, yet, has a lot to do with the culture of where they’re based. Indeed, the engineers and the engineering culture of the Valley have always had a certain distaste for advertising, and for advertising salesmen (the kind of people who usually end up running media companies)—too messy, too intrusive, and, worst of all, too dumb. As any Silicon Valley VC who first invested in one would tell you, the goal of a technology company is to develop an essential product that will gain a dominant market position—ideally, so essential that generating revenue off it is more about collecting rent than about selling. And it’s the tech rent collectors who draw the highest valuations on Wall Street.

Media companies, on the other hand, are different, and the VCs know it. Get typecast as a media company—a mere seller of advertising—and you get a media company valuation. Which makes it a great irony that advertising is the only way the Silicon Valley platform companies have ended up making their money.

Their discomfort with this may be why, since before the time Google built AdWords, these tech companies have often seemed more attracted to fixing the flaws they see in the advertising business model than to making it easier and more effective to advertise a brand online. (Steven Levy, in his book In the Plex, writes that “contempt for traditional advertising permeated Google from the top down.” As Eric Veach, the engineer behind AdWords, put it to Levy, “I hate ads.”) 

“They’re always looking for a black box solution to everything,” says one annoyed advertising buyer about the Silicon Valley companies. Veach admitted as much to Levy when he described Google’s formulas for getting your search ads deemed “relevant” as something “you can’t easily explain to advertisers.”

The question now: Can the dominant players in Silicon Valley finally do the kind of explaining, and the kind of selling, to Madison Avenue that advertisers want them to do, and hence attract big brands and big brand margins?

On the surface, digital publishers appeared to have had a banner year in 2010. Total ad sales were up more than 16 percent from $22.7 billion to $26 billion, according to the Interactive Advertising Bureau. Digital has now eclipsed print to command the second-biggest audience in time spent on media, surpassed only by TV. But to this day, most of that money has been dollars shifted from direct response. As the IAB’s CEO Randall Rothenberg says, the Web has “been replacing the U.S. Postal Service.”

The $60 billion that digital “should” be getting is almost entirely money from big brands. As the 2011 upfront season demonstrated, advertisers were perversely willing to pay higher CPMs for the reach they could get on TV—amounting to more than $18 billion in immediate commitments—even while the overall TV audience has declined.

Meanwhile, premium pricing for digital inventory is becoming more elusive by the month. CPMs continue to trend downward, according to the IAB, not only for the much-loathed but still widely deployed banner ad, but also for the newer display ad units that are supposed to be luring brands online. The 16 percent growth in 2010 came courtesy of what Booz & Company consultant Chris Vollmer labeled two years ago as the “low hanging fruit”—stolen much more from below-the-line forms of traditional direct marketing, junk mail, and the Yellow Pages, than from those lucrative brand budgets.

Those direct marketing offers have been placed against an infinite universe of inventory that continues to expand. Rothenberg, speaking at a recent event to IAB members—the people who sell digital advertising space, including the big platform players—said, “What we’ve spent a lot of time and a lot of our energy doing is pushing tonnage out into the marketplace.” And the tonnage is what’s driven down CPMs, and thus potential profits.

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