Andrew Harrison: Digitals crucial weakness

“It’s time to mourn the death of commercial TV as we know it”. Is it? “The twitter of a threat to traditional marketing”. Really?

Readers of recent editions of Marketing Week, struggling to stretch their shrinking ad budgets across new and old media, have had plenty of advice that the end of the world is nigh.

But isn’t it time someone started wondering whether the online social networking emperor has no clothes?

Here’s a broad social networking brand roll call from the past few years – Friends Reunited, Pandora, Bebo, Last.fm, Second Life, MySpace, Flickr, You Tube, Facebook, Spotify, Twitter. Each has been heralded

as the next big thing at some stage in the past few years. All are caught up in the whirl of advertiser excitement about all things digital.

Some of this is nonsense. Someone should say so. Does anyone seriously consider Friends Reunited or Second Life as an advertising solution to the downturn? Why would this year’s next big thing be any better? Of course, social networking is the new online phenomenon; of course it’s interesting that some of it is in real time (though I’ve no idea how a client is likely ever to be able to approve an ad campaign in real time); of course lots of real people are gathered on these virtual sites, but that doesn’t make it an appropriate advertising medium any more than Wetherspoon pubs or Costa Coffee are a new important medium for advertisers because they are each a home for social networking in real time.

The universal truth is media platforms survive or fail by their delivery of audience and generation of revenue.

Let’s start with audience. Twitter is the latest golden child. According to research by O2, UK businesses are sending about 3 million posts or “tweets” per day, with about 700,000 companies now using the service. Around 6,000 small businesses sign up every day. But Twitter has an active user base of only 1.2 million. That’s worldwide. About the circulation of one issue of The Sunday Times in England. Yes, Twitter’s growing fast – but if advertising on private mail exchanges is the best way to deliver commercial messages, then letters would have evolved ahead of TV as the biggest display advertising medium of the last century.

Or take Spotify. In the UK, Spotify attracted 55,000 unique visitors in January 2009, half the traffic of Last.fm, last year’s  big music thing (based on ComScore). Last.fm is now a mature business in the UK and yet only has a reach of 0.3% of the UK’s 36 million regular internet users. This indicates the sort of traffic that a streaming music service can expect. In comparison with established media, these reach numbers are miniscule. Compare Last.fm’s 100,000 users each month with TV: Dancing on Ice gets 9 million viewers each episode (84 times Last.fm’s entire monthly reach from just one programme). There’s a similar chasm between Spotify’s 55,000 monthly music subscribers and the 20 million listeners who tune into radio breakfast shows every single day.

Then consider revenues (or lack of them). I don’t think anyone is yet clear about what the viable sustainable business model is for online social networks. What is clear is that advertisers appear to be confusing social networking phenomena with real business revenues. According to the IAB website, approximately 60% of all online revenues in 1H08 were search. In addition, we know that Google has about 85% market share of all search spending.

Put more starkly, Google alone accounts for more than half of total online revenue, meaning that all the other thousands of online businesses have to fight it out for their fractional share of the rest. And IPA Touchpoints confirms that online media consumption only accounts for 15% of the media day – way below press, TV and radio’s consumption.

It’s true that ITV or Johnston Press might be taking a hit on the share price (City analysts are all admiring the Emperor’s new clothes of social networking sites too – just as they admired the RBS acquisition of ABN Amro last year), but it’s also clear they have real, long-term revenue streams. Whether cyclical or not they dwarf the actual revenues of online social networks. So, the model may be changing but, like Mark Twain, rumours of the death of traditional media seem somewhat exaggerated.

But, do expect – especially in a recession – the next dotcom bust. There’s a huge over-supply of online inventory chasing a smaller advertising cake. At the same time, online, consumers are resistant to paying for content. So, ad-based models need to be developed for social networks to survive and distribute content free. But those same users don’t really want ads interrupting their messaging.

Once advertisers see that the real audiences on social networks are small and can’t be monetised, they’ll prioritise spending elsewhere. Then everyone will finally realise how naked this particular emperor is.