Which side will outlast the other in this arms race?
At the other extreme, how long before the MS Office Assistant becomes
non-disable'able and streams continuous advertising, keyed off your
interests from what you type into Word files? Why not? It's the most
targeted you could ever get, and it would subsidize free Office! What
a spectacular good!
No one really seems to be talking about what advertising *means* in
the limit: it can't be 100% of GDP, it's capped at only a certain
share. So unless *consumption* increases directly, cable, and now the
Web are in a zero-sum game with other media.
Web ads have surpassed outdoor as of last year (never mind that one
of the fattest chunks of new business in outdoor in the wake of
no-tobacco is... internet advertising). That's 1.6 billion dollars.
Not a lot.
Yet everyone believes Internet advertising will hockey-stick into the
stratosphere to support all this "content is king" bs. Sure, at the
high-end, the slickness and feel of the buying process -- once you've
committed to a GM car, say -- is a critical part of e-business l&f,
and metric shitloads of cash will be spend in the "advertising"
sector to polish that effect. But that's money taken from fufillment
and sales budgets, not ad dollars.
"Pure" advertising is imagery (audio, video, whatever) that
influences the choice of *which* brand to buy within a sector; and
only occasionally to create new sectors.
So work the numbers. The maximum free cash flow of the average
American household -- the most consumptive by far, so remember this
is an *upper* bound on planetary Internet growth -- is about $40,000
with two earners.
Now, they desperately want some "stuff" for their money. Ineffable
"status" is a kind of "stuff" at the extreme levels, but on average,
the price difference between Generic Corn Flakes and Kellogg's Corn
Flakes with K-sentials is about the upper bound of how much that
"choice" is worth. Suppose it's as high as 10%.
Mind you, this implies your average consumer is too stupid to realize
your product consists of .9 stuff and .1 advertising for every unit
of generic goods.
That's $4,000 a year -- that's the total value of all advertising a
nuclear family ought to be exposed to in a year. In other words, if
you were MegaCo and offered to buy some household a $4,000 kitchen
renovation, motorcycle or any other desired good, you could put
blinders on them and just force them to buy whatever products you
recommended (Amway, anyone?).
Consider the sum as a 'cafeteria-style' HR benefits plan. You're
being offered $4,000 in fringe benefits, but you can't bring it home
as cash, or any other sort of useful good. It's like being given
those little skee-ball carnival tickets you can cash in for prizes: a
95% discount on the New York Times, say; or a new episode of
Seinfeld; or a subsidized baseball game.
If you invert the conventional wisdom that some huge percentage of ad
dollars goes to television, you can say instead that the American
public is willing to divert a huge percentage of its discretionary
attention to get television.
Now, think about the thousands of proliferating new venues to be
stamped with advertising images. I just untied a bunch of green
lettuce, and even the darn twist-tie had an advertising message from
the vegetable-growing industry (no, not network TV, the *other* one!).
Here's the $64,000 question: In this environment, please justify
$4,000/household valuations of cable systems.
Think about it: AT&T goes out on the bond and loan markets and buys a
huge pile of cash in return for future dollars (at rates like 6.5%
!). It hands this pile of cash over to MediaOne stockholders. It now
has bought the *option* of deploying broadband to all these teeming
millions of households -- not all of which can be above-average
wealthy! -- saying, in effect, "there's no better way on the planet
to invest $56 billion today -- not housing, feeding, and caring for
the entire planet's poor, for example [which would only cost $60bn
according to the UN.]"
Suppose -- and this is conservative, for me -- that they can convert
households for about $1000, counting equipment on both sides,
installation labor, G&A, tech support, and the works. This means that
AT&T is now sitting on a $5000 investment in Joe Doaks' household.
This is only worth it if AT&T could thus control every buying choice
Joe ever makes!
Or in other terms, accepting 5 year depreciation of the equipment
($200/yr) and cost of capital at 10% with principal payable over 10
years, breaking even means Joe Doaks has to throw off $200 + $400 +
$400 = $1000 a year to make this worth AT&T's while.
That's a $85/month cable+phone+movies+music bill -- reasonable enough
on its face, right? No, that's the PROFIT AT&T has to make -- content
still isn't free, and the NAB will never let it be. So that's more
like a $150/month basket of goods AT&T has to shove through that
pipe, even at obscene 50% gross profit margins to simply BREAK EVEN
after depreciation and interest!
The only way to make this shell game work, as I see it, is to write
off thousands of dollars per pop as 'goodwill' and take the
intellectually dishonest step of depreciating highly-volatile
broadband equipment over Telco-class time horizons (typically 25
years).
Enjoy the bubble!
Rohit