Battelle: What are the biggest obstacles in our industry?
Rothenberg: Venture capitalists. They create new businesses, but they incentivize companies toward short-term cash-out potential, not long-term growth. So if I were a marketer, my worst problem is chaos--not knowing what will make a difference. Venture capital has supported and financed a bunch of chaos.
Now, it is what they do. The investment structure in the digital industry does fuel nonproductive chaos. That's one of the biggest issues in the industry. For marketers who are trying to build brands and sell products, and agencies and publishers, it's a big issue.
Battelle: Our marketing partners often say we want to work with Hot Shiny Startup X, and can you get us a meeting with them? But often these startups don't have a way for marketers to engage. When they get there, they create their own native ad environment. Everyone seems to be chasing that Google AdWords model. What do you make of the rise of all these new ways of marketing? Is this going to work?
Rothenberg: No. Marketing for large companies is fundamentally an industrial process. They depend on scale. The reason advertising grew was all because of scalability. The television ad takes a writer, a designer, a producer, and a media or account person to place the ad. Then it can run anywhere--on 600 networks, or any magazine.
What's happening here that's so difficult--imagine you're starting up a new magazine and you say I don't want 9-by-11 pages, I want 12-by-17. But you won't get it stocked in supermarkets. Or a music TV network taking only ads with music in them.
They're forcing the customers to take on new costs. Essentially, publishers at the bottom of the food chain are charging customers at the top of the food chain more. It doesn't work. It's hard to create a large-scale business out of custom executions.
Battelle: So companies pushing native advertising are hopelessly fooling themselves?
Rothenberg: Some will be successful. But it's really difficult to do it economically, so it's hard to justify the valuations they're getting.
Technology allows you to do vastly more forms of customization--in aircraft manufacturing, or jeans. But you can get wrapped up in diseconomies of scale very quickly. Economics requires you to push most of your customers into standardized or semicustomized experiences.
When the WPP Group made the first hostile acquisition in the ad business, J. Walter Thompson... PR has always had lower margins than advertising--because it's not a scale business, it's a people business.
Battelle: IAB standard ads, banner ads, are understood to be lower-performing. Is that form of display dying?
Rothenberg: No. But we need to admit that our digital ad forefathers created the digital advertising business to be direct-response.
Battelle: I didn't know I was doing that.
Rothenberg: No, but the way we did things facilitated direct-response marketers mostly. That's why low click-through rates is a red herring. What matters to marketers is the yield curve. And the economics of online direct-response advertising are very favorable for marketers--one-tenth or less than that of direct mail.
Battelle: What is the solution to re-energizing the brand display marketplace in a scalable way?
Rothenberg: A number of ways. This becomes a commercial for the IAB. But we have to commit to serving the interests of our customers. 95% of brand dollars are staying out of digital advertising. Good, solid brand advertising supports the brand marketer's need to elevate its product beyond commodity levels. Coca-Cola has to get 20 cents more a liter than the store brand or it goes out of business.
We obviously need better spaces and places and opportunities for brand expression. It involves creating ad units that standardize the capabilities of the Internet.
We need to be able to use data in a protected and honorable way.
Battelle: I was going to ask if a big challenge was looming government regulation of online advertising.
Rothenberg: It's a big honkin' problem. Fortunately in the U.S., we began working five years ago to create a voluntary regulatory mechanism. The really monstrous threat of really bad advertising regulation is over in the U.S. for now. But it's a problem in Europe.
Q (from the audience): How do you standardize in the social realm?
Rothenberg: It's hard but it's certainly not impossible. In fact, both Facebook and Twitter and trying to do that. You need a middle ground between freewheeling, unstructured stuff and standards.
There's also the standard in public relations: the press release. They're remarkably effective for [getting coverage in] poorly staffed newspapers.
In a way, the craze for viral video is an attempt to create a standard around social conversation. You can see it's not impossible.
Q: How do you envision the display market three to five years out?
Rothenberg: Most display is not for branding. Close to 70% of all the revenues in display are performance. They're not CPM anymore. That got crossed in 2002.
A digital GRP and especially new, functional ad units will unleash the ingenuity of great creative people. That will make the difference in drawing big brand budgets on the Web. Can I do great work that will get into 20 million homes at a pop, create an emotional connection, and prompt sales? That can happen.
