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Monday, July 29, 2013

The Knowledge Economy and Advertising

A long time ago, I began my career at an a very large ad agency in New York. On my second day on the job, my boss called me in and began to brief me on the industry. He was very methodical and kind. After an hour or so, he asked me if I had any questions. As a newly minted MBA, I asked about the firm’s assets. He smiled and said we really only have two. They were the company’s reputation (largely the creative product) and the people. He said,“Our major asset is our people and they go up and down on the elevator every day.” That was the first time I had heard that term which is still repeated to this day. What he was telling me, and at the time he did not know it, was that I had just joined the “knowledge economy”.

As best as I can tell, the term came from management guru Peter Drucker in his 1969 book, THE AGE OF DISCONTINUITY. Like many coined terms from Drucker, the idea took a while to catch on but, when it did, it gained a lot of traction in erudite business circles.

What does it mean? A formal definition offered by the British Work Foundation is “The Knowledge Economy is what you get when you bring together powerful computers and well-educated minds to meet an expanding demand for knowledge-based goods and services”.

How can we bring this down to the world of 2013? Well, when we all studied economics, we were invariably taught that labor and capital were the dominant factors of production. Today, many of us would say that knowledge is replacing labor as a major means of creating wealth both personally and for one’s company. When you use a non-depleting asset like knowledge you can actually enhance its value by sharing it. Today, in developed countries it is safe to say that some 50% of the GDP and also half of the jobs are in the knowledge economy.

Knowledge, true knowledge, really adds value to an organization. It makes for better decisions, encourages innovation and often can raise productivity. Many big companies have appointed Chief Knowledge Officers which sounds horribly pretentious but makes a very good point. A knowledge officer has to be able to distinguish between knowledge and information. A few consultants whom I have run across say that you have “explicit” knowledge and “tacit” knowledge. You can easily find explicit knowledge in company databases and the occasional old filing cabinet. Tacit knowledge exists in employees (your assets) heads and is largely intangible as it covers intuition, experience, and judgement. When IT leads company projects they often fail as they are chained to explicit data or information.

From my second day in the ad business, I learned that the assets of the agency left on the elevator each night. This is a crucial issue. Competitors can lure aways your most talented employees and some older staffers retire. Some companies received a rude awakening in 2008-2009 when they downsized too aggressively and fired a lot of 55-62 year olds to save on large salaries and especially health care costs. Suddenly, they found that the remaining teams did not know how to do certain things. Also, the older folks had a strong knowledge of customers, of products, relationships within the company and with clients. Also, many had what I like to call “organizational memory.” If they had been around longer than most senior executives, these graybeards knew what worked and did not in the past and, also what clients did not like. It has always stunned me that executives do not do a detailed debriefing with a long term employee the last year of their employment. Most spend an hour with a clueless HR person in some form of final meeting.

Fifty years ago, the name of the game in the industrial economy was efficiency. Even Hollywood movies made fun of efficiency experts. After a while, most people caught on to efficiency in production. So, today production advantages are not that great. We then moved on to business processes which blended resource planning and information technology. As those advantages narrowed, we have now turned to knowledge as the issue that can make our group have a sustained competitive advantage.

A key for the future will be seeing how well companies can differentiate themselves on tacit interactions that rely on judgement.

Also, you may find that your boss may not have any idea what the Knowledge Economy is yet he or she may live it every day. Brains matter more than anything. If you work in Advertising or the Media, keep it top of mind.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Wednesday, July 24, 2013

The Long Tail of Internet Media

Over the last year I have been writing back and forth with a young media planner who reads Media Realism. He has wondrous enthusiasm for all media issues and I love the dialogue that we have established together. About six months ago, he proudly sent me a list of 16 different sites that he had chosen to use for a client message. Results were some 22% better than what his predecessor’s online plan had delivered the prior year for the same money.

Now, let me start by saying that this young man works harder than just about anyone that I have ever seen. He took me through his thought process and the screens that he used to come up with the 16 winning sites he selected for client use. I had to admire his effort but could not give him the vote of confidence that he wanted.

I tried to gently use a literary example to make my point. Back in 1604, the great Spanish author Cervantes in DON QUIXOTE urged “ look not for a needle in a haystack.” My point was that looking for the 16 sites that he chose was incredibly labor intensive and he likely missed a great deal of opportunities. Sadly, like many of his generation, he could not relate to an analogy over 400 years old although he asked “Don, are you telling me that I am tilting at windmills.”

Next, I tried to continue the “needle in a haystack” theme by quoting John Bogle, the founder of the Vanguard funds. Bogle has made many ordinary investors millionaires by touting the virtues of index funds. You do not try to outsmart the market by buying a few select stocks, you simply buy the whole market and do not get eaten up by fees for money management. Over time, the trend is for stocks to go up. Did you take a haircut in 2008-2009? You bet! Now, you are doing fine again.

Bogle often uses the quote in seminars or speaking engagements that investors should “forget the needle and buy the haystack (index funds).” My young friend warmed to this a bit and then asked “do you want me to buy my client one of those crappy blind ad networks?” (a blind network is an ad network that does not let advertisers known where the ads will be displayed. Increasingly passe, they are often sold as remnant inventory at a low cost)

Finally, I shifted gears and got my point across. I asked if he knew of Chris Anderson who, when he was editor in chief of WIRED magazine wrote an article in 2004 called THE LONG TAIL and then followed it up with a book of the same name in 2006. My media planner said he loved reading WIRED. Anderson kicked off the book with a marvelous story of how a book on mountain climbing entitled TOUCHING THE VOID became a bestseller ten years after being published. What happened is that a slew of recommendations on Amazon.com popped up after a similar book was published.  Anderson stated this as “an example of an entirely new economic model for the media and entertainment industries, and one that is just beginning to show its power.”

Anderson says that if you plot sales (or musical downloads) against actual products you will find many sales against a relatively small number of products or choices. But there will be an extended “flattish” tail that may stretch to hundreds of thousands of sales year after year if someone chooses to stock the items online.

The above example illustrated two principles that Anderson made clear:

Make everything available
Help people find it

Anderson said that when Amazon analyzed book sales they found that a large share of sales came from books that were not readily available in book stores. Music illustrated a similar pattern. Go to Wal-Mart and you can find the most popular selections on any given day.  However, if you try and find some obscure CD from a local or regional band, you can forget it. So online you have what is known as the “long tail.” Most sell only one CD a quarter. A similar pattern exists for Netflix films. They have over 100,000 titles but most are rented in very low volumes.

Lego, the Danish toy manufacturer, was another case of the long tail. Most toy stores stock only 1-2 dozen Lego products. Yet their mail order business has 1,000 choices. And, today, only a handful of their top sellers can be found in stores. Many children around the world design their own Lego products and the company shrewdly posts them on the website and many others buy them.

The point of all this is that in online the niche market is very strong, even powerful. After some back and forth, my young friend asked a leading search engine to come in and, with their help, his next plan had an ad message on 1700 sites. Sales skyrocketed vis a vis his “sweet 16” choices in the quarter before. He had not “bought the haystack” but he was reaching hundreds of thousands more prospects with pinpoint targeting. Playing the Lone Ranger was heady for him but it was not generating maximum return for his client.

This has been going on for at least 5-6 years yet some media people out in the hinterlands have not been optimizing their online buys. The same is true with cable TV. Planners buy a couple of channels when a package of 6-8 could do them a world of good.

Anderson concluded his thesis of THE LONG TAIL when he said, “when you dramatically lower the costs of connecting supply and demand, it changes not just the numbers, but the entire nature of the market.

So do chose some sites that are perfect fits. Just remember that there are thousands of others that can add a fresh, new audience in small numbers that can work very well for your brand.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Thursday, July 18, 2013

The Media Legacy of the Great Recession

Today, the Dow Jones Industrial Average closed at an all time high of 15,548. This is an enormous gain since the low point of the Great Recession in spring 2009 when it bottomed out at 6,500. While we all know that the stock market can turn quickly in either direction, we are now for the first time in several years beginning to hear media pundits talk again about a possible return of the “wealth effect.” In brief, the theory behind the wealth effect is that when people feel wealthier as a result of unrealized profits in either equity markets or residential real estate they spend more as their net worth has become a psychological cushion.

All of us want prosperity but increasingly both gains in income and net worth are going to those at the top end of the ladder. Nearly all of the equity gains have been realized by the top 5% of Americans and the top 1% may have scooped up as much as half of the paper profits since spring, 2009. Yet, I hasten to add, in a free market, there is nothing wrong or illegal about that. We live in a meritocracy and those who produce more get a disproportionate share of the pie.

If you talk to people at the top of the heap (top 5%), things are pretty much back to normal and some of us feel better than ever about our finances. Recently released data indicates that the average 401k balance is just under $90,000. That is great if you are 30-35 years old but dangerously low if you are in your 50’s. What few mention is that the majority of workers in the US have no defined pension or no 401k or IRA or, if they do, the balance is very low. So, the fact that the Dow hit a new high today means nothing to most people.  If you look at recessions of the past 100 years, this one is truly different. In past downturns, everyone suffered. And, when things bounced back, the overwhelming majority returned to prosperity very quickly. Today, unemployment remains stubbornly high and “under-employment” approaches record levels. Economists and those who follow business cycles closely will tell you that the Great Recession ended in June, 2009, approximately 18 months after it began. Over the last four years, I would say that the majority of Americans do not feel much better off or more secure than they did when the recession was hitting us full force.

This may sound a bit flowery but it appears to me that the collective psyche of Americans has shifted. The sunny optimism of people has been replaced with an uneasiness which will take a very long time to shake. Many who have returned to the workforce after being laid off in the big downturn are now working for less and sometimes far less than they did back in 2007 when the economy, especially the consumer economy, was firing on all cylinders. Young people are finding it difficult to get on a career track and those with fragile egos now suffer from a stigma of underachievement. Those who suffered from foreclosure will be haunted for years and some will drop from the middle class permanently.

As marketers what does this mean to us? Plenty. If you work in marketing, advertising, or media you are likely to be in that top 5% who is doing just fine, thank you. However, you are often selling to a large group who is struggling. And, there are entire markets that have been savaged. Again, this is unusual as generally, in a recovery, the uptick pulled all markets up. Consider real estate. Owning a home has been the American dream for decades and government tax policies encouraged  it. From their peak in 2006 to the bottom in 2010, housing prices in Las Vegas fell 58%, Phoenix 55% and Tampa 45%. Speculators have moved in and bought up distressed properties but there remain millions of American homeowners who are delinquent on their mortgage or are underwater (their house was worth less than the principal on the mortgage). These people are nervous and unlikely to spend as they once did for a very long time.

So, what does this mean to marketers? For higher end products, media and market selection has to become more careful than ever. Some 25% of Seattle residents have graduate degrees while 2% is the norm for most markets. So, for expensive clothing, cars, vacations, expensive wine and liquor and a host of other products and services, Boston, Washington, DC, New York, San Francisco and Denver merit special consideration and overweighting. Pockets in Atlanta, Dallas-Ft. Worth, Houston and Chicago also deserve attention. Some markets should simply be avoided period as the purchasing power is simply not there. The large group of Americans with a high school education or less are falling further behind than ever as our industrial base has not been revitalized despite the claims of politicians. As always, the higher your education, the greater your income so the “brainbelt” markets are a place where many advertisers can expect a solid return relative to less educated areas.

Many broadcasters will nod and smile when I present this line of thinking but those in markets where things remain challenging do not seem to grasp that their struggles will continue for at least several more years. The economic world has changed and our culture is shifting as well. Talk to a few very well educated and eminently well paid young adults on the fast track. They have friends all over the world and they are a bit detached from what is going on in the Wal-Mart nation. They look to New York, London, Seattle, San Francisco, Washington, Singapore, Hong Kong and Beijing as the center of the universe. They do not see the uneasiness that many Americans feel or associate with many who are having a hard time right now.

So, publications, cable channels, and digital options that cater to the well heeled should do really well over the next several years. For other media types, the issue will be what share of the pie they can garner for products that have broad appeal or are necessities.

Long term, I remain optimistic about the future. Keep in mind, my friends, that the healing process from the Great Recession is barely underway and it will take a long time for things to return to “normal.”

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, July 7, 2013

The Romantisicing of Mom and Pop Stores

As we enjoy a holiday weekend in the United States, many friends and relatives get together for barbecues and cookouts. One topic that always comes up is “the good old days.” And, it is rare when someone does not conjure up how much they miss the Mom and Pop shops they visited during their childhood.

It is not merely nostalgia for most people. For many people, the small shops that you visited frequently in your youth were a connection to the community. If you live in the suburbs today, that world is truly gone forever. They still exist in very big cities such as New York where people either walk or take mass transit to work. You can stop after work and make a purchase as you are not in stuck in traffic as many of your commuting co-workers often are. The line from the old NBC program “Cheers”--“I want to go where everyone knows my name” still resonates with most of us.

There is a romance that has evolved about the Mom and Pop shop. It seems to tie in the anti-big business sentiment that some people hold. You want to go to a place where people will get to know you and where the service is personalized and often exceptional. Independent hardware stores are a great example where you can spend 10 minutes explaining to an old codger what your problem is and he provides a workable solution that may cost you only $1. Try that at Lowe’s or Home Depot and the youngster may suggest that you go down aisle 16 and look to the right.

As suburbs grew and supermarkets came in to vogue, the small shop began to die. Shopping malls killed off more and the big box stores like Wal-Mart and Target really hurt them. As one senior marketer told me, “We all like to give our money to locals who are often nice people in our community but these days most offer overpriced merchandise and limited selection.” His comments may sound harsh but he makes a very big point.

One exception appears to be restaurants. Most new businesses fail within their first five years of operation and the majority of them are restaurants. Despite the difficulty of the long hours and slim chance of success, there is never a shortage of people trying to open anything from a coffee shop to a white tablecloth establishment. If a restaurant clicks and maintains standards (very hard to do), it can buck the tide against chains in most US localities.

I have read from a few sources that Ben & Jerry’s tried to move in to West Seattle several years ago. They opened a shop and tried elaborate couponing and other promotional ideas. People ignored it and went to the long standing ice cream shop and, after a year, Ben & Jerry’s quietly closed up shop. So, local guys can succeed against long odds but the service and product has to be exceptional.

People with a bit of money often tout the “David vs. Goliath” struggle and aim their verbal attacks at Wal-Mart. I understand their passion but why don’t mass Wal-Mart boycotts get any traction? The reason is that top 5% of America is doing great (many of you reading this post) but the majority of Americans are struggling. In study after study, shopping at Wal-Mart can save the average middle class family about $50 per week over other alternatives and the spread may be much higher vis a vis Mom and Pops. So, as much as they might like to use Mom and Pops they simply cannot afford to do it for many items.

One outspoken multi-millionaire told me “for package goods, you are crazy not to go to Wal-Mart. I would not be caught dead in their clothes but Kellogg’s Corn Flakes and Crest Toothpaste are the same quality everywhere. So, why pay so much more for identical items? I got rich by watching expenses and I still do it.”

So, the bottom-line is that if you are going to support your small local merchants you are going to have to pay for it. For mainstream items, they simply cannot compete on price. Big box retailers often charge less than they can buy items from a distributor.

How can they survive? Well, as cities become gentrified, people are driving less. This can help as young adults in particular can walk to local shops and, in places such as New York, many do not have cars.

Also, the internet is saving some speciality shops. This past spring my wife and I were visiting a small but very lovely city in New England. There was small shop on a side street that sold only salt. They had all types of exotic salts from a few dozen countries. It was very expensive but we bought a few gifts for our gourmet friends. The owner told me that he also sold to restaurants in the region. When I asked about the internet, he laughed and said that he sold to people everywhere. A local greasy spoon cannot mix it up in the international marketplace but a unique shop with a decent website can go global quickly and often profitably.

Where I grew up in seaside Rhode Island, my father would often take me to the local village drugstore before school. Coffee was a nickel and hot chocolate was a dime. There was indeed a sense of community and all the regulars had their own booths or counter stools. It was a wonderful atmosphere and everyone knew our names. That way of life lives on in a few spots but does not fit in with the long commutes and traffic snarl many of experience today.

Is the struggle of Mom and Pops simply progress or a sad commentary on the world of 2013? Hard to say.  It is certain though that Mom and Pop survivors will have to be able to adapt to changes perhaps faster than larger companies and maintain an incredible service oriented ethic in the future.

If you would like to contact Don Cole directly, you can reach him at doncolemedia@gmail.com