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Salmon: The Disruptive Potential of Native Advertising

NEW YORK (Reuters Blogs) -- Andrew Rice delivers 6,000 words on BuzzFeed in the latest New York Magazine, which means he has the space to tell a number of different stories. The one I'm interested in is the way that BuzzFeed CEO Jonah Peretti wants native advertising to disrupt banner advertising. I apologize for the long blockquote, but it's a lot shorter than the article:

Peretti has talked of building "the agency of the future for a social world." ...

Watts and Peretti first set forth their theory in a co-authored 2007 Harvard Business Review article, "Viral Marketing for the Real World," partly basing it on data from an experimental ad campaign at the Huffington Post. Watts has since continued to refine his research. His standard is that for every 10 views an advertiser pays for when it buys a viral ad, it should get two shares. ("There is no free lunch," Watts likes to say, "but maybe you can have a cheap snack.") Peretti is convinced he can engineer a higher reproduction rate. "You can make money with that," Watts says. "If they are predicting 20% of the variance and the competition is predicting 10% of the variance, they're kicking ass."

Peretti's formula for virality really adds up to a more mundane sales pitch: Buy lots of ad impressions and realize a modest, if unpredictable, viral bonus...

BuzzFeed has released some selective data about the fractional proportion of sharing it achieves -- its so-called "lift" -- and claims that for the median advertising post, ten paid views yield around three shares. Peretti adds that the brands that have embraced the format most enthusiastically have better results. Virgin Mobile's ratio of shares to paid views is better than one to one...

Virgin Mobile's posts received around 1.1 million views for the last week in March. Other campaigns running on the site during that period, however, showed smaller results: Geico, 140,000 views; GE, 65,000 views; Pepsi Next, 44,000 views. These numbers don't quite match the hype around native advertising, which might be why ad agencies sound much less enthusiastic about the medium's transformative potential than publishers do.

Peretti complains about "obstructionist agencies," and when he looks at advertising -- with its four dominant holding companies, rococo bureaucracies, and reliance on a lucrative television medium now threatened by ad-skipping technologies -- he sees an industry ripe for disruption.

I think that Rice is missing a couple of very important points here. For one thing, he's wrong that native advertising is fundamentally "mundane" and provides just a "modest" uplift to whatever you can achieve through more traditional channels. Native pageviews might hard to come by -- but any smart brand would absolutely prefer a single native pageview to a dozen banner-ad impressions. The difference between the two isn't something marginal, on the order of 20% or 30%: it's huge -- a good order of magnitude, at least.

That's because a native ad is something that consumers read, interact with, even share -- it fills up their attention space, for a certain period of time, in a way that banner ads never do. Rice does mention that the advertising industry is dominated by the television-ad market, but he doesn't seem to understand why. Yes, TV ads have the kind of reach that no other medium can match. But they also have duration and a storytelling arc: If you're not ignoring them, they command attention in the way that, well, TV shows do.

In that sense, TV ads are truly native; the way you consume a TV ad is the same as the way you consume a TV show. Similarly, long copy print ads are native, for the same reason. And the ultimate native ads are the glossy fashion ads in Vogue: In most cases, they're better than the editorial, and as a result, readers spend as much time with the ads -- if not more -- as they do with the edit.

On the Web, by contrast, the vast majority of ads are not native. Instead, they're intrusive, annoying, unpleasant, and -- in most cases -- completely ignored. We've now been consuming content on the Internet for 15 years; we all know how to do it, and we know what we like, and publishers, including BuzzFeed, have become very good at delivering exactly what we want.

In stark contrast to the increasing sophistication of Web publishing, however, the overwhelming majority of web advertising is still based on standard IAB ad units, which were introduced in 1996 and haven't changed much since. We've all learned how to tune such things out, either mentally or technologically, with ad-blocker software. Banner ads are never engrossing, they're never shareable, and insofar as they attract your attention they do so in an evil way, by animating or blinking or otherwise distracting you from whatever it is you are trying to read.

When someone reads a BuzzFeed ad from Virgin Mobile or Geico or GE, they might "only" have a 20% or 30% chance of sharing it. But that's not really the point. The point is that they read it, and they liked reading it. The "social uplift" is an indication that the ad is connecting with consumers -- it's like click-through rates, but real. Native advertising (as well as content marketing, insofar as there's a distinction) is a way of communicating with web readers in a language they're receptive to. And it turns out that when you do that, they actually listen.

In terms of disruptive force, then, native has a huge advantage over banners in that it is much more effective in connecting with consumers. And there's another way that it's disruptive, too: It utterly upends the standard ad-agency business model. This is the real reason that ad agencies are less than enthusiastic about native -- they can't make money at it. Banner ads are a lovely income stream for agencies, and ad-sales networks, and the whole crazy ecosystem of display-advertising companies. Every time there's an impression, lots of intermediaries are sure to take their cut.

Native, by contrast, works on a very different model: You spend a certain amount of money putting it together and then it lives online forever, generating marginal views at zero marginal cost. The agencies can still charge for their creative work, but they can't charge for media buying any more -- which is where the real money is.

As a result, most native campaigns tend to be worked out between publishers and brands directly, with ad agencies helping out but not driving the decision making. It's the beginning of the disintermediation of the agencies, and so it's hardly surprising that they're unenthusiastic about the trend. This is real digital disruption: native shops like BuzzFeed or Barbarian Group will never be as profitable as the huge ad agencies, but they can still cause those agencies to suffer very large drops in their digital revenues.

The big unanswered question, then, is not whether native has disruptive potential -- it clearly does. Rather, it's whether native will ever be able to truly scale. Native is growth-constrained on two fronts, and that means that if you're betting on industry-changing disruption, you're making a risky bet. The first constraint is creative. Native is hard work. Rice talks about how Virgin Mobile has to come up with "several posts a week" when its running a BuzzFeed campaign, and his article is illustrated with a photo of a "creative strategy meeting" where I count 19 people in frame, plus untold others out of it. The amount of human time and effort that goes into a native campaign is enormous, continuous and it doesn't decrease much once the campaign is up and running. You can't just run the same banner a billion times: the marginal daily cost of native campaigns is vastly greater than the marginal daily cost of buying banners.

And then there's the second constraint, which Rice mentions: All of that effort is going into reaching a relatively small number of people. This is another way in which native ads are like long copy print ads: They reach a small audience, rather than a mass audience. As a result, any brand wanting to reach a mass market is going to have to use native as just one part of a much bigger strategy, and that, in turn, is going to keep the native-averse ad agencies in the driver's seat.

My guess is that BuzzFeed's investors will do OK for themselves, in the end. But a healthy exit for BuzzFeed is not the same as a genuine disruption of the digital advertising space. Although native ads have the potential to be incredibly disruptive, I'm far from convinced that their larger potential is going to be realized any time soon.

-- Written by Felix Salmon in New York.

Read more of Felix's blogs at Reuters.

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