I'm thinking of a media business that is facing these problems:

(A) Leaders know that they need to change but, even so, many companies are gripped by inertia.
(B) To be more specific, these companies are structurally locked into old ways of doing things that remain highly profitable as revenues stall.
(C) It is clear that more and more customers are bypassing the industry completely in favor of digital alternatives and other options.
(D) To modernize on the fly, many of the companies are now rolling the dice by buying small digital firms.

You could say all that about the newspaper industry, but I'm thinking instead of the business that provides the life blood of newspaper revenues -- advertising. Nearly every diagnosis and prescription for the newspaper industry comes at the question from a "let's-talk-about-us" perspective. How can we follow our readers online?  What's our new business model going to look like?

Through the lens of the advertiser/marketer, the outlook has suddenly turned stormy. Traditional media advertising looks flat as far as the eye can see. Disruptive threats -- individually small but collectively big -- pop up with increasing regularity.  

There have long been marketing alternatives to a fat media schedule. Suddenly, though, the tradition of "pushing" branded messages at consumers is falling out of favor.  At the very least, marketers want to ramp up their online advertising capacity. Even more threateningly, they are exploring ways of going direct to the consumer, bypassing the pairing of ads with news or, in the case of television,  entertainment content. These two alternatives (online and direct-to-consumer) are where marketing budgets are growing. By contrast, traditional media captures only a few extra dollars and a declining share.

Even in the good old days of the advertising business, there was instability from frequent ad agency mergers. Periodic account reviews and the churn of big customers was also part of the landscape.  Lose a couple of big accounts and heads would roll on a scale far more dramatic than the recent wave of newsroom cuts.

Still, agencies that kept customer relations strong and consistently delivered on creative content and media planning could count on making money on a percentage share of billings placed in newspapers, magazines and broadcast. An elaborate structure of metrics grew to support those ad buys. The system has delivered handsome livings to platoons of smart professionals.  Few are pining to blow up what has worked so well for so long.

But as in the newspaper business, macro-indicators show that current and future growth lies elsewhere.  Merrill Lynch analyst Lauren Rich Fine (a member of Poynter's National Advisory Board) covers both industries. In a recent report, she notes that advertising growth has stopped outpacing basic economic growth. 

Rates have softened

Fine also recently revised her 2007 growth estimate for the advertising industry downward to 2.8 percent in the United States versus 4.7 percent this year. That is a combination of tiny advances in traditional budgets with continued robust growth of the online sector. The Internet Advertising Bureau estimates growth at 37 percent for the first six months of 2006, compared to Fine's more modest estimate of 31 percent for the full year

That brings the ad business to an inflection point all too evident for several years already for newspapers: little sustaining growth in the old business model.

But wait, there's more.  We recognize now that one problem for newspapers and broadcast is that they compete for time and attention with such non-journalistic online formats as search, shopping and social networking.  The monster under the bed for traditional advertising agencies is direct-to-the-customer marketing in a dizzying array of formats.

Here are a few examples:

  • Product placement grew 42.2 percent globally in 2005, will grow another 38.8 percent this year and will continue at healthy double-digit rates through the decade, according to PQ Media. The practice (think about the giant Coca-Cola glasses for judges on "American Idol") is a hedge against DVR commercial-skipping and considered a solid investment in brand awareness.
  • Automakers continue to invest in their own Web sites, which allow potential buyers to see interior design and other options. You may have noticed recent television advertising for Toyota and Hummer among other makes, essentially encouraging viewers to go check out those sites. Newspaper display advertising, down sharply this year, remains part of the mix but a shrinking part.
  • Commerce Bank of New York launched a program this fall to distribute 2 million packs of tissues with the bank's logo at sporting events and other public venues. In Japan, this non-traditional format is now a $1-billion-a-year business with 4 billion packs distributed.
  • Procter & Gamble has built its proprietary HomeMadeSimple.com site to the equivalent of a major women's service magazine with 4 million opt-in subscribers. P & G also has created an in-house agency, Tremor, that harvests input from consumer panels to frame winning word-of-mouth campaigns for its own products and those of other companies. (See sidebar.)
  • Event marketing is also on the rise. DaimlerChrysler's Camp Jeep campaign attracted 75,000 names and generated 85,000 test drives at offsite locations with live music and other attractions. The conversion rate was eight times that of typical auto promotions. Home Depot and TLC attracted 27,000 women ("toolbelt divas," as the campaign put it) to "Do It Herself" events at stores in just a matter of weeks.

Can newspapers get similarly innovative?  They must, concluded the American Press Institute's year-long "Newspaper Next" study. A typical pilot project at the Dallas Morning News targets moms with local where-to-go information and marketing messages in a wide range of formats.  Called Mastermom, the service is especially focused on providing information on such services for kids as camps.

Several of the examples above are drawn from an August article by Randall Rothenberg and associates at Booz, Allen and Hamilton entitled, "The Future of Advertising Is Now." The piece is subtitled, "Marketers take heed: After years of over-hype, the digital revolution is finally mainstream." Rothenberg, a longtime columnist for Advertising Age and author of several books on the business, has done some of the over-hyping. Polemical or not, though, there is plenty to alarm in his essay.

Two charts suggest an imbalance in the allocation of marketing budgets that is bound to be corrected. The first from 2003 shows that even back then, the Internet had a 22 percent share of impact on auto purchase decisions, but was getting only a 1 percent share of the media mix.  A second, reflecting a 2004 survey, showed 86 percent of marketers expecting to spend more on the Internet, with network TV taking the biggest loss but print experiencing a hit as well.

Fast forward to the present and look at the dismal third quarter 2006 results for public newspaper companies. The year-to-year losses in revenue are led by national display advertising (of which automotive is an important component) and by automotive classified.

Automotive also provided the lead example in a Chicago Tribune takeout earlier this month on "shock waves rolling through the newspaper business."  A group of 101 auto dealerships in Houston is shifting a share of budget to various online sites, where the number of leads can be quantified exactly, and a firm connection to actual sales is established.

As in many matters digital, there is debate about just how transforming the changes are and whether traditional players can retain their place.  Sir Martin Sorrell, CEO of WPP, one of the world�s largest advertising agency, argued in a Times of London opinion piece that agencies have been slow to develop comfort and expertise in the new media. These will come over time and "slowly, the new media will cease to be thought of as new media; they will simply be additional channels of communication."

Not so, fired back Dave Morgan, CEO of Tacoda, a behavioral targeting firm, in a rebuttal in Advertising Age. As the digital revolution is completed over the next decade, consumers will erase the borders of traditional 'siloed' media, Morgan wrote. "To them it will just be news or information or entertainment or great offers. Most people in traditional media are not prepared for this -- and they are powerless to stop it." Real-time interactivity will become the marketing norm, he concludes, and those wedded to old-fashioned one-way sales messages will simply be passed by.

Merrill Lynch's Fine tilts to the view that agencies will find their place -- as guides to a landscape of possibilities difficult for clients to navigate on their own. One of her recent reports noted how many of the big holding companies have created or bought substantial portfolios of interactive agencies.  Sorrell's WPP group, for instance, has a half dozen with 4,150 employees and $852 million in 2005 billings. That is four times the size of the largest U.S. free-standing interactive agency, Avenue A/Razorfish of Seattle.

A final parallel between the advertising and newspaper businesses is that the pace of change over the next several years is debatable but the direction isn't. Rothenberg notes, apropos autos, that both the agencies and the carmakers, still just love the format of the 30-second network TV spot and the emotional messages about driving these ads relay to viewers. But as it gets easier and easier to find out just who is in the market for a Lexus -- or a trip to France or cotton diapers, for that matter -- pretty 30-second commercials are not where high impact, high accountability marketing and advertising is headed.

Newspaper and broadcast franchises need to find their foothold in the rising customized and digital part of the business or they are in extreme peril of watching from the ground as new advertising/marketing strategies take flight.

Coming next: As advertising changes, what are the bright spots for newspapers?