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The Black Hole of Internet Advertising: John Wannamaker’s Question has been answered

|Includes: CNVR, GHC, Alphabet Inc. (GOOG), NYT
How many times have we heard “consumers spend 1/3 of their time on the internet but the internet captures only 10% of the advertising dollars? Just wait until the flood of traditional advertising dollars start to flow to on line companies. Everyone will make money.”
Every year, $412B (yes Billion!) is spent on traditional advertising in the USA and an equal amount in the rest of the world, mainly in Europe.  However, these dollars have NOT moved one for one from the traditional print, TV, radio to internet advertising.  
So why do dollars seemingly “disappear” down a Black Hole as we shift from traditional to on line advertising? The answer is that companies and consumers are choosing to pocket the increased efficiency of internet advertising instead of spending it on more advertising.
This theory is based on two critical assumptions: First, the elasticity of demand relative to advertising dollars flattens out at some point. Second, we seem to have answered John Wannamaker’s age old question as to which half of his advertising was wasted.
Our  investment conclusions imply that the advertising pie is not as big as we all think, thus incumbents such as GOOG will beat smaller players (VCLK) and old media (newspapers, TV). International markets however, might witness net new dollars flowing into on line advertising, as their traditional advertising industry was less developed to begin with.
The first assumption rests on its simplicity. If you could sell more by simply advertising more, you would. Obviously there is a point of diminishing returns. The second assumption brings us back to the post Civil War era of John Wannamaker (1838 - 1922) of Philadelphia. He founded what is now considered the modern department store in the 1870’s based on the principle of “one price and goods returnable”.  He is also considered the father of modern advertising and is credited with this insightful statement. "Half the money I spend on advertising is wasted; the trouble is I don't know which half".
Well, it took over 100 years and the help of the internet to answer that question. Google (NASDAQ:GOOG) claims they can tell you exactly how your dollars are spent. Thus you know which “half” of your advertising budget is wasted. Thus advertisers are not spending money they believe is wasted and the pie shrinks during the move from traditional to internet advertising.
This theory hit home a few weeks ago, as we held a massive yard sale. When the issue of advertising for the sale came up, we felt we had three choices, 1. Nailing up cardboard road signs, 2. Putting adds in the four local papers and 3. Placing an ad on Craig’s List. Without the internet, we would have put ads in all four papers. However, we chose to advertise in only two. Next, we put an ad on Craig’s List; however, we did not advertise “more” on Craig’s List just because it was free. One ad was enough.
In fact, a senior executive at a Silicon Valley advertising company explained it like this. Let’s assume advertising dollars for classified ads in a local newspaper total $100,000 per year before Craig’s List enters the market. After Craig’s List enters the market, the newspaper and Craig’s List split $10,000 in total advertising revenue. That’s a 90% drop in advertising dollars in a market with presumably the same consumer satisfaction. By the way, our yard sale was a hit.

Disclosure: As of the date and time of this posting, we had no positions long or short in any of the stocks mentioned in this article.