Saturday, August 30, 2014

Learn From Firms That Transformed In The Internet Era To Prepare for the Collaborative Era

"Those who cannot remember the past are condemned to repeat it."
  - George Santayana

photo credit: Hampton Roads Partnership via photopin cc
In my last post about the Collaborative Economy, we examined the companies that made mistakes at the beginning of the Internet era in order to learn what organizations can do differently today, at the beginning of the collaborative era. Many large companies were too confident in their existing brand strength and business models, so they did not see the need to innovate until new consumer behaviors were already diminishing revenue and income streams. The result was the collapse of companies that were household names with long histories of growth and profitability.

My friend Brett King, founder of Moven, challenged me to repeat the exercise, this time studying firms that succeeded with Internet transformation rather than those that failed. It is in an excellent idea, since not all established organizations were impacted equally. Even in industries where many strong companies crumbled, a few bucked the trend. What did they do that kept them solvent while others failed, and how can we apply these lessons as the Collaborative Economy emerges and grows? Here are the three examples we will explore:

  • Source: Piotr CieĊ›lak
    Film and Photography: Kodak, the most powerful name in photography for many decades, died and emerged from Chapter 11 a different company dedicated to corporate digital imaging. Agfa-Gevaert spun off its consumer division in 2004, but less than a year later that company filed bankruptcy and today Agfa-Gevaert is entirely B2B. Of the three largest companies that were once known for film, only Fujifilm avoided collapse; its stock is down 10% in the past decade, a huge success versus the traditional competitors the company had at the start of the Internet era.
      
  • Bookstores: B. Dalton, Waldenbooks and Borders once operated more than 2,000 stores--all are gone. Today, Barnes & Noble is the only significant bookstore chain left in the US; it now owns two-thirds of the country's retail bookshelves. As with Fuji, B&N's success is relative--its stock is down 32% in the past decade and there is no assurance it will be around in five years--but it is worth considering how B&N managed to fail much more slowly than the competitors it had entering the Internet era.
     
  • Source: Daniel Oines
  • Electronics: Circuit City, CompUSA and hundreds of small computer and consumer electronics (CE) retailers are defunct, but Best Buy soldiers on in a subcategory that has been fundamentally altered by the Internet. NPD Group found that more than 27% of U.S. CE spending took place online last holiday quarter, and about 40% of U.S. shoppers say they have tested products in stores before buying them online; in fact, Best Buy is one of the top two stores for "showrooming." Despite the unique and profound challenges of tech retailing, Best Buy's stock is at almost the same price it was a decade ago.  

While many familiar companies vanished, Fuji, B&N and Best Buy have prospered (or at least survived). What can we learn from the way these companies adjusted to the Internet era? And how do we apply these lessons today, in the early years of the Collaborative era, another significant revolution in consumer purchasing and consumption habits?

Why Not Focus on the Successful Startups?

Before examining Fuji, B&N and Best Buy, it is worth explaining why we must look at these three companies--none of which have positive stock performance in the past ten years--instead of companies like Amazon, Ebay and Google, which have thrived. Too often, authors and bloggers hold up startups as examples for well-established companies to follow, but that naive approach is neither fair nor helpful.

VC investors have different expectations about
risk and return than do Fortune 500 shareholders.
Source: Amplifier Ventures
Startups operate with vastly different expectations than established firms, and the risk tolerance for Venture Capital (VC) investors is wildly divergent from that of Fortune 500 shareholders. Three out of four venture-backed firms fail, a survival percentage that no Fortune 500 company can emulate. Unlike VC investors, shareholders of public corporations do not reward expensive, high-risk investments that may (or may not) deliver fabulous profits years in the future.

For example, back in the early days of the Internet era, no leadership team at a Fortune 500 retailer would have been permitted to follow the lead of Amazon, which lost almost $3 billion between 1998 and 2002. With Amazon's stock down 90% and Pets.com and eToys dead, the shareholders of traditional retailers were not demanding or interested in a costly Amazon-like approach.

Just last year, despite a six-year 80% drop in its stock, JCPenney's board canned CEO Ron Johnson after only 17 months when his aggressive plan to resuscitate the retailer resulted in a net loss of $552 million. Even in 2013, with everyone wondering about JCPenney's ability to survive, its shareholders were still unwilling to accept any sort of high-risk business strategy!

Today, with the Collaborative Economy growing, established companies may look to startups like Airbnb, Uber, Lyft and Lending Club for ideas and partnerships, but this does not mean they can adopt the same strategies or risk appetite. As today's publicly held companies consider how to react to the Collaborative Economy, they should look to the lessons of Fuji, B&N and Best Buy--firms that entered the Internet era as reputable and successful corporations with millions of shareholders, not no-names backed by a handful of high-risk investors.

What did Barnes & Noble do differently than Borders? How did Fujifilm outlive Kodak? And why is Best Buy alive while Circuit City is buried and Radio Shack is the walking dead? These are lessons worth considering at the dawn of the Collaborative Economy era.

Barnes & Noble vs Borders

Barnes & Noble may not be a success story--its stock is down and the company closed more than half the 1500 stores it operated in 1999--but B&N is the lone survivor in book retailing. What caused B&N to fail slower than all of its competition? If you are expecting a mention of the Nook at this point, you are right but perhaps for the wrong reason. The Nook was B&N's attempt to compete with Amazon on Amazon's turf, and it has not been successful.

Launched in 2009 against the already established Amazon Kindle, the Nook received some early praise, with The Atlantic calling it a "Kindle killer" and Wired predicting Kindle owners would have "buyer's remorse." But the Nook could not compete against the Kindle e-reader, much less the slew of even more powerful tablets that soon came to market.

In the last four years, the Nook division has bled more than $1 billion. In fact, twenty years into the Internet era, B&N is being sustained by bricks and mortar and dragged down by its digital offerings--Nook's $475M loss in 2013FY almost equaled the $485M profit on bookstores. Nook's days are numbered, as B&N has announced it will spin off the plunging Nook business.

B&N deserves credit for trying this innovative route, but its Nook strategy was more focused on the company's past than consumers' future. B&N saw the Nook as a way to extend the bookstore model into mobile whereas others aggressively pursued the full potential of tablets as more than just a replacement for paper books. Amazon's Kindle started as an e-reader, but in 2011 Amazon followed Apple's lead with a fully functional tablet computing device, the Kindle Fire. B&N was not prepared for the constant demand for hardware innovation, and its device was left behind, a common problem that has tripped even companies with deep tech roots such as Dell, Compaq, Palm and Blackberry.

While digital hardware and distribution is not B&N's future, the company still perseveres where its competitors failed. Part of B&N's continued survival is simply due to the reduction in competition, since many people still like to sit in a quiet bookstore, enjoy a latte and leaf through a paper book. Why is B&N the last bookstore standing?

    Borders CDs on closeout. Source: OCWeekly.com
  • B&N positioned itself against the Internet rather than trying to beat it: Borders beefed up its DVD and CD merchandising just as digital delivery was growing, plus Borders stayed committed to its traditional strategy of providing a very wide breadth of book titles, even though this was not valued by customers. While Borders lost to streaming services and the "long tail" efficiency of online bookstores, B&N took a different approach. It fell back from music and movie offerings that were shifting online and kept its product line narrow. In addition, B&N found a niche that online competitors could not undermine as quickly: As general market bookstores were failing, stores on college campuses still thrived. B&N operates almost 700 college bookstores, and this segment continues to deliver around a quarter of the company's revenue.
      
  • B&N demonstrated a will to innovate and to bring new skills inside the organization: Borders shut down its ecommerce operations and turned it over Amazon, and this turned Border's website into a "a customer-harvesting vehicle for Amazon." B&N's online operations may not be making major contributions to the bottom line, but the company chose to invest in new capabilities rather than voluntarily give up skills, data and customers to the competition. And although Nook may not be a long-term success, B&N's e-reader product gave the company the sort of digital strategy that Wall Street wanted to see--in the six months following the Nook's announcement on October 10, 2009, B&N's stock was up 20%, outperforming the Dow Jones index by more than 50%.
      
  • B&N leadership made better decisions about core operations: It is not as sexy as talking about tablets and online stores, but B&N was simply better run than Borders with respect to basic management of finances and real estate. B&N was conservative with its finances while Borders opted for a very ill-advised 2005 stock buyback program; the buyback initially pleased Wall Street and boosted the company's shares, but it only hastened Borders demise by leaving it under-capitalized. In addition, the reason that B&N is today sustained by its bricks and mortar presence is that B&N "paid close attention to where it put its outlets," while Borders, "grasping for growth," picked "B locations." Despite (or maybe because of) strong online competition, the old adage "location, location, location" has helped B&N survive. 

Fujifilm vs. Kodak

In the early part of my career, there was no brand worthy of more respect than Kodak--the brand was about memories while the competition was merely about film. Kodak's towering brand delivered towering success; in the 70s, Kodak commanded 90% of film sales and 85% of camera sales in the U.S.

The world's first digital camera, made
by Kodak in 1975. It took and wrote
0.01 megapixel pics to a cassette tape.
So how does one of the world's strongest brands flame out so quickly? Everyone seems to believe that Kodak failed to adapt to digital photography with sufficient haste, but that is not really true. Kodak created the world's first digital camera in 1975, and it realized in the early 1980s that digital photography was inevitable. In fact, Kodak beat many of its competitors to market with a consumer digital camera, the DC series, which debuted in 1995.

Fuji has enjoyed more success, but not because it was an earlier adopter of digital cameras. Both firms halfheartedly got into digital cameras in the mid 90s, and neither company truly jumped into the business with both feet until 2001--Kodak with the EasyShare line and Fuji with the FinePix line. So why did Fuji do better than Kodak?

A big part of the answer has to do with corporate culture. "Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one," notes The Economist. Even Kodak's CEO would agree, noting "If I said it was raining, nobody would argue with me, even if it was sunny outside." Fuji's chief, Shigetaka Komori, also agrees: Kodak was so self-assured that it "never bothered to look over its shoulder at what was coming up from behind." Kodak was culturally incapable of seeing its problems and reacting as necessary, but how did Fuji escape a similar fate?

Best Buy vs Circuit City and Radio Shack

Best Buy is the Energizer Bunny of retailers. It staved off competition from Circuit City in the 90s. In 2002, its stock hit a new low when investors questioned its viability in the dot-com era, but Best Buy's shares lifted almost 400% in the four years thereafter as investors sorted out the dot-com bust. In 2012 fears of showrooming rose, and Best Buy's shares plunged to prices even lower than in 2002. Today, the company claims it has "killed showrooming" and its stock is up 175% from its 2012 low

Best Buy has outlasted Circuit City and hundreds of local and national competitors that sold TVs, computers, audio gear and mobile devices, and the company will soon lose another competitor as Radio Shack is on its last legs. What caused Best Buy to survive challenge after challenge while bricks-and-mortar competitors succumbed?

What This All Says About Preparing for the Collaborative Economy

Even though they are in very different verticals, the stories of Fuji, B&N and Best Buy share some lessons for firms as they consider how to innovate for the growing Collaborative Economy:

  • Get the Customer Experience right: The demand to compete on Customer Experience has never been greater. Consumers have more choice, can switch more easily, and can share perceptions of positive and negative experience more widely than ever before. Kodak was not slower than Fuji in launching digital cameras, but Fuji's products provided the experiences customers desired. Circuit City eviscerated its bricks-and-mortar experience, seeing its most experienced employees as costs, while Best Buy knows its employees are experience creators. Kodak's and Circuit City's strong, resilient brands offered no protection when their Customer Experience failed to meet consumers' changing expectations.

    Collaborative Economy Lesson:
    Today, Zipcar is a model of efficiency and ease with its online and mobile tools, while Enterprise CarShare's experience is absolutely terrible, requiring individuals to first set their state and "program" and then remember their member number before signing in. If Enterprise thinks this is good enough, it should consider the lessons of Kodak and Circuit City.
      
  • Position yourself against more nimble and lower-cost competition: Circuit City tried to take on online retailers at their own game while Best Buy positioned itself for future success in appliances. Borders tried to compete head-to-head with online stores with broad book and entertainment options while B&N focused on narrower in-demand offerings. These examples demonstrate that established companies must take a brutal look at their unique strengths vis-a-vis newer competitors and find ways to compete against, not with, those companies.

    Collaborative Economy Lesson:
    Hotel chains are currently slashing services in order to lower margins and increase profitability; this is short-term thinking that will hurt hotels in the future. Room service and daily housekeeping are features Airbnb cannot offer, and cutting those services only puts hotels on the same competitive playing field with their new competitors. Hotels do not need fewer services but more value-added services that differentiate hotels from collaborative lodging companies; for example, Airbnb is exploring experience packages, but hotels are much better prepared to offer these at scale since they have many guests staying one place rather than scattered over wide areas.
        
  • Diversify!  Current business philosophy demands companies narrow focus on core strengths and diversify everything else. There is value in this, but what happens when a company's narrow specialty is destroyed by innovative new offerings? Circuit City spun off Carmax and Kodak divested itself of Eastman Chemical, leaving both firms dangerously dependent on business models that would soon be threatened by Internet startups. Compare that Fuji, which today offers broad products and services to diversified B2B and B2C marketplaces, or B&N, which continues to get value from college bookstores long after bookstores disappeared from most malls.

    Collaborative Economy Lesson: 
    Financial services firms with narrow offerings must consider expansion options. Certain categories of financial services will be more challenged than others by the growth of collaborative and mobile models; for example, traditional auto insurance will decline as more people careshare, and the adoption of non-traditional peer-to-peer and mobile money management and transfer services will challenge core banking offerings. Now is the time for finserv firms to consider non-traditional products that align to their brand promise of helping consumers obtain, secure and grow assets and income.
      
  • Don't just partner; build! Kodak did not win by partnering with vendors on kiosks, nor did Borders succeed by giving up its online business to Amazon. Both Fuji and B&N prospered by developing new skills versus outsourcing them.

    Collaborative Economy Lesson: 
    Allowing an unknown startup to build its business while leveraging the strength of your existing brand may be collaborative, but perhaps not smart. Take, for example, the idea of a drugstore chain partnering with a local driver/delivery service (such as Walgreens partnering with TaskRabbit). In the short run, it provides the drugstore chain with an easy and risk-free way to add delivery service for customers, but what are the long-term consequences? If home delivery is the future, the drugstore should work on building its own capabilities. And once the driver/delivery service has obtained new customers thanks to the strength of the drugstore brand, why wouldn't it consider delivery of toiletries, cosmetics and OTC medications from lower-priced retailers? Not all partnerships are bad, of course, but established companies must carefully weigh the short-term gain against the risk of building a new competitor's skills, customer base and future growth potential.
      
  • Accept short-term pain for long-term financial gain: It is easy for traditional companies in stable categories to deliver steady growth of the top and bottom lines, but all this changes when the marketplace is upended. In many ways, when consumer habits and expectations begin to change significantly and rapidly, it turns every player--even traditional ones--into startups, and this means that future growth and survival may demand lower earnings today.

    We can see short-term, quarterly thinking in the actions of the companies that failed and long-term patience in the ones that succeeded. Kodak repeatedly abandoned products and shifted strategies trying to recover short-term profitability while Fuji reduced current profits to secure future return. Borders deserted its unprofitable online presence while B&N adopted digital strategies and built online skills. And Circuit City tried to maximize current profits by dumping experienced employees, leaving it unable to compete in the future.

    Collaborative Economy Lesson: It can be a bitter pill to swallow for companies accustomed to stable and growing earnings, but if the Collaborative Economy is altering the playing field in your industry, leadership focus must shift from maintaining constant earnings to securing the future of the company. As we saw with JCPenney, today's shareholders may care more for next quarter's earnings than the future survival of the company, but great leaders will not destroy today's strong brands in order to please shareholders who trade company shares in milliseconds.

    At the beginning this blog post, I said it was naive to compare established companies to startups, and now I am being purposefully naive, as well. I am suggesting that corporate leaders in verticals where the Collaborative Economy is growing put the company's intermediate- and long-term interests ahead of shareholders'. This has been done before: Apple's Tim Cook told shareholders “If you want me to do things only for ROI reasons, you should get out of this stock.” And, as we saw with Fuji, its CEO opted for decisions that were "damaging" to the firm's short-term profitability in order to secure long-term viability.

    It takes a strong CEO to lead the company in a way that does not maximize today's shareholder equity, but times of change require strong leadership. No one looks back at the leaders of Kodak, Circuit City and Borders with admiration for maintaining profitability as long as possible while driving the brands into the ground. The leaders that will be lauded in the future will be the ones that can make decisions that enhance 2020's annual report and not just next quarter's 10-Q. 


A free ebook in progress, being created one blog post at a time:






Friday, August 22, 2014

What Marketers CANNOT Learn From The #IceBucketChallenge

Credit: slgckgc via photopin cc
I love internet memes, but I hate the way each one gets turned into fodder for advertising publications and agency bloggers to (try to) turn the event into a "teachable moment" for marketers. While a trend is hot, news sites and agencies strive to build more attention and traffic with a form of newsjacking, leveraging interest in a trending topic to create attention for themselves. Right now, this is happening with the Ice Bucket Challenge, with dozens of news, blog and LinkedIn posts telling marketers what they can learn from this meme. I do not agree with much of what has been written, so at risk of engaging in newsjacking myself, I am going to write about this program and hope that it encourages more dialog and consideration about this craze and what it may or may not mean for marketers.

Sometimes, a meme can furnish a few lessons that marketers might consider when developing their marketing strategies. At other times, the connection between the event and brands is tenuous, at best. And on occasion, the effort to turn current events into something relevant for brands and marketers blows back.

Many recently criticized PR agency Edelman for publishing a blog post immediately after Robin Williams' suicide suggesting brands "Seize the day" and use the tragedy "as an opportunity to engage in a national conversation." While the Edelman blog post was worthy of criticism, it was really just a symptom of a larger issue: Marketers' and agencies' continued promotion and use of dubious tactics such as "real-time marketing" and "brand newsrooms." These schemes attempt to hijack consumer emotion and interest in a current event to make otherwise irrelevant brands more relevant.

Business leaders must recognize that companies build relevance not by hopping from one trending topic to another but with concerted and ongoing effort in specific and discrete issues that resonate with consumers. Edelman should know--better than most--that the time for a company to demonstrate care for depression and suicide is before a celebrity death brings these topics to the forefront and not after Twitter is abuzz. One way tells consumers that your organization stands for something more than profits; the other tells consumers your brand is a vulture willing to exploit any tragedy or event to try to boost the bottom line.

It is happening again--while the world is busy dumping buckets of ice water over their heads, ad industry news sites and agency blogs are lighting up with posts about what marketers can learn from the #IceBucketChallenge. Alas, I believe many of these posts and articles are simply wrong, drawing arguable connections between what worked for this charitable effort and what will work for brands. Here is what I believe marketers can (and cannot) take from the success of the Ice Bucket Challenge:

  • The #IceBucketChallenge demonstrates the power of social media, not the power of social media marketing. (Tweet This): Almost every article and blog post I have read calls this a "campaign." It is not. A campaign is a planned series of marketing events launched by an organization to achieve a goal, but the ALS Association did not plan, launch or manage this (although they have eagerly jumped on the bandwagon). The Ice Bucket Challenge was a spontaneous and viral happening created and spread by individuals; in fact, had the ALS Association attempted to launch this themselves, they likely would have been criticized for manipulating and asking too much of people. The Ice Bucket Challenge succeeded not because it was a carefully crafted campaign but because it wasn't.
     
  • The Ice Bucket Challenge didn't succeed because it is easy but because it is difficult. I have read several times that brands can learn from this program that making participation easy for consumers is vital. Excuse me--the Ice Bucket Challenge was easy?! Most brands would do backflips simply to get 15 seconds of consumers' time to post a rating or positive comment. Meanwhile, the Ice Bucket Challenge required people to find a bucket, fill it, lug the heavy bucket somewhere convenient, fill it with ice, set up a smartphone to capture everything, lift the heavy bucket, douse themselves in ice-cold water, dry off, change clothes and post the video online. And, oh yeah, donate money! If that is your idea of easy, I wonder what a difficult activity might be!

    Ironically, had the challenge been something easy--"I dare you to post a video doing a duck face!," for example--it would not have worked. Because the Ice Bucket Challenge was difficult, it gave people an opportunity to demonstrate their willingness to make the effort--and no, your brand probably cannot get people to do heroic activities in support of your product or service. 
      
  • Credit: gwen via photopin cc
    The Ice Bucket Challenge was not a program about caring but about pride and shame. Before you react negatively to me calling out ego and humiliation as drivers, let me point out that this is not a criticism. The program succeeded, and there is nothing wrong with a charity with using the human emotions of pride and shame to achieve a positive end; after all, those are exactly the same mechanics that work in many charitable programs. Take, for example, the VFW fundraising program where volunteers stand with cash buckets in front of store entryways and give away little flowers to those who donate. If you cough up cash, you get a Buddy Poppy to wear around that day, showing pride in your small sacrifice; but if you make eye contact and walk past without donating, you feel shame. (You know you do!)

    The fact that people could show off how creative they were (with Bill Gates building a dousing contraption and Stephanie Izard doing an ice bucket Flashdance) was a big part of the success of the Ice Bucket Challenge. So was the part of the program that demanded people call others out by name; this was the charitable equivalent of a chain email, but because of the social media elements, people could not break the chain privately and quietly but only by humiliating themselves with silence and inaction. While some have claimed this program was about pulling at the heartstrings, I can recall seeing just one video that was legitimately emotional. The lesson of the Ice Bucket Challenge is that pride and shame are powerful human emotions, but brands should be very wary of trying to activate these emotions as part of a for-profit marketing campaign. 
     
  • Lou Gehrig's farewell speech, when he declares himself the
    "luckiest man on the face of the earth," moves me to tears.
    The Ice Bucket Challenge was not successful as a cohesive marketing effort, but it was a great first step. As I write this, the ALS Association has received $41 million of donations thanks to the Ice Bucket Challenge, more than double what the organization raised in its last fiscal year. But while this clearly had a terrific fundraising impact in 2014, will it build future success for the ALS Association?  For example, I would suggest the Ice Bucket Challenge did little to raise awareness. Most people had heard of Lou Gehrig's Disease before the Ice Bucket Challenge, and afterwards, how many of the participants would be able to identify its symptoms, when it strikes, its prevalence or anything else about ALS? Very few of the Ice Bucket videos made even passing reference to ALS, and without awareness and knowledge, this one-time event cannot be turned into a lasting driver of success in the fight against ALS.

    Of course, the ALS Association now has the names and contact data for more than 700,000 new donors. If the charity fails to educate those individuals, few will donate again and the association will not build upon this success for future fundraising benefit. With additional concerted effort, the ALS Association may convert this successful acquisition program into an effective awareness, loyalty and repeat donation effort. The point that marketers should take from this is that no single campaign or program can be a soup-to-nuts success delivering on every marketing goal; instead, building deep, strong, and long-lasting consumer relationships takes a cohesive brand journey. 

It takes nothing away from the generosity of many or the rewards accruing to the ALS Association to point out that this was not an effective marketing program but another example of the way social media lightning can strike unexpectedly. This is what brands can learn: Consumers are fickle and crowds are hard to predict or motivate. They can ignore your carefully-crafted and expensive viral video campaign then turn around and make the Harlem Shake the next big thing. 

Kudos to the ALS Association for seeing the Ice Bucket Challenge rising out of the crowd and being agile enough to capitalize on the opportunity. In the end, that may be the most important message of all for brands--your brand succeeds not with what you plan and post but with what consumers think and do. If brands did more worth talking about and concentrated less on broadcasting content, they would have a better chance of building relevance and loyalty in the social media era. 

Friday, August 15, 2014

New York Times Admits Its Native Advertising Violates FTC Rules

Photo Credit: Me!
Two weeks ago, John Oliver's bit on Native Advertising went viral--at least in marketing circles--but it was hardly the most disturbing thing to be published that week on the alarming and growing practice of sponsored content in mainstream media. While I enjoyed the humorous (and accurate) critique on Oliver's "Last Week Tonight," AdAge.com featured an even more troublesome item, entitled "New York Times Tones Down Labeling on Its Sponsored Posts."

The New York Times, long considered a U.S. national "newspaper of record" due to its professional ethics and reporting standards, has decided to appease advertisers desperate to bypass consumers' natural aversion and avoidance of advertising. The newspaper "shrunk the labels that distinguish articles bought by advertisers from articles generated in its newsroom and made the language in the labels less explicit."

What is so disappointing about The New York Times' action is that studies demonstrate a substantial level of confusion on the part of consumers about sponsored content. Consumers do not recognize Native Advertising as paid media, nor do they understand what "promoted content" means:
  • The IAB published a study last month that found business and entertainment news audiences could generally identify sponsored content, but "the general news audience had more trouble, with less than half (41%) recognizing that the material was advertising."
      
  • A 2013 study by David Franklyn, law professor at the University of San Francisco, found that people “didn’t remember seeing ‘sponsored by’ posts when asked to read a web page and the majority (over 50 percent) also didn't know what the word ‘sponsored’ actually meant.”
     
  • A recent study by Contently found that "while a plurality (48 percent) of respondents believe that 'Sponsored Content' means that an advertiser paid for the article to be created and had influence on the article’s content, more than half (52 percent) thought it meant something different." The study further found that:
    • Two-thirds of readers have felt deceived upon realizing that an article or video was sponsored by a brand.
    • 54 percent of readers don’t trust sponsored content.
    • 59 percent of readers believe a news site loses credibility if it runs articles sponsored by a brand.
    • Every single age group would prefer news sites stick to banner ads versus sponsored content. (This may be the first study in history to find a preference for banner ads, which makes evident consumers' perspective on Native Advertising.)
        
Advertising ethics and Federal Trade Commission (FTC) disclosure rules demand more disclosure, not less. The FTC does not set standards for disclosures but determines the effectiveness and legitimacy of the disclosure based on whether or not it succeeds in informing consumers. Simply put, if consumers cannot distinguish that content is sponsored nor understand what the disclosure means, it is illegal under the FTC Act, which prohibits "unfair or deceptive acts or practices."

This is made explicit in the FTC's ".com Disclosure" guide, which the agency created to help marketers and media outlets understand the law in the digital world. It states, "The ultimate test is not the size of the font or the location of the disclosure, although they are important considerations; the ultimate test is whether the information intended to be disclosed is actually conveyed to consumers." Today's Native Advertising undeniably fails to meet this standard (and it is a shame the FTC is burying its head in the sand rather than enforcing the rules it has established.) 

While it is sufficiently disturbing that The New York Times would diminish disclosures to make them less "clear and conspicuous," it was this line in the Ad Age article that left me dumbfounded:
"Several marketers have bristled at all the labeling, suggesting it turned away readers before they had a chance to judge the content based on its quality."
If this were a legal drama, that statement would cause the courtroom to erupt as the judge bangs his gavel demanding "Order in the court." That sentence is is an admission of guilt; a confession that The New York Times is violating both FTC guidance and advertising ethics.

The entire point of the FTC's "clear and conspicuous" disclosure rules is to ensure consumers recognize content as sponsored before engaging with it so that they can make an informed decision to read, watch or listen to the brand-sponsored media. In the old days of printed "advertorials," those fake "articles" were surrounded by a special border with the word "advertisement" repeated so as to provide a clear and conspicuous disclosure to consumers before they began to read the ad. On television, the FTC requires infomercials to "clearly disclose that 'THE PROGRAM YOU ARE WATCHING IS A PAID ADVERTISEMENT FOR [NAME OF PRODUCT]' at the beginning of an infomercial." (The italics are mine, but the capitalization is the FTC's.) 

The admission that The New York Times and its advertisers are actively attempting to deceive consumers into engaging with paid content before disclosing it is sponsored content is startling. It is also upsetting, because this demonstrates the wholesale failure of the news industry, marketers and regulators to uphold well-established, long-standing ethical advertising guidelines.

Some may argue I am overreacting--that Native Advertising can be done legally and ethically. I agree it can--with clear and conspicuous disclosure that plainly informs consumers the content is paid media. If the readers choose to proceed after seeing and understanding the disclosure, everybody wins! But absent that level of disclosure, Native Advertising is dangerous for all parties. It undermines the trustworthiness and independence of the news media; causes brands to look deceptive, untrustworthy, desperate and disrespectful of customers; deceives consumers who may not realize the content is influenced or written by a brand; and makes the FTC look toothless and opens the door to further violations of its rules.

To appreciate the potential damage caused by Native Advertising, put yourself not in the shoes of a marketer with sales or market share goals to deliver; instead, consider this from the perspective of a parent, spouse or customer. We can forgive David Ogilvy for a bit of sexism given the era in which he said it, but his famous admonition to advertisers demands we see our practices from both sides: "The consumer is not an idiot. She is your wife." How would you feel if a "respectable" news site buried a disclosure and encouraged you or your family to read:
  • "The Five TV shows You Can't Miss This Season" (sponsored by a production company that only included its own shows)
       
  • "Danger: Eating Tainted Chicken Sickens Children" (sponsored by the beef industry)
      
  • "Researchers: Fracking Completely Safe for Environment" (sponsored by a petroleum lobbying group)
      
  • "US Falls Behind As Regulation Stifles American Competitiveness" (sponsored by a bank trying to get Washington to loosen banking regulations)
     
  • "Human Rights Abuses Mount in Fill-In-The-Blank-Country" (sponsored by a top Pentagon contractor that will make billions if the US intervenes with military action) 
"First NYTimes frontpage (1851-9-18)"
 by The New York Times - ProQuest
Database. Licensed under Public
domain via Wikimedia Commons.
Native Advertising (without clear and conspicuous disclosure) is not a slippery slope; it is a single step onto a banana peel. I certainly understand the appeal of this new form of advertising to The New York Times, whose stock has declined 70% in the last decade (while the Dow has risen an equal percentage); nevertheless, the future of the Times (and of news, in general) is not improved by violating FTC rules, undermining trust and raising suspicions in consumers' minds that what they read was written by the highest bidder.

The current leadership of The New York Times would be wise to head the message that was printed in its inaugural issue in 1851:
We shall be "Conservative", in all cases where we think Conservatism essential to the public good;—and we shall be Radical in everything which may seem to us to require radical treatment and radical reform. We do not believe that "everything" in Society is either exactly right or exactly wrong;—what is good we desire to preserve and improve;—what is evil, to exterminate, or reform.
It is hard to imagine how obfuscating paid media is in the "public good." In fact, actively minimizing disclosures to deceive readers is clearly evil, and the Times' leaders would be well advised--not just for ethical reasons but for its own future--to "exterminate" or "reform" its Native Advertising practices.