The Surprising Economics of Digital Advertising

NEW YORK It is commonly held as a self-evident truth that digital advertising is cheaper to produce than traditional advertising. Stories abound of low-cost online executions that have taken on lives of their own on the Internet, reaching millions of consumers with zero media spending. Just ask the Subservient Chicken or go and elf yourself.

But a white paper being released today by the American Association of Advertising Agencies argues the opposite.

"A Marketer's Guide to Understanding the Economics of Digital Compared to Traditional Advertising and Media Services" was written by Joe Burton, evp and COO of McCann Worldgroup's San Francisco operation. (It's available at the 4A's Web site, aaaa.org.) Explaining the need for the report, Burton said, "The lack of understanding of the [digital] space is the single biggest friction point between agencies and clients."

For the report, Burton spoke to 25 experts from a wide range of marketing disciplines. He garnered input from C-level executives at WPP, Omnicom and IPG, and drew data and analysis from another 25 analysts, authors, creatives and production executives.

The fundamental argument presented is that digital advertising is inevitably more complex and therefore more expensive than advertising in traditional channels. However, the paper goes on to argue that the extra value delivered for marketers by digital advertising far outweighs the extra cost. Only if the shift to digital is inspired by the right reason -- a better, more rewarding service for clients -- will it result in agencies equipped to thrive in the future, according to the white paper.

Jeff Hicks, president and CEO of Crispin Porter + Bogusky, agreed with the trade-off cited in the report. "It is all the things clients and agencies love about digital that drives the cost up," he said.

Four main reasons are given for why digital advertising is more expensive.

The first is that digital work is more labor intensive because there are inevitably many more executions to be created in a wider range of media. Also, digital campaigns are more dynamic, subject to change even within the lifetime of a campaign, requiring more creative, media planning and buying resources.

Digital work also requires that more of the production work is done in-house, whereas in traditional advertising much of it is outsourced. This means digital work requires the establishment of in-house resources and expertise, including designers, planners and programmers. "If you outsource analytics, technology, Web development, programming, pretty soon you'll have outsourced the project," said Burton.

Thirdly, digital advertising necessitates a blurring of the lines among media, production and creative services. This results in extra costs for agencies as they have generally separated these functions. Reorganizing is expensive.

And digital work almost always means the creation of new job functions and organizational structures. Particularly significant is the need for developers and technologists, and the management associated with them, but there are others. The traditional traffic function, for example, is generally insufficient to manage the complexities of digital projects.

The report then argues that digital advertising delivers much more value because it can be targeted, tracked, measured and adjusted on the fly. The paper claims that these enhanced returns for marketers far outweigh the extra cost for digital advertising.

The paper finishes by offering some practical advice to agencies, such as the need to educate marketing partners about the different economics that apply to digital advertising and a warning to avoid the "shiny new toy" syndrome.

Reiterating the report's central theme, Tom Finneran, the 4A's evp of agency management services, said, "As clients move money into digital with all its marketing benefits, the level of agency service they require rises dramatically."

A new study from the 4A's turns some general beliefs about online advertising on its head