This is an update to a post I originally wrote in 2008 on Seeking Alpha.

The internet has witnessed the conversion of analog advertising dollars into digital advertising pennies (credit due to Jeff Zucker when at NBC for “coining” that metaphor). Despite the fact that a viewer is always just a “click away” on the internet, online advertisements command only a fraction of the cost of far less measurable media – like print, radio, and television. Consider this: an advertisement on Facebook might cost $.25 to show to 1,000 people ($.25 CPM), versus $25 for 1,000 readers of Time magazine ($25 CPM).

In the good old days of performance-less advertising, engagement didn’t really matter because you generally couldn’t quantify it. Studies on Reach, Frequency, and Recall aside, General Motors had no way of measuring the marginal benefit (much less revenue!) of a particular advertisement. But on the internet, it is quite clear that if nobody is clicking on your ad, then nobody is noticing it, much less “connecting” with it. Proctor and Gamble has likely spent millions of dollars on Facebook advertisements that attract a few dozen active “followers” – probably the same hit rate they had in Time magazine 20 years ago, but with one key difference: Now anyone can prove that people don’t engage with the advertisement! If only Facebook (and internet advertising agencies) hid such pitiful data, perhaps the pennies would somehow metastasize back into dollar form. When there’s no way to measure the marginal benefit of an advertising unit, it’s very easy to get ripped off.

Pundits will argue that with increased ad targeting, profiling, and all sorts of other algorithmic alchemy, online ad revenues will be boosted. Such talk is nonsense insofar as brand advertising (not direct response) is concerned. Rather, a seismic shift is underway – one that will not only change the nature of advertising, but will also show that the last century of offline advertising witnessed a tremendous amount of money being flushed down the toilet. We are a lot smarter than we were 50 years ago, and those analog dollars really should have been analog pennies all along.

The result of this peculiar wastefulness was (and, for the moment, still is) a “private” consumption tax for the funding of “public” content. If the BBC is funded by the British government (i.e. taxpayers), NBC is funded by Proctor & Gamble, Coca-Cola, General Motors, et al (i.e., consumers of those brands). If you happen to watch your favorite sitcom without transacting with any of those brands, then you are free-riding off of those who do spend – a remarkable corollary to the piracy of paid content. The “free content” system of the past century is no different than forcing people to buy NBC content from iTunes, but instead of the cost being charged to their Visa cards, it is tacked onto the cost of their Tide, Cherry Coke, and Chevy Malibu.

Don’t expect it to last, though. As the brands recognize that they are being bilked – rather, that there is at best a tenuous link between consumption of their goods and consumption of the free content they are sponsoring, they will be less likely to foot the bill. For the beneficiaries of free content, the internet is unraveling this whole ecosystem with unwavering speed.

If you are a media company, or a shareholder in a media company, there is a good reason to worry about what the next ten years hold in store. The enemy is not Google or the internet, but rather increased intelligence and analysis of advertising spend, which will irrevocably change the way advertisers allocate their dollars.