Digital's First Deadly Sin: Arrogance

Why do we always dare advertisers to go elsewhere?

The deal was supposed to be for $8 million.

And it was, right up until the final contract review.  That’s when two top ad sales executives at AOL, Myer Berlow and David Colburn, decided in the middle of the meeting that the price tag should double.

It was 1997, and the world was moving uncomfortably through a digital membrane.  On one side of it, where commerce had comfortably existed in the physical space for thousands of years, business executives were realizing that the foundations of the ways they made money were shifting under their feet.  Their counterparts who were creating value were moving to the other side of the digital membrane, where storefronts existed outside of meatspace and didn’t carry all of the baggage normally associated with brick-and-mortar operations.

The company on the wrong end of the extortion – Music Boulevard – aspired to change how the world bought music.  At a time when Spotify, iTunes or even Napster hadn’t yet been invented, Music Boulevard was trying to bring music into the digital world.  For its trouble, it was watching its price tag double on an advertising and distribution deal that could help make or break its business.

Berlow’s reasoning for the in-meeting shenanigans, according to The Washington Post, was that the Music Boulevard executives in the meeting stood to gain personally from the deal they were getting from AOL.  With its parent company N2K about to go public, the rules of the go-go 90s dictated that the mere announcement of this deal would drive demand for N2K stock, giving the Music Boulevard execs in the room a big payday.  Berlow realized that AOL wouldn’t see any of that money and thought perhaps they should.

So, much to the consternation of Colburn, Berlow tore up the deal at the final contract review.  And instead of the $16 million price tag Berlow arbitrarily set on a whim, AOL ended up with a deal worth $18 million.  And a cut of Music Boulevard’s sales. Up from the original $8 million.

Why is this story important?  To understand why, we need to revisit the genesis of the commercial explosion of the web.

Commanding attention equals commanding top dollar

Companies began to move en masse to the web in 1994 in the wake of the release of Netscape Navigator – not the first web browser, but the one that really started bringing the web to the masses.  By 1997 when the meeting I’m describing occurred, commerce was in a period of upheaval, characterized by a realization that the future of commerce was online, and a subsequent “land grab” where companies old and new began to stake their claims on the digital landscape. 

Whether you were selling furniture or pet food or real estate, protecting your business at that time involved finding out where people were researching and considering your products online, and you had to do your best to “own” it.

The best way to do that was to look at where people started their research.

At the time, there were a bunch of search engines that no longer exist today in the wake of the Google revolution: Lycos, Alta Vista, HotBot, Infoseek.

There were online services that gave home users onramps to the Web, like AOL and Compuserve.

There were ISPs that provided dial-up access to home computers and had their own ways of introducing their users to the web: Mindspring, Earthlink, Prodigy and many others.

And there were portals – places where people often started their searches for information about products: Yahoo, Pathfinder and Netscape.

Scattered within this landscape were a host of content sites, some topical and some general interest, that commanded enough of a share of Internet traffic to be significant in the early land grab.

To protect your business in 1997 meant looking at this landscape and deciding which investments in advertising, distribution and revenue-sharing were going to protect your market share in the rapidly evolving world.  This often involved high stakes dealmaking where price tags soared into the tens or even hundreds of millions of dollars.

Thankfully, much of it was self-funding.

Playing with Monopoly money

If your business happened to be publicly traded, the market would respond disproportionately to announcements of these major deals.  The effect wasn’t confined to digital newcomers to the NYSE or NASDAQ.  Brick-and-mortar retailers could easily differentiate themselves from competitors by announcing an arrangement with AOL or Yahoo.  The corresponding lift in stock price would more than fund the deal.  For instance, when Barnes & Noble struck an ad deal with Yahoo to replace Amazon.com for most of its book searches, its shares jumped 30 percent on the news while Amazon lost 5 percent of its value.

This reward mechanism gave rise to the infamous Dot Com Boom, where companies eager to position themselves at the forefront of the digital revolution reaped the benefits of an overexuberant market - one that wanted to place its bets behind disruptive digital players who could upend entire business sectors.  Only a few years later did the Dot Com Bust snap the digital and finance industries back to reality with a return to fundamentals that showed that many of the promised benefits of these high-flying deals never materialized.

But it was during the boom part of the cycle where digital advertising committed the first of its Deadly Sins – Arrogance.

To be fair…

Arrogance has long been a characteristic of companies that control consumer attention.  The TV networks were guilty of it in their heyday, and the walled gardens like Google, Meta and X/Twitter are guilty of it now. As we’ve seen, AOL - among the first of the walled gardens - took this deadly sin to extremes in the early commercial days. Today, they’re no longer a player.

‘Where else will you go with your ad dollars?’ seems to be the overriding attitude from the walled gardens.

That’s a good question.  In 2022, more than three quarters of digital ad revenue is spent with the top 10 companies in the business, a list dominated by walled gardens. (Warning: Direct link to .pdf)

The rest of the market, including advertising on the open web, fights over the remaining few percentage points, adopting commonly-used technology for ad targeting and effectiveness measurement. The walled gardens disrupt that technology, often unapologetically. For now, they control enough attention in the digital sphere to arrogantly push aside what the open web embraces.

But will it last?

In our next installment, we’ll discuss the current market, why the walled gardens feel justified in their arrogance, and – most importantly – how that arrogance will mean their downfall.