AOL's Dumbell Strategy

AOL just recently fired 150 ad salespeople as part of its re-organization, and it's a strategically interesting question for digital marketing. AOL is structuring itself as a two-product player in digital advertising: on one end there is a commodity programmatic ad sales division. On the other end is a high-margin, customized products division. Part of AOL's restructuring is getting rid of the middle ground that used to exist between those two ends of the market.

Now, what is interesting about this is how obviously similar it is to the story in other industries. It seems that everything from PCs to mobile phones to apparel to food to housing to, apparently, ad sales, is being affected the same way: the low-end is flourishing due to a technology-driven expansion, but that expansion is fueled at the expense of margins, because such a large, open market tends to be come standardized and commoditized.

The high end of the market also does well, because when the underlying technologies are harnessed for a specific, custom purpose, the custom products that can be produced are perceived as higher-quality than the mass-market commodity goods in the low end. But in this situation, there really isn't room for a "middle": if you are buying on price, you buy the low end, and if you are buying on quality, you buy the high end.

This process has been so widespread that we can look at some other industries in which it has already had more time to reach its later stages, and see if we can make some predictions about the future of digital marketing.

In fast food, the companies with the best performance are the ones that have managed to keep margins high through a willingness-to-pay strategy and a high organizational focus: Five Guys, Chipotle, and Panera all keep their menus small and expensive, attracting customers who want a perceived better experience with higher-quality food for slightly higher prices. On the other hand, the formerly dominant commodity players like McDonald's are struggling. McDonald's in particular has expanded its menu in a quest for higher margins, but still can't move its core customers off the dollar menu, and now has to deal with increasingly complex operations thanks to the new breadth of its offerings.

In electronics, the good news is even harder to find: the big players have only a few years of high margins on any given product before it gets commoditized into unprofitability, so they have to relentlessly try to develop improved products, or at the very least new products (customers can disagree about the value of some of the innovations, e.g. the flub that was 3D TV).

In retailing, the similarity to the current state of digital advertising is even starker. Amazon and related web-commerce sites are taking over the low-margin low end of the market, and boutiques are embracing digital technology to develop their brands and reach more customers with their high-margin low-volume products.

So, which of these three situations will digital marketing find itself in in the next 5 to 10 years? This wouldn't be much of a blog post if I didn't make a prediction (although I frankly admit to no special expertise in this matter), and my prediction is that it will look like the electronics market. The low-end business will be huge but not very profitable, and the high-end business will be split into small, profitable niches threatened by the improving quality of the low-end products (e.g. the audiophile market).

Now of course, this is assuming that no major changes occur in the structure of the industry, which is itself unlikely. It will be interesting to see how the different players respond to the changes taking place, and whether for instance Google will embrace the "dumbellization" of the digital advertising market and seek to empower one or both ends of it, or whether there will be some attempt to rescue the old middle of the market.