Yesterday, I bought myself a CD alarm clock. Looking at this transaction in economic terms, it might seem to be nothing more than a simple consumer purchase of a durable good. Yet something more is going on. This purchase also leads to a change in lifestyle — and it is part of a trend that is changing the way the economy is organized.
A CD alarm clock in itself is the unremarkable combination of an alarm clock and a CD player. Instead of waking up in the morning to the sound of a radio, I can now wake up to the sound of a music CD. The CD clock takes on more significance, though, when you look at the reason why a consumer would buy a CD clock ($30) instead of the less expensive clock radio ($20): to wake up in the morning without having to listen to those annoying commercials on the radio. Other people are getting the same result in other ways: satellite radio subscriptions, public radio stations, Internet radio stations, and MP3 music players. It is not hard to arrange to wake up with commercial-free audio programming, and more and more people are doing it.
This trend is an example of countervailing power. If you look at the two parties at the endpoints of radio advertising, the advertisers and the consumers, each has ways of exerting influence on the other, and this influence should help keep the exchange in balance. Consumers long ago stopped devoting attention to radio advertisements. Yet advertisers had a way to respond, by producing their audio content in a way that makes it more insistent, although this is also what makes it annoying. Consumers are now responding by limiting their exposure to radio advertising. Consumers listen to the radio just half as much as they did a few years ago and are more likely to listen to commercial-free radio when they do tune in. One response from advertisers has been the recent legislative initiative to silence Internet music radio by requiring exorbitant per-listener music royalty payments from the Internet music radio stations, yet this is only a small step, as Internet radio is just one of dozens of ways for consumers to get audio programming.
In theory, the potential for this kind of response and counter-response is supposed to keep an economic relationship relatively in balance. Yet in some cases, as in the example of radio advertising, it seems to have the opposite effect. Each party stakes out more and more extreme positions until there is scarcely any relationship left. Some advertising messages today, in their attempts to cut through the clutter of commercial radio, are so jarring that just hearing them can ruin a listener’s whole day. And some listeners are so annoyed at the intrusion of radio advertising that they are determined to shut it out completely, even if that means no longer going into restaurants where commercial radio is playing.
Perhaps this result, where the parties go to extremes instead of finding a workable compromise, is more likely when there is little economic validity in the relationship to begin with. Consumers, it must be conceded, get very little benefit from radio advertising, so why wouldn’t they eventually find a way to block it out completely? And advertisers, for their part, have only the slightest interest in the long-term effects of their messages. If an advertising campaign brings people into a store this week, then the thought that it might help drive listeners away from the commercial radio medium over a period of years is of little concern.
Of course, the flight from advertising is not just affecting radio. Television viewing hours have been falling for years, and when people watch television shows, they are more likely than ever to purchase the shows online so they can see them without commercials. Newspaper circulation is falling rapidly, and while magazine circulation is holding up, people are less likely than in the past to read the magazines they get.
Advertisers look at their advertising opportunities as windows into a consumer’s day. Most of the day, consumers are out of reach — asleep, at work, reading books, exercising, and so on. The decline in commercial radio is taking away two points in the course of the day when advertisers could get into consumers’ heads: waking up and driving.
The declining reach of advertising is not just a case of advertisers worrying about nothing. The effectiveness of advertising can be measured in many ways, and it all points to the same conclusion: advertising is having less impact. One of the best ways to measure the effectiveness of advertising in general is by measuring brand awareness, and brand awareness is declining. For example, people often cannot tell you the brand name of the camera, refrigerator, or blue jeans they own. Asked to identify the top brands of televisions in the United States, consumers are more likely to pick Zenith and RCA, brands from decades past, than Vizio, Samsung, and Polaroid, some of the current market leaders.
Technology is letting consumers steer clear of advertising. So what does this mean for the economy? It is troublesome news for the planning system, the large-scale half of the economy that traditionally has depended on long-term planning. In order to sell to consumers the products they are gearing up to promote and distribute, large companies depend on a degree of control over popular culture to create the level of consumer demand they have planned on — and this mainly means advertising. If advertising no longer reaches consumers, and the consumer response can no longer be guaranteed, then the planning process becomes an empty exercise. The plan to sell 10 million units of the New Hot Product is useless if consumers aren’t even aware that the New Hot Product is something they are supposed to be buying.
In this context, the ability to advertise on the Internet is little consolation. Internet advertising is largely self-selected. It reaches consumers only after they are interested in a subject. This is a real boon to some advertisers, but it is useless as a way to drum up demand for a new product that consumers don’t yet know or care about.
If consumers cannot be controlled, companies are having to rely more on predictions of consumer behavior, preferences, and trends. Focus groups, which assemble a random group of consumers for a short meeting to gauge the reaction to product concepts, are part of this research, but these results can be misleading. A focus group is naturally curious about the subject of their work, and this is a curiosity that consumers at large do not share. Lots of products that succeed brilliantly at the focus-group level fail to capture consumers’ attention out in the real world.
One way to make predictions more accurate is not to try to predict so far into the future. Half a century ago, it was common for a large company to plan initiatives that could take five years. Now, planning does not extend more than 16 months into the future unless it’s absolutely necessary. The shorter planning horizon may seem surreal sometimes, as corporate committees prepare to launch products that will be designed and named at a later date. Yet this is what it takes for a big company to avoid unnecessary risks when consumers are hard to predict and control.
And so, as the reach of advertising declines, the planning system is losing its central position in the economy. It no longer seems to be half of the economy, but something less than that. It is no longer so clearly distinct from the so-called market system that makes up the rest of the economy, but is forced to work within the constraints of market forces much of the time. Venture capitalists have become more important as there are projects to be financed that involve real risk that cannot be planned away.
And all this is happening as a result of lifestyle changes as simple as waking up to a music CD. As technology gives consumers more control over their lives and surroundings, it can only get harder for the big corporations to include those consumers in their long-term plans.
