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The Impulse Economy

Suppose you could offer someone an infinite number of purchasing choices, customized to their needs and with the ability for them to buy what they wanted the moment they heard about it. Sounds like a promising business opportunity, right? Welcome to the impulse economy… By Robert H. Reid

Ask any bodega or manager to point to the store’s most precious , and odds are you’ll be waved to those few linear feet of counter space surrounding the cash registers. Scant as it is, this turf is highly prized by peddlers of tabloids, Altoids, and novelties who will pander, plead, and (literally) pay to secure a foothold there.

There was a when merchants only faintly understood the value of this and the rest of their shelf space. No more. These days they have it reckoned down to the penny. The rise of barcode scanners and such interpreters of scanned data as ACNielsen and Information Resources has allowed retailers to gaze deeply into the microeconomics of their businesses. From a supplier’s perspective, this insight has given retailers nightmarish powers, letting them charge towering rents for competitive shelf positioning. This power has gradually reshaped the dynamics of a large swath of our economy, transferring margin to retailers, squeezing manufacturers, and in theory, bringing consumers the trickle-down benefits of more efficient pricing and distribution.

Most of us, certainly retailers, think of shelf space in purely physical terms. But there’s a less tangible kind of shelf space, media shelf space, that is just as central to our economy as the aisles in the supermarket. And just like the products at your nearby grocer, the media need to win hotly contested shelf space in order to reach the public. Television, for instance, has a fixed inventory of media space which dictates the range of content it can offer. TV offerings are limited by the number of channels – a handful in the days of broadcast, a few dozen now in the cable era – and by the number of hours in the week.

Expanding shelf space inevitably brings greater variety – just think of what happens to the cereal selection when a corner store is knocked out to make room for a supermarket. When television’s shelf space expanded with the transition from broadcast to cable, the diversity of its offerings increased as well. There are now entire channels devoted to cartoons, science fiction, and classic films. None of these categories commanded much more than a sliver of television’s of shelf space in the broadcast era. Now they’re allotted hundreds of programming hours per month – entire aisles in television’s greatly expanded superstore.

Like merchants working with cramped quarters, programming directors tend to appeal to broad, rather than narrow and refined, tastes when their shelf space is limited. No standard cable system is physically able to distribute all the national cable networks available to it in addition to local stations. So the cable subscribers lose out on access to dozens of stations that some might enjoy very much. Space is similarly tight in other mass media. More than 250,000 unique titles are in print, but the 80-odd radio stations of a typical large metropolitan area have an inventory of only 10,000 or so programming hours per week – and much of that is devoted to things other than music. The inevitable result is that the majority of published music gets no broadcast distribution in the majority of cities. The situation is similar for printed periodicals. There are thousands of these in the alone. But at any given newsstand, only a handful are on display.

The positive side of this situation – from the distributor’s standpoint, anyway – is that scarcity creates value. Consider this fact: Radio stations in major urban centers can easily sell for upwards of $20 million, even when the acquired station’s format – and with it, its brand and its audience – is to be wholly dumped. According to Jack Messmer, Radio Business Report senior editor, “large-market stations typically sell for 16 to 17 times the station’s cash flow.” Usually, just a couple million dollars of the sale price covers the value of the station’s physical . The remaining value – the crushing majority of it – reflects the value of the station’s scarce Federal Communications Commission license; that is, its right to claim a slot on radio’s narrow shelf. Consider also the utter dominance the major television networks enjoyed in the days before cable. This stemmed from a number of factors – branding, marketing muscle, access to premier content. But the fact that viewers didn’t have many choices is just as significant.

In recent years, cable and other (the VCR, for example) have expanded television’s shelf greatly. The networks consequently have seen their ratings – and with them, their market share, mind-share, and influence – erode steadily. There will never again be a like CBS in the ‘50s.

Big shelf

The shelf space of the is unlike that of any other medium in that it has no bounds. You make more of it – more shelf space, more Web – simply by adding something to it. posts a new two-page article to its , the Web’s shelf space – its media capacity – expands to fit the story. Anybody – not just established producers and program directors – can add to the Web’s shelf space.

Not surprisingly, the Web’s infinite shelf has enormous implications for the media. It is no less significant to retailers. founded online bookseller .com in part on this premise. Bezos knew that there were more than a million unique in print and that no shelf in the world was big enough to stock them all. For instance, Tattered Cover in Denver carries only 350,000 titles in its 40,000-square-foot store and is one of the largest booksellers in America. With shelving so cheap on the Web, Bezos can cram 2.5 million titles into his store, with infinite room to spare.

When talking about online retailers such as Amazon.com, the notion and nature of shelf space begins to bend. The Amazon.com bookstore exists not on Elm Street but within the , a global medium. In this regard, its shelf space is media shelf space, similar to Channel Four’s programming hours. But Amazon.com is a store, not a magazine article or a sitcom. Its shelf space is a product- bearing distribution channel, like the cereal shelf at the supermarket. Two fundamentally different types of shelves are starting to blend together on the Web, even as they are extending into tens of millions of homes, schools and businesses. This process lies at the heart of some of the Internet’s most awesome, and barely tapped, business potential.

One result of these changing properties is that online media now enjoy a wealth of new ways to exploit audience attention that their offline ancestors never could have imagined. The media have been mining human attention – the ultimate finite resource – for centuries. Traditionally, they have done so in two ways: charging for access and selling impressions. Charging for access is straightforward. It involves offering people something fun or valuable enough to do with their spare attention that they’ll pay for it. Selling impressions involves carving out small slices of the attention that a media property draws and subletting them to sponsors. Media such as television and radio make a living from selling impressions in the form of commercials. Certain media, such as movies, books, and recorded music, make a living more or less solely from charging for access. Still other media, such as most newspapers and magazines, pursue a hybrid of both approaches. Between these standard points on the spectrum lie many mutant models.

There are exceptions. One of the more dramatic is television’s Shopping Network (HSN), which raked in $1 billion in sales in 1997 by hawking a curious mix of merchandise directly to cable viewers. All day long, HSN’s on-air barkers pitch the items in its warehouses, viewers dial in to buy this or that specially priced doodad, and the cash pours in. HSN’s success vividly demonstrates the power that can result when the media’s ability to stimulate demand is coupled tightly with a mechanism for converting that demand into sales – in this case, an 800 number and a platoon of chirpy operators.

In almost all other cases, there is no direct link between demand created in the traditional offline media and the fulfillment of that demand. This structural disconnect has huge ramifications. Today’s mass media are the world economy’s dominant agents of demand generation (with the likely exception of our biological drives). They make us aware of goods and services, and tell us where to get them. They reign as our arbiters of taste, fashion, and relevance. Put simply, they make us want to buy. But when offline media are involved, demand cannot be fulfilled within the context of its creation. I may fall in with the new Bestie Boys song on my way to work. Hearing it may get me primed and ready to buy the new Beastie Boys . But before I can do that, I must shift contexts entirely. I have to wrap things up with the radio, then find my way to a record store, or go online and track down that CD.

Two things inevitably result from this gap. First, demand leaks from the system. However excited I am about the Beastie Boys this morning, it could be weeks before I’m next in a . By then I may only faintly recall that I was recently dying to buy something or other. As a result, I may walk out of the store with something that will thrill me less, or perhaps with nothing at all. Second, even very influential agents of demand generation have trouble getting a cut of the commerce flows they catalyze. A respected reviewer’s nod could help bring a film millions in ticket revenue. But no slice of that pie will find its way to the review, the publisher, or the producer.

The rise of the impulse economy

Interactive and highly auditable, the Internet is the first mass medium to bridge the disconnect that has long existed between the two sides of the demand coin. Unlike a sitcom, say, the Web can take your number. It also can offer all the product details you might need to make up your mind about buying something – instantly, on demand - and maybe even charm you into parting with your dollars when you’re sitting on the . Perhaps most significantly, the Web’s infinite shelf is not just a media shelf like that of Channel Five, or a sales and distribution shelf like that of Macy’s; it is both.

Amazon.com’s Associates Program, initiated in July 1996, was one of the earliest and most powerful pointers toward what might be called the Impulse Economy. The Associates Program enables any Website to set up a bookstore without having to build warehouses, cut deals with publishers, or enter the order-fulfillment business. An affiliate site simply embeds hyperlinked references to books it wants to ‘sell” in whatever context it wishes (reviews, footnotes to articles, and so on). Thereafter, any visitor who is moved enough by the ’s context to want to buy it can click on its title and be spirited off to an Amazon.com order page that is already filled out with the book’s name. Amazon.com handles all back-end processing, and rewards the Website with a payment for every book purchased by that visitor (between 5 and 15 percent of Amazon.com’s selling price for most of the better-selling books, or roughly $2.50 for hardcover ).

Thanks to this program, a visitor to The Atlantic Monthly’s Website, for instance, who decides to buy a book after seeing it reviewed can do so straightaway – without losing the media context (The Atlantic Monthly’s site) in which the demand for the book was generated. No month-long wait before visiting a bookstore means less leaking demand. And the Internet’s powerful audit loop means that the agent of the demand generation (the Atlantic) can be correctly identified and credited. All of this is possible because on the Web, everything happens on one shelf.

Since its 1996 debut, Amazon.com has gained more than 40,000 associates, including relationships with America Online, Yahoo!, Communications, iVillage, and . This model has spread far beyond Amazon.com. Competitors such as BarnesandNoble.com, Computer Literacy, and Cendant’s Books.com have implemented their own twists on the Associates Program. So have music sellers such as CDnow and Music Boulevard. One of CDnow’s most intriguing affiliates is TheDJ.com, which took advantage of the Web’s infinite broadcast spectrum to create 72 unique, 24-hour-a-day radio stations around the most eclectic range of formats imaginable (there’s not just a station but unique Delta blues, Chicago blues, electric blues, and modern blues stations). Should a number on the “Awesome80s” station strike your fancy, just hit the “Buy This CD” button and TheDJ.com will connect you to CDnow. Release Software, in Menlo Park, Calif., meanwhile, is signing up dozens of independent software vendors and building an online software distribution network to enable its affiliate sites to set up software stores. 1-800-Flowers, Virtual Vineyards, and Internet Travel Network, among others, have followed suit, allowing sites to hawk bouquets, magnums of Zinfandel, and redeye flights to their visitors.

What all this means is that any entity on the Web, even the humblest, has a wide and growing arsenal of ways to mine the human attention it draws. This arsenal has already grown beyond the business of charging for access and selling impressions, extending directly into the realm of commercial transactions. The economic potential of this new model is huge – far larger than the estimated $78.6 billion that Americans spent on catalog commerce in 1997, a slice of the economy that, on the surface, would appear to be most analogous, and vulnerable, to online commerce. It’s on the scale of the uncounted – and uncountable – billions that are spent as a direct result of exposure to goods and services, facts and fads, critiques and praise, and billions of person-hours of consumed advertising impressions in the mass media.

This is because the Web is well on its way to becoming the dominant medium in our society and economy. Its infinite shelf gives voices to those who can’t be heard elsewhere. It has unique transactional, auditing, and personalization capabilities. In the intermediate term, it promises to distribute CD-quality audio without the intercession of record labels, trucks, and tightly shelved music stores, with a longer-term promise to deliver high-quality video on demand to our living rooms.

As bandwidth expands, processors speed up, and people become more computer-literate and computers more people-literate, the proportion of the words read, the songs we hear, and the video we watch that is in some way -distributed will explode. Like today’s mass media, tomorrow’s Internet media will be a huge arbiter of taste and stimulator of demand. But unlike television, radio, and print, it will bolster these roles with links to forums for further discovery, price comparison, and purchase. As commerce becomes increasingly interwoven with media context, the credibility of that context will remain paramount. The New York Times Book Review has driven huge volumes of commerce for years, because its opinions are highly respected and are believed to be uninfluenced by the most direct beneficiaries of that commerce; that is, you can buy a full-page ad for your book in the Times, but you can’t buy a good review from it.

The importance of credibility will tend to hold in check one of the darker temptations of the Impulse Economy: the urge to portray all products and services glowingly, so as to reap the maximum bounty from driving sales. Needless to say, if the online of The New York Times Book Review began to sycophantically praise every major title in print and build its around flashing “CLICK HERE TO BUY IT NOW!” buttons, it would rapidly lose its credibility, its audience, and its ability to play in the growing Impulse Economy. To be sure, there will be those who succumb to temptation, and others who deliberately manipulate the of the Impulse Economy to create the online cousins of the infomercial – a sales nexus masquerading as an unbiased editorial product under a contentlike veneer. But for media properties that are in it for the long haul, credibility, as always, will be their currency.

The Impulse Economy will not be limited to commerce driven by critical reviews. Far more of it will probably be driven, as so many of our purchases already are, by serendipity (for example, the decision to buy a CD after hearing a song on the radio). Perhaps even more will be driven by something that might be called “contrived serendipity,” which occurs when someone expresses or demonstrates an interest in a certain area, then is gently presented with a range of related products that might be of interest. Go to a search engine such as Yahoo! Or Excite, for instance, type in the name of a popular singer, and in addition to scanning the Web for information about her, the search engine will present you with a link to the musicseller’s Website (CDnow in the case of Yahoo!, Music Boulevard in the case of Excite). Click on the link, and you are served a page hawking her latest work. Similarly, search almost any subject on Yahoo! – the New York Yankees, say – click on the Amazon.com link atop the search results, and you get a list of books directly related to your search (more than 50 in the case of the Yankees, such as O Holy Cow!: The Selected Verse of Phil Rizutto).

The Impulse Economy also extends into the realm of paid advertising. The underlying call to action of almost all advertising is a plea to buy. But this plea’s effectiveness is muted in the traditional media because the buyer needs to shift contexts before acting on the desire to buy. No less significant, is the difficulty of measuring or auditing the response. How many CDs were sold as a result of last week’s ad in ? Did someone buy it because of the ad? Because of ? On a friend’s recommendation? The tight link between the call to action and the response within the Impulse Economy, coupled with the Web’s unique auditability, gives marketers more powerful insight into the efficacy of their campaigns than they ever dreamed possible (feedback such as “1.332 percent of the people exposed to this opportunity clicked on the link and eventually bought”). New, powerful, and deeply analytical disciplines in marketing will arise from this wealth of data.

The commercial possibilities of the Web are just beginning to be mined. To appreciate the long-term potential, consider again that incredibly productive three-foot stretch of counter space next to the cash register. This space is productive because it is here that demand – generated largely by serendipity rather than the meaningful context that can be enlisted on the Web – can be fulfilled most readily. But it’s a tiny, tiny shelf, and as such is stocked with only those products that speak to a wide audience. Thus the candy and the 3-inch tabloid headlines.

The rest of the store, and the consumption of almost all media, fall far from the flickering infrared eye of the barcode scanner. As a result, few products enjoy the same proximity to commerce, the same tight coupling of demand stimulation and fulfillment. But on the Internet, any sound clip, any paragraph, any image can be just as close to the cash register as a Snickers bar at the supermarket. A scholarly tome, therefore, can be presented to its entire tiny, widely dispersed global audience in the ideally appropriate niche of an online academic forum and can be snapped up on impulse, much as a high-churn, low--denominator, mass-market perishable can be presented to its very wide audience at a checkout counter.

End of the runway

Great as its marketing weight will prove to be, the Impulse Economy is not just about bigger sales for niche products. It is also about purchaser convenience. If I can buy tickets for the Friday’s showing of the new Quentin Tarantino film right after reading the review in Monday’s paper, rather than trying to remember four days later what I had read about it, I get more bang for my consumer buck.

The Impulse Economy is also about business process. It is about harnessing the Internet’s innate ability to let enterprises integrate, collaborate, outsource, and bid out slices of their activities in ways that are so closely integrated and so invisible to their customers as to have been unimaginable just a few years ago. The Internet allows any pair of kids in a garage to carve out some shelf space and start serving a constituency with content and interactive forums, regardless of how small or far- flung that constituency is. Elements of the rising Impulse Economy enable them to offer their audience books, music, conference calling, fax services, email, trips to Mongolia, and a whole palette of other goods and services – all without expanding their head count, facilities, or balance sheet one iota.

The fifth-generation Internet media property/store/lifestyle center of a few years hence will seamlessly integrate the work of dozens of enterprises. Many different companies will sell and ship products selected for their appeal to audiences. Others will personalize content for visitors, sell ad impressions, serve targeted ad impressions, provide live-video services to link visitors to one another, sell tickets to events, or pipe in background music for visitors – all within a single, coherent, branded environment.

The Impulse Economy is in its earliest days, and no one can predict precisely how it will develop or how quickly it will grow. Some fundamental changes in our ways of interacting with and conceiving of media and commerce must occur before it can become very large. But the Web itself was similarly tiny as recently as 1994. Its proliferation likewise required a fundamental shift in our approach to media and business information, and this shift came swiftly.

It is impossible to say exactly what form the Impulse Economy and its various players ultimately will assume. However, it seems likely that we will the gradual rise of two distinct types of business (although there will be many companies in the gray zone): demand generators, such as The Atlantic Monthly or TheDJ.com, and demand fulfillers, such as Amazon.com and CDnow. In many cases, demand generators will be boutique businesses, because those who fuel demand best often appeal deeply to narrow segments of the population. Demand fulfillers – with their warehouses, shipping departments, and volume-driven pricing agreements with suppliers – will tend to be larger businesses that enjoy scale economies, in some cases network economies, and have relatively low margins. Margin pressure will come from the fact that good agents of demand generation will have strong bargaining positions in picking their fulfillment partners. For instance, if I can guarantee my book vendor 1,000 sales per month, I may as well stage a bidding war between Amazon.com and BarnesandNoble.com for my royalties. One early indicator of this margin pressure surfaced in March, when online toy retailer eToys announced that it would give its affiliates 25 percent of the sales they generate, up from 12 percent.

Whatever the scope of tomorrow’s Impulse Economy, one thing is clear. Like Internet commerce itself, it is at take-off, just rising off the end of the runway. Make sure your seatbelts are securely fastened.

ROBERT H. REID ([email protected]) IS A VENTURE CAPITALIST WITH 21ST CENTURY INTERNET VENTURE PARTNERS IN SAN FRANSISCO AND AUTHOR OF ARCHITECTS OF THE WEB (WWW.ARCHITECTSOFTHEWEB.COM). HE MAY HOLD POSITIONS IN SOME OF THE COMPANIES HE MENTIONS.

ADDITIONAL RESEARCH PROVIDED BY NISSA CRAWFORD.