March 26, 2005

Will Advertising Just Please Die?

I'm not planning on posting too much today—at least that's the plan—because I have to sack through the new three-gazillion page biography of John Kenneth Galbraith so that I can review it, get that over with, and never have to worry about it again. As they say in Richard III, "Cursed be the heart that had the heart to do it!" Or something. Anyway, back on task... I have a short attention span, so I was clicking around the New Yorker's site a few minutes ago, and found a fun article by Ken Auletta on the decline of advertising. Do read.

But I wonder… at least within some industries, like the pharmaceutical industry, critics have blamed the lack of any real drug innovation on the rise of advertising. Something like, of the 78 drugs the FDA approved in 2002, only a handful had new active ingredients, and only a smaller handful were real improvements over older drugs. The rest were just variations on existing themes. But of course, it doesn't matter so long as the big drug companies can market the shit out of their "me-too" drugs. Profits will still rise, even without innovation, so what do they care?

But let's say Auletta's right and eventually advertising will reach a point of seriously diminishing returns. It's just too hard for a company to distinguish itself these days, what with billions of TV channels, media over-saturation, the ability of consumers to enjoy media without commercials (TiVo, .mp3 pirating, etc.) (There's a question of whether advertisers will be able to track consumers' internet habits and win them over that way, but Auletta quotes Yahoo's chief of sales dashing this hope a bit. Besides, eventually you'd still get over-saturation.)

Anyway, if that's all true, perhaps a day will come when real innovation is clearly the best way to capture the market and make profits—since you can only fight to parity, at best, on the marketing front—and hence R&D spending will rise once more. Happy thought! Alternatively, though, it could be the case that companies will continue to delude themselves into thinking that they can win the great advertising rat race, and so they all pour even more money into ads, even though that's not money well spent (i.e. they would be better off allocating resources to R&D). The answer, then, is that firms are irrational in some respects and hence, more government R&D spending is necessary. Bah. There are probably clever economic models that get at all this, but I don't know where to get them, or how to use them. Back to Galbraith...
-- Brad Plumer 5:00 PM || ||