The video shows two teenagers "Speed Dressing," timing themselves as they put on their clothes after undressing to "get away with it" in the girl's basement -- a message a Penney marketing manager has said the company would never condone. But the company has also gotten a lot of notice for the ad, which, as The Wall Street Journal points out , may curry favor with more urban teens, especially on the coasts. So, for a mass brand like Penney, they condemn the ad. But they, perhaps, reap the benefits of the branding in a measurable way -- hundreds of thousand saw the video before it was pulled, and it's now available on other sites. Ezrick, in the Naked Media segment, points out that neither Penney nor its ad agency, Saatchi and Saatchi, have yet completely explained how the ad got to be entered in the Cannes awards contest, nor exactly how people affiliated with them were involved in producing the video.

Both Ezrick and Byrne point out that Penney can't have it both ways: If they genuinely don't condone the video, they need to investigate and reveal how it came to be to the best of their knowledge. If they had something to do with it, they must say so, and, if need be, apologize honestly for any discomfort or harm they may have caused. But what they can't do is reap the benefits of the video going viral and also be upset while they gain brand awareness. You also can't, in a digital age, segment audiences as you could in a previous era, showing one ad to the coasts, say, and another to "Middle America." Perhaps digital media means everything is outed, eventually. And that means we have to be more honest, or at least more consistent.

Here’s an answer: The content becomes an upsell for something else. Hard to justify making millions of dollars of material as a marketing play, but it’s done very successfully in multiple venues. Bloomberg, for example, almost gives away its news product -- and did, literally do so for years -- to help sell its proprietary stock and bond market terminals and information. Reuters, now part of Thomson, also gets a minority of its budget from news, which it sells on its own but also feed its proprietary terminals. For mediabistro.com, the editorial product gets paid membership and attracts ads, but it also helps attract users to the big kahunas: jobs and classes.

What, though, if you produce entertainment, TV shows or movies and the like? How can you make money from a drama that’s cost millions to make, and you want to sell, if everyone gets illicit digital copies? That’s a tougher one to answer. Perhaps, if ads are embedded, the ads are paid for even if the program is copied and distributed free. If you give the programming away, or make it tremendously cheap, the counterfeiters can’t outsell you. You can take a brand you’ve created and launch ancillary “products,” as Disney’s done with the Miley Cyrus concert tours (no way to counterfeit a live concert). Add enough value to a the paid experience through a controlled distribution channel that people will want to pay for those additions.

Here’s another way to look at more by subtraction. David Pogue, a New York Times tech columnist who I find entertaining and quite informative, had a column last month about why a product can be a success even with acknowledged flaws. Referring to Apple’s Mac Air he wrote:

…When your laptop has the thickness and feel of a legal pad and starts up with the speed of a PalmPilot, it ceases to be a traditional laptop. It becomes something you whip open and shut for quick lookups, something you check while you're standing in line or at the airline counter, something you can use in places where hauling open a regular laptop (and waiting for it) would just be too much hassle.

It's the same lesson I learned when I reviewed the Flip "camcorder" a couple weeks ago: if you change the shape and concept of something enough, it ceases to be that thing. It becomes a new thing, or a descendant of that earlier thing. But it's no longer the original thing, and you can't judge it on the same yardstick.

Lesson learned: Form—the products attributes—can create the function. Thus an entrepreneur can break out of a well-defined category (camcorder, laptop, cell phone) by changing some key characteristics—weight, time to boot up, capabilities—even a dramatic new price point.

Does this insight provide any guidance for the media industry? Should the local newspaper continue trying to be a general interest publication even when online? Is it already something else, in which case it needs to be evaluated by a different metric (i.e., time spent, return visits) than what has been used in the past (i.e., hits or clicks or gross eyeballs or total page views)? Or, perhaps, should legacy media be creating new “things” based on the old? What is the media equivalent of the Mac Air or Flip camcorder: a product that is recognizable but, by changing—often removing—product attributes is used by consumers (and advertisers in this case) in new ways?

Experiments with short form videos—first popularized from the bottom up thanks to the YouTube platform—have now become mainstream with the traditional video programmers. Viacom purchased short film pioneer Atom Films in 2006. But most attention continues to be on finding outlets for conventional programming, such as NBC Universal/News Corp.’s Hulu.

If I had the answer I’d offer it (though probably not here—a guy’s got to feed his family, or in my case, start paying college tuition). But I think it is an area ripe for brainstorming and another round of informed trial and error.

Ready. Fire. Aim.

I say this as an outsider. I don’t have access to the crunched numbers and five year outlooks no doubt ginned up by the Microsoft investment bankers. And, to be sure, many business pundits have a similar pat justification, all along the lines that both Microsoft and Yahoo have persistently tried to best Google but failed. “No one can compete with Google on their own anymore,” says Jon Miller the former chairman and chief executive of AOL. “There has to be consolidation among the major players.

Suddenly Microsoft, just a few years ago the bad boy of the computer galaxy, is—what—the white knight? Mark Read, director of strategy for the WPP Group, which owns ad agencies like JWT and Ogilvy & Mather, opined, “It is good for investment. It is good for competition.”

A combined Microsoft and Yahoo, notes The New York Times, would beat Google in Web traffic and come closer in ad revenues. Most importantly, the pair would give Google a greater challenge as it tried to enter display advertising, because Yahoo has the largest share of that market.

But wait a second. What does a merger with Yahoo really do for Microsoft—to the tune of a cool $44 billion? Lets look at some numbers.

Google has grown dramatically, going from zero to $17 billion in revenue. It is highly profitable, a bit (well, $200 million) over $4 billion in 2007. Very impressive. But Microsoft had almost 3.5 times that revenue -- $58 billion—and four times the profit-- $17 billion.

So what does Yahoo bring to the party? Not even $7 billion in revenue and a piddling $660 million in profit. It brings a search engine that’s technically pretty good. But Microsoft already has a comparable piece of technology. Yes, most of its revenue is derived form online advertising, nearly twice that of Microsoft.

And what’s the synergy of Microhoo? (or Yahsoft?). Not much that is obvious. Microsoft forecasts at least $1 billion in annual cost savings for the merged entity, from synergies in areas such as combining engineering talent.

Sure, a merger of this magnitude—pegged to cost savings rather than market opportunities-- would make sense if Microsoft was a struggling enterprise. It's not -- and a 29% profit margin at that. It has $21 billion in cash and short term investments. Assuming it actually realized the savings—so what? Microsoft already has the resources to compete with Google—if it is possible at all.

Then what does a Mircohoo end up with? Despite trying, Microsoft has not come up with a strategy to erode Google’s dominance in search and online advertising. Its share of the search market ended last year at 9.8%, down from 12% in mid-2006. Yahoo does better, but fell from an estimated 28.8% mid-2006 to 22.9% last year.

Now, let’s see. We take Microsoft’s failed strategy and add it to Yahoo’s failed strategy... and the best they can come up with is some savings effect, as the combined entity slides further behind.

I understand that the hope is that the two combined would bulk up to a third of the search market—perhaps in aggregate enough to prime the pump to attract more advertisers. But Yahoo alone had nearly a third of the search business in 2005 and that did not keep it from sliding downhill since then.

The combination of Time Warner with AOL in 2001 has been a disaster. However, it was primarily the outlandish $112 billion price tag, negotiated at the peak of the Internet bubble, that made it ridiculous. The notion of an old time content company wanting to modernize by associating with the new media start-up had some strategic sense, even if the conflicting cultures and stratospheric valuation doomed the combination. I could understand the potential synergies, even if not to the degree that could justify the cost.

I can also understand Microsoft’s necessity to segue from the operating system and packaged software business to a greater reliance on Internet-derived revenue. It knows it needs to modify its current business model. But I can think of better uses of $44 billion to get there. Glad I sold my Microsoft stock last year.

Local advertising traditionally has accounted for about 85% of total revenue for newspapers in larger market, even higher for small market newspapers. Local TV stations receive a far higher proportion of their revenue from spot national advertising, while radio stations have tended to be in between, though in most case closer to newspapers than TV. The primary local competitor for newspapers has historically been directories (e.g., Yellow Pages) and direct mail. Increasingly, cable has been able to siphon off local dollars with the capability to insert advertisements down to the neighborhood level.

What must be most unnerving to newspaper publishers and, to a lesser extent other local media players, is that pure play Web sites now have the largest share of local on-line advertising revenue—43.7% by the reckoning of Borrell Associates.

How can this be? Didn’t the publishers take solace in the fact that their local papers had a built in advantage over the upstarts thanks to their identification with the local market? And that all-critical brand equity?

It is becoming evident that the value of ad placement based on search terms, Zip code or Internet address proves more effective for the local advertiser even if the page viewed does not directly contain information that is congruent with the location of the user. That is, the value of the local newspaper or radio station has been that the advertiser had a high degree of confidence that anyone listening to that station or reading that paper was in their local trading area. But online the advertiser may not only be assured that the ad is placed in view of an individual within their target trading area, but may also have specific demographic or other characteristics desirable for that advertiser. Not to mention the added delight of knowing when an ad may have been seen and responded to in the form of a click or more.

Of course, this is true for the online site of any local medium. Too often, however, it seems that while the publisher’s sales force was working on convincing the paper’s current advertisers to try the online version, the new players had no such blinders. They were marketing to anyone, which often meant new service providers and merchants who had not been print advertisers: smaller in size but far greater in number. A version of the long tail effect. And that is where much of the growth is coming from. It’s not just old advertisers in new bottles.

Of course, we will know in the long run, when some media historian looks back on this time from 20 years hence. But that doesn’t help today’s decision makers. That is why the research of University of Chicago economist Matthew Gentzkow published earlier this year in The American Economic Review is so helpful.

In this highly data driven paper with the typically academic title, “Valuing New Goods in a Model with Complementarity: Online Newspapers,”, Gentzkow blends consumer data from the Washington, DC market with newspaper operating results to address three questions: What is the relationship between print and online versions on 1) the demand for either diversion, 2) on the welfare of consumers, and, crucially, 3) on the impact of charging consumers for the online product?

With 30 pages of assumptions, explanation and calculations, Gentzkow makes a well substantiated finding that, The Washington Post would have been better off charging a modest sum for its online version (on the order of $6.00/month) until about 2004. After that, however, the growth in online advertising expenditures crossed over to affirm that it is significantly more profitable to set a zero price for the online edition when one factors in even a small transaction cost for online payments. He suggests that his findings are robust enough that they would likely apply to other big city newspapers.

Along the way, Gentzkow upends the early assumption that the print and online versions of a newspaper were complements. Applying a more sophisticated demographic model than had been used in the past, which simply looked at newspaper readers and online readers, Gentzkow concludes that the substitution effect is “nonnegligible." He does add that ”it is “small, however, relative to some earlier predictions.” In other words, real but not likely “to threaten the survival of print media,” at least right now.

Gentzkow further quantifies the “consumer welfare benefit” created by having a zero consumer price for online newspapers, which he put at $45 million annually for The Washington Post’s market. For the 2000-2003 period that came at the expense of Washington Post Co. stockholders, as he calculated it lost money by giving away the online edition when it could have made a profit by charging for it. (Among the factors here is that, as substitute products, by charging for online, some print subscribers would have continued with their subscriptions instead of switching to the online offering). Starting in 2004, however, the Post was more profitable with the free online version that it would have been with an online use charge

Having seen considerable discussion about whether The Wall Street Journal would be better off making its online version free, as the The New York Times has done Gentzkow’s approach is another data point (a rather large one at that) to reinforce the advertising supported model, for mass market newspapers, at least. There are numerous instances, however, where a consumer-paid model will still be needed. In the magazine business, for example, advertising revenue for many of the mass audience magazines, such as People or TV Guide, can be 50% or more of total revenue. But there are many niche publications, such as The Nation or Weekly Standard, that are highly dependent on subscriptions for the bulk their revenue. It is likely to be the same for niche online sites.

Yesterday he declared that "the sky's-the-limit profits from traditional broadcast TV are over….Free-to-air television faces a lot of challenges, just from the sheer fragmentation of the audience.” Overall he characterized broadcast television as a "highly challenged industry in America."

This may actually be on the minds of some of the striking Writers Guild of America members. The Wall Street Journal reported than some of the writers who work for the soap operas are resigning from the union and going back to work. The audiences for the soaps have been sinking for years. “Writers and producers in the genre fear that by the time the strike finishes, their audiences won't return.”

On Monday Murdoch publicly admitted that he expected the online version of The Wall Street Journal will soon be free. News Corp. will likely close the deal to acquire Dow Jones next month. "We are studying it and we expect to make that free, and instead of having one million [subscribers], having at least 10 million to 15 million in every corner of the earth, keeping up-to-date minute by minute with all business and economic news from around the world," he told an audience in Australia.

Such comments give some insights in News Corporation's strategy and business model. Clearly, advertising will play a larger role in the business model for online content. On the other hand, he is hedging his bets on advertising from broadcasting. First, he advocates making television productions very high quality, so they can be sold to the global market “and then be brought back to America--or to anywhere in the world, for that matter --and be sold as DVDs.”

So, television becomes more consumer financed, while online becomes the prime advertiser-supported medium. At least in Murdoch’s view. How will this be affected, if at all, should DVD’s be supplanted by online delivery, such as by Netflix or Amazon’s Unbox or iTunes video service? Actually, News Corp has a bet there, with Hulu.com, its ad-supported online video venture with NBC Universal.

News Corp. has developed a “portfolio strategy”: When the crystal ball is cloudy, invest in a range of possibilities. Not all need to be a success. Two or three big ones will do.

What Google is apparently working on is not the hardware per se, but an open operating system and applications that play to its strengths in search, mapping, YouTube and, of course, targeted advertising. Various accounts has it speaking with Verizon Wireless, Sprint and T-Mobile in the U.S., possibly others globally.

The first question anyone following this thread would ask is why would any of these players consider opening up their tightly controlled phones? Right now, for example, Verizon customers who want GPS directions pay $10/month or $3.00 daily for data that cost Verizon almost nothing to provide. Other mobile phone data services bring in anywhere from $5 to $45 month. Why would Verizon agree to an open system that would blow open this cash cow?

The answer lies in the same metrics that lead The New York Times to forgo $49 from 220,000 subscribers to its Times Select service. And it is the same calculus that my colleague here Dorian Benkoil (and various commenters) put together for scenarios that might make it more profitable for The Wall Street Journal to give away its online product and forego the $60 million, plus or minus, in subscription revenue. That is, the potential for advertising revenue is greater than the current and projected revenue from the walled cell phone garden.

What are the stakes? In 2006, an estimated $301 million was spent on ads for mobile phone in the U.S. One research firm guesses that should increase to $2.12 billion in 2011. (How can they predict to two decimal places four years from now? Someday I will examine a bunch of these past forecasts and see how they line up with what really happened). But this projection likely assumes that the current cell phone industry model prevails. If a more open network evolved, with advertising dollars available to replace lost subscription revenue, that $2.1 billion would be higher. How much? Ah, there’s the rub.

What I am suggesting here is some credibility to the notion that the carriers, like much of the media industry, might do better from an advertising model than from user revenue for their data services. The most likely carriers to be amenable to a deal with Google would be number three Sprint-Nextel and number four T-Mobile. Word is that the latter may be closest to a deal. But Verizon could want to get in on the act as well to counter AT&T’s excluive with Apple. In any event, Google would likely need to split revenue more generously with the carriers than it does in the media world because the carriers are in a much stronger bargaining position.

If Google does get its foot (or whatever) in the mobile phone world, the impact could be every bit as great as has been its impact in the Web universe. It might force Apple to open up the iPhone even more than it has planned to, as much to accommodate its current partner, AT&T, than out of true belief.

I’m not ready to buy Google stock at $700—but then, I thought it was rich when its IPO priced it at about $85, so don’t take advise on this from me. Still, if they pull this off, $700 may look cheap by 2011.

What's happening to the industry is monopolistic advantages created either by regulation or severe limits on distribution are being shaken up by the new distribution platforms. If someone charges too much, a lot of the audience will get the music or programming for free – laws be damned. Marc Cuban quipped at a conference that he doesn't bother paying to put copy protection on DVDs of movies he funds that any six year old can crack. TiVo, YouTube, BitTorrent, Kazaa – the names are legion, and will be endless. iTunes was perceived as offering a fair price and great model, until NBC said recently they wanted flexible pricing for differentiation.

We're often taught that competition is great, but in fact capitalism can't function with perfect competition. If every piece of content, every ad spot, every song, every product is up for auction, and the disruptive technology of the Web flattens all profits, margins will be cut razor-thin, ad space become commoditized, and the ad industry loses -- except for those few breakout creative pieces that people will really be willing to pay for to show appreciation, or because that creative distinction is a differentiator that allows charging of a higher price. So much today is up for a "pay-what-you-want" or auction model. Auctions on eBay and competitors, keywords on Google and others, brokers who sell ad remnant inventory and the like.

What Radiohead, a highly acclaimed if not superstar band, is doing is not only using the technology to reach out to their core, not only using the new technologies to end-run the recording industry, but also working on new models for making music and making money. It's been pointed out that we're in a new music industry model, one in which, rather than making money off CDs, artists make money through add-ons and concerts. Concerts can take in hundreds of millions of dollars at $100 per ticket. Radiohead's site, through a very simple interface, says "It's up to you" what to pay, and later get a download code. They're offering the music for free, but offering upsells for more: a package with the CDs in a special box, another disc of songs, two vinyl records, lyrics, artwork and so on costs 40 pounds (about $80) that will be available in December. The latest Prince concert, gave away CDs, and took considerable flak for giving yet more away as a newspaper insert.

Radiohead's site crashed last week after they couldn't handle the demand. Their initiative is seen primarily as promotion. Within 36 hours after the announcement, Radiohead had reached #3 on Billboard's "Buzz 100" list of most blogged bands. But it's more: The band gets names and contact info of people who subscribe, all of which have a lifetime value. And they get marketing information: How much will fans actually pay for an album? And releasing the album this way doesn't preclude negotiating a conventional record deal later; that deal could be more lucrative once they've proven the music's popularity beforehand. (CDs still account for about 80 percent of music sales.)

How long, too, before sites like Radiohead's are seen as place to show ads? And there we begin to create yet another long tail disruption. If everyone who can aggregate an audience, especially an audience with a specific bent or demographic profile, begins to serve ads, begins to offer itself to advertisers, we'll start to see all these niche sites (perhaps in Radiohead's case it should be called a "mass niche") that get ad dollars in addition to all the other revenue streams. We'll also see if marketing budgets can sustain so much mainstream media that appeals to less targeted mass audiences.

Some links:
Radiohead Says: Pay What You Want (Time mag)
Radiohead letting fans set the price for new album (Canpress)
A record price for a Radiohead album: $0 (LA Times)

A difference, though, is the passion the people have for their topic. What wire service journalist, for example, is going to devote himself to a niche area of health in the same way that someone desperately interested in it will? For health, the number of Passionistas is 1.8 million, Yahoo's folks said. And marketers want to go to them, directly, because of the passion they have and inspire in their readers.

Now, I know, they may not be professional journalists. But on a blog, they'll be called out by the community for inaccuracy. If they're not objective that's usually, over time, pretty obvious. Many countries' –first-world countries – journalists practice journalism on their front pages with a bias (France's Liberation is unabashedly left, Le Figaro right). So, it's not like passion or a particular bent disqualify someone from purveying legitimate information or even journalistic probity. (And there's no such thing as objectivity. Fairness, yes. Objectivity? We can try.)

I know what I'm writing here is heretical to a lot of people who consider themselves journalists. But those in the managerial ranks had better acknowledge the threat to not just their classified ads from Craigslist, their display and brand advertising from Google and YouTube, but also to their marketing dollars from people with a journalistic ethos and an incredible passion for a topic that may jibe well with a marketer's interests. Which is a commercial rationale – and perhaps a journalistic one – to do something Jeff Jarvis and others have suggested: bringing those bloggers into the fold, letting them tap into their communities through the portal provided by the mainstream news organization.

Calculated from the Times’ press release , TimesSelect had about 227,000 subscribers beyond its print base. This was generating an estimated $10 million annually. By online subscription standards, both are substantial numbers (though dwarfed by The Wall Street Journal’s base of one million online subscribers).

The Times’ release clearly points to the strategic basis for its decision: It could do better than $10 million in advertising by opening up its columnists and archives to a larger audience. No subtlety here: Denise Warren, chief advertising officer expected that “with the removal of the pay wall… Advertisers on the site can expect to see an unprecedented number of Times readers interacting with their brands." American Express is the first “sponsor” of the newly opened site.

TimesSelect was a bit controversial from the start, and not just with consumers. Many of its columnists, who, after all, get both ego satisfaction and presumably greater impact with a bigger audience, were unhappy being sequestered behind the pay wall.

Although the venerable Times yielding to the advertising-over-consumer payment model seems to add further credence to the “information wants to be free” trend, I have gotten wind of a new venture that aims to succeed as a user payment model for content providers where micropayments has failed. I will supply more details when available.