Who Wins With Sponsored Content Advertising?

Six years ago, Maryland Smith marketing professor Bo "Bobby" Zhou came across a full-page story in the New York Times, detailing how populations in state-run women’s prisons have changed over the last 30 years. Toward the bottom of the page, Zhou noticed a familiar-looking photo of inmates in orange jumpsuits, prompting him to read the fine print at the end of the piece.

What Zhou thought was an article turned out to be sponsored content from Netflix, subtly pushing its original series, “Orange Is The New Black.” Though Zhou saw it in the New York Times' print edition, this new form of advertising is showing up across media platforms as all of those stories that almost blend in with the rest of the content on the news page of your favorite media outlet, says Zhou.

“It doesn’t typically push you as a consumer to directly buy something,” he says. “Instead, it tries to portray a very positive brand image of the underlying advertiser so that consumers will have a better appreciation for the brand.”

Zhou, almost duped by the Netflix ad, was intrigued – sparking his latest research, in the journal Management Science. Working with Prabirendra Chatterjee of the Cardiff Business School, he looked at competitive media platforms and when they should use sponsored content advertising or stick to more traditional formats, like banner ads. The researchers also looked at how consumers respond to these ads.

They generally don’t like them, says Zhou, but that doesn’t necessarily mean media outlets should abandon sponsored content ads. That’s because the media platform is a two-sided market, he says. Consumers only account for one side. The other very important side belongs to the advertisers – and they are enamored with the new ad format, he says.

“Even if consumers dislike this new ad format more, as long as advertisers strongly prefer this format over the traditional ad format, the platform might still choose to offer sponsored content ads,” Zhou says.

But there’s a catch that media outlets should seriously consider, he says: The research shows that even if advertisers strongly prefer the sponsored content ad format, if two competing media platforms are both offering this format, each could be earning less profit.

“This is a very counterintuitive result,” says Zhou. The advertisers are very enthusiastic about the new ad format and they are willing to pay a higher price to advertise this way. So why do competing platforms’ ad profits suffer when they both offer this advertising format?

It goes back to the two sides of the media business. “In order to attract more consumers so that they can appeal to advertisers willing to pay more for the new ad format, the media outlets need to show that they have lots of readers. That means they are often slashing or eliminating their subscription fees,” Zhou says. “The market outcome where both competing platforms were to offer the new ad format could lead to a profit reduction.”

The revenue lost from consumers’ subscriptions could potentially outweigh the revenue gained from advertisers paying a premium for the sponsored content.

So why offer them at all?

Advertisers really want them, and they are willing to pay more for the ads, says Zhou. They believe consumers are so fed up with traditional banner ads that advertisers are willing to invest more time and money into developing sponsored content ads, with high-quality writing, graphics and even videos. And for the most dominant media outlets – those who have no direct competition for subscribers – selling sponsored content at a premium to advertisers is a clear win.

But for others, the decision to offer sponsored content ads should be weighed carefully, says Zhou.

“Media platforms fiercely competing with other outlets for advertising dollars should be very cautious in evaluating the profitability of this new ad format,” says Zhou. “They have to take into account the competitive landscape before making any strategic decisions on which ad formats to adopt.”

But even in fiercely competitive media markets consumers and advertisers can still reap benefits from sponsored content ads.

“Essentially, when the media platforms adopt the new ad format, even though the profitability of the media platforms take a dive, the two sides of the market simultaneously benefit,” says Zhou. “Consumers can benefit with lower subscription fees and access to more content that they might enjoy or learn from. Advertisers like it because they feel like it’s a better way to engage consumers for a longer period of time.”

So which media outlets should offer sponsored content advertising?

“If you’re the leading media platform in your targeted market, then go all-in on sponsored content advertising; advertisers will be willing to pay a hefty premium in order to access those consumers,” says Zhou. “For media outlets in intense competition with other outlets, then take a good look at the competitors to see what kinds of ad contents they are offering.”

Read the full research article, “Sponsored Content Advertising in a Two-sided Market,” in Management Science.