You may have missed it, but advertising just died. At least, some very credible sources have pronounced the industry dead. And this, as you can imagine, has a lot of people upset.

It's no surprise that in a recession companies are cutting their ad budgets. It's a variable cost so easy to target quickly. If your growth plans just flat-lined (flat IS the new up) then your marketing communication budgets just went the same way. But that's business as usual. The real news is the argument that this is more than just a cyclical change in the business, this is an existential issue. According to some, advertising just doesn't work anymore.

It's widely accepted that advertising is changing format. Internet and search advertising has been eating away at more traditional media for some time. Newspapers are essentially (and practically) going out of business - witness the Hearst group shutting down the Seattle Post-Intelligencer or the Sun-Times Media group filing for bankruptcy. Bob Garfield from Advertising Age (hardly a magazine with no stake in the current model) makes a strong argument for the transformation of the industry.

The conclusions he draws:

Newspapers: dead
Magazines: dead

“Chicken Little, don your hardhat. Nudged by recession, doom has arrived”

Even if Bob does a great job articulating the transformation it's not off the scale on the controversy-o-meter. You could almost argue that this view of transformation has become conventional wisdom. But this month, there were worse prognostications to come.

Prof. Eric Clemons from Wharton really put the cat amongst the pigeons when he made the case for extinction, not transformation.

“The problem is not the medium, the problem is the message, and the fact that it is not trusted, not wanted, and not needed,”

Basically, Eric makes the argument that arguing that this is a transformation in delivery is not the point. The point is that nobody wants the package, and nobody is paying attention any more. Of course, this change doesn't happen overnight. Amazon took years to kill the retail book industry; online sales didn't polish off Circuit City for a decade. But once the change is set in motion, there isn't a lot anyone can do to stop it. Inertia in business, entrenched skills and practices all contribute to change being slower than pure business logic might dictate but this is a bandwagon that is gathering steam. The Economist piles on:

“…every business needs revenues—and advertising, it transpires, is not going to provide enough”

in reference to the new dot-com businesses hoping to monetize eyeballs for riches. Eric even goes so far as to disrespect the mighty search engine, describing search engine advertising as "misdirection". Heresy! You mean that search engine optimization is an industry with no future? Search has been the one big success story in internet advertising - really the only business to make any money.

If advertising is getting less and less effective, companies will be forced to face a reality. Not a new reality, but one that has been neatly - if rather inefficiently - bypassed by resorting to comfortable historical choices. Advertising's decline in efficiency drives the relative efficiency of word of mouth, already a source of major advantage for leading firms significantly higher.

We already knew this. Companies like Amazon, Zappos and Starbucks - even Google ironically - grew primarily through word of mouth. Stories of meteoric internet success were usually stories of word of mouth, not examples of companies propelling themselves to success though superbowl advertising (the inverse was usually true). But the status quo persisted. It's easy to point to change aversion, career skills protection as the root cause. But the real change of course was the internet finally giving voice to customers as both an accelerant to great businesses and a compelling alternative to company brand messaging. You no longer own your brand. Your customers own your brand and they are exercising their ownership in full view.

Now some interesting outcomes connect NPS with firms’ word of mouth efforts. NPS really represents word of mouth capacity.

Capacity (economics), the point of production at which a firm or industry's average (or "per-unit") costs begin to rise, usually because some factor is fixed (often capital or land).

Exceed your word of mouth capacity as a business, and your growth needs to be driven by less efficient models - mainly advertising. It's hard to quantify this effect, but the extremes are easy to understand. A business with an NPS of zero has zero word of mouth capacity. The only way it can generate demand is through traditional advertising methods - that represents a very significant P&L disadvantage relative to competitors in its industry with higher NPS. We know that loyalty leaders - in a specific industry - have lower costs and this is one of the sources of that competitive advantage. A company with an NPS of 70% has such a significant capacity that - if they can mobilize it - they won't need advertising at all. Hence, Amazon.

But relative advantage in an industry is not the entire story. We know that some industries are characterized by low NPS - even amongst the best firms. Industries with low NPS winners are likely to be at a profitability disadvantage relative to firms who are competing in industries with high NPS. We would expect high margin industries to have high NPS on average.

There is also a strong argument to be made that higher nominal NPS has a disproportionate effect on word of mouth and demand generation efficiency. In other words, efficiency is not a linear progression as NPS rises. This fits with our intuitive sense of hyper growth associated with NPS leaders.

What drives this nonlinearity? One factor seems to be that promoters in high NPS companies seem to actually advocate for that brand more than promoters in low NPS companies. Vince Nowinski has some data to support this; check out his whitepaper. Why might that be the case? In part it could be social - people enjoy promoting products amongst other positive promoters. The opposite effect could hold true. If you had a great experience with a firm, but everyone around you is negative, you may choose not to advocate, as your sense of personal risk has just gone up. If misery loves company, apparently advocacy does as well.

Oh and remember that traditional advertising industry? Well, it turns out that the efficiency of traditional advertising may, in fact, be tied to NPS. High NPS companies actually get a lift because their advertising message is more likely to be received by promoters, of whom there are more. Once again, this makes intuitive sense. If you are positively predisposed to a brand, you are more likely to be receptive to that brand's message.

Will firms embrace this shift? Necessity is the mother of invention. Either firms evolve, or new entrants will finish them off with a superior, high NPS business model. There seems a lot of that going around right now.