This story was written by Jim Spanfeller.
Jim Spanfeller is the outgoing president and CEO of Forbes.com. He is also treasurer of the Online Publishers Association and chairman emeritus of the Interactive Advertising Bureau.
How is ad pricing different online and offline? Fundamentally, it isnt.
At this point, many internet sellers and buyers are reaching for the keyboard to declare this statement heresy. The web is trackable, they will say. It is bought on a per-impression basis, and it is clickable. All true.
They will also want to say that unlike with offline media, there is no scarcity online that there are countless unsold impressions that are going to waste and that we now have the technology to at least achieve some value around this inventory. But while that’s a commonly held theory, it isn’t completely accurate. The only medium in recent history that has had true advertising scarcity is network television, and, with this years upfront, one might suggest that even this is no longer true. In every other case there has been either unlimited inventory available (magazines and newspapers) or limits that have rarely, if ever, been reached (radio, cable and spot TV).
The web has advantages in providing a platform for advertisers, but the notion that it is some sort of new animal entirely has grown out of a variety of misconceptions that have worked to radically slow the eventual migration of ever-larger advertising budgets online. Here’s the way to dig ourselves out of that hole.
A publisher can and should price their inventory at levels that will meet the market expectations and drive their business model. What they should not do is allow some sort of invisible hand (or should I say hands) to price their inventory against a backdrop of objectives that can and often does change at a moments notice. This practice has fundamentally driven pricing down across the web and, perhaps more importantly, changed the success metrics from ones based on demand creation to ones driven by demand fulfillment.
A big part of the problem is this notion of remnant ad units. Remnant, as most folks know, has been around for a long time in analogue media. Broadly, it is the idea that certain inventory, because of position or proximity to extinction, is more or less valuable then other units. The airplane industry (filling unsold seats with low fares close to the time of departure to drive revenue yield) helped pioneer the idea, but you also see it with ads in the “back of the book” of magazines or on late-night TV.
Until recently, we had seen the growing use of ad networks to liquidate the unsold remnant inventory that was result of people spending more and more time online while the ad-dollar migration from offline failed to keep pace. The IAB (where I’m chairman emeritus) and Bain Consulting did a study on this about a year ago that showed a huge increase in the percentage of inventory sold via ad networks on a sample of seven member sites (5% to 30% increase in just one year). What this study also showed, though, was the incredibly low amount of revenue that these impressions garnered as the pricing for inventory sold in this manner was outlandishly low (less than 2% of total ad revenue was generated by these impressions and the pricing from ad networks has fallen even further since this study was done).
The fact that were relying on methods developed by an industry (the airline business) that has to date not made any money in the aggregate is scary to say the least. Consumers arent dumb; They understand that if they wait, they can get lower fares, and, as such, the airlines have been forced to operate on razor-thin margins after spending years educating their consumer base to act in a way that was and is debilitatin to those companies’ bottom lines. And media buyers spend a lot more time and energy trying to get great buys for their clients than consumers do shopping for cheaper airline tickets.
Countless research has shown that almost all positions in magazines and newspapers have similar impact with readers. Print publishers have aggressively argued this for yearsfor the most part, successfully. They have not backed away from this even in the current brutal media marketplace. On television, advertisers sometimes pay a premium but not so much for time of day as for size of audience. Massing huge numbers of people at one time, whether it’s for a popular prime-time drama or a mid-afternoon weekend sporting event, has great value.
On the web, ads generally perform the same regardless of when or where they are viewed. Sure, some inventory is better than others, but that is due mostly to the audience it attracts and the environment it provides (impressions in email applications for teenagers, for example, are not as valuable as contextual ads in high-value editorial products viewed by affluent adults).
Smart buyers will debate these points because they hope to negotiate lower prices. Good for themthat is their job. But smart sellers should know this and not allow themselves to be out-negotiated as they are now in almost every instance. Some buyers will point to activation levels (clicks, signups or outright sales) as indicators of the relative worth of specific inventory. This is completely understandable as a guideline. But giving it too much weight is problematic. For example, we now know that 16% of web users generate 80% of clicks and that this 16% represents the lower income and education segments of the total user base. Do we really want to be held accountable as an industry by metrics generated by the lowest common denominator and a minority of users to boot? I cant think of too many successful models using these types of metrics.
These metrics drive the conversation and the core objectives of online advertising away from demand creation (which is basically the definition of advertising) to demand fulfillment or, put another way, direct response. There is nothing wrong with direct response; every other medium has it, and the industry drives huge value for both marketers and media. But direct response is not advertising—it is something different. By following the flawed theories outlined above, we have allowed the internet to become a demand-fulfillment medium almost exclusively, to our detriment.
In buying into the notion of remnant, publishers have vastly reduced their pricing power. They are training the buying community to fixate on the wrong metrics, and for very little near-term return. At the end of the day, the inventory that is now getting sold as remnant, mostly through horizontal ad networks, is generating so little revenue that it is inconsequential to the bottom line of the business. Others have worked the math on this including a great piece by David Koretz from Blue Tie on Mediapost. And recently, the OPA (where I serve as treasurer) came out with research from Dynamic Logic that shows the far greater value in buying ad programs directly from the publisher.
And then, of course, there is the problem of data drain. By opening up their inventory to outside third parties, publishers are helping to expose vast amounts of information about their user base to a very wide and growing sub industry without the users permission or, for the most part, even knowledge. I do not think anyone would suggest that this is the best way to treat your most important constituency, and it is certainly not a great way to run your business. Givin would-be competitors a better understanding of your user base than perhaps even you have is not a great way to maintain the best value in your selling proposition.
When all is said and done, there really is no remnant inventory on the web, just as there is little to no real remnant inventory elsewhere. We should price online inventory similarly to how we price offline units. To think otherwise is to tragically slow the growth of the industry.
By Jim Spanfeller