Ad spending is coming back - should we worry that it seems to have left a little something behind?
If you're in the online advertising business, you've finally seen the headline you've been waiting for: "Online Advertising Surges." And the news looks good everywhere you turn. According to TechCrunch, industry bellwethers AOL, Google, Microsoft and Yahoo were up by a total of 10.2 percent in the fourth quarter of 2009, a significant achievement because display advertising showed a comeback - and was actually ahead of the general economy.
In the first quarter of 2010, Yahoo saw a 24 percent jump in guaranteed display, the splashy premium advertising units that some of the more established sites have been focusing on recently. In the year since the Online Publishers Association launched its high-priced, super-sized creative units with its membership, more than 400 advertisers have signed on, according to Pam Horan, the organization's president. The New York Times Co. saw first-quarter online ad revenue in its News Media Group jump by 11.2 percent to $46.9 million, "mainly due to strong growth in national display advertising," according to its earnings release.
CPMs appear to be up as well. According to the Rubicon Project's "Rubicon 20" index of top sites, rates are up 25 percent in the last year; Adify says the CPM of its food vertical grew by 179 percent between the first quarter of 2009 and Q1 2010; sports was up by 121 percent.
So, the subhead to the "Online Advertising Surges" story should be that the rising tide of the advertising economy is lifting all boats, from ad technologists to old-media companies. And to some extent, it is.
But dive a little deeper, and you'll see an alternative reality that's not so pleasant. Overall, Yahoo's revenues were up by only 1 percent in Q1; the jump in online ad revenue at the Times wasn't nearly enough to offset declines in print ad revenue. Those new OPA ad units? They garner CPMs significantly higher than the marketplace, but, per comScore, represent only .1 percent (take note: that's point one) of online inventory, even as they continue to gain traction.
The spikes in pricing for food and sports verticals detailed by Adify resulted in CPMs that jumped by $4 (to $7.30). And then there's comScore AdMetrix's first-quarter 2010 ad report. It noted online display rose to $2.7 billion for the quarter and that 15 percent more ads were served than a year earlier. But here's the punchline: the average CPM was only $2.48. (comScore says the number is up from last year, but won't say by how much, since its ad spend data was in beta at the time.)
Advertisers must be happy to pay such low rates, but it doesn't take a Ph.D. in mathematics to figure out that even if average CPMs doubled, most sites might be destined for the dust heap of failed dot-coms.
The rampant inefficiency of online advertising is still very much with us as well, as the industry continues to cough up services to make things simpler - which wind up making them more complex and expensive. The industry is crammed with "solutions" from demand-side platforms, third-party data providers, and so on. "Everyone is competing over lots of non-impression-based expenses in the same $200,000 buy. This makes it harder to operate at margin," says Steve Goldberg, a long-time online ad consultant, who has also taught business economics at the University of Southern California's Marshall School of Business.
"None of these solutions are wrong," adds Sloan Broderick, managing partner of MediaCom Interaction. "It's our job to figure out the right suite of them to combine."
'Looking for a Normalcy'
The discussion over how to make the market more efficient typifies the industry these days. Everyone agrees there's a problem, but each vantage point brings its own solution along with it. Yes, despite increases in ad spending, the online ad business is still in turmoil. "We're all looking for a normalcy - that's a very carefully chosen word - a normalcy of what pricing should be," says Perianne Grignon, CMO and vice president of media strategy for demand-side platform XplusOne. In fact, the industry still appears to be cleaved in two factions over this issue, and many more.
On the one hand, there are companies offering technological solutions to making the business more profitable. Usually backed by venture capital, these companies mainly focus on sites - or inventory - that is out of the top tier, seeing improved targeting that can reach audiences at scale, as the industry's solution. Joe Apprendi, CEO of Collective Media, describes this approach as "using data as a driver."
On the other, are prominent publishers. They think the online ad market - particularly their own businesses - is better served by embracing the advertising model as it has always been, if tweaked for the digital world. Just as it is with Super Bowl advertising, they believe in showcase brand advertising that can't be duplicated across the Internet.
The poster child for this approach may well be the OPA's super-sized ad units; they include the "pushdown," a gargantuan 970 x 418 that takes up almost a full page before rolling up to the top of the page. The idea, according to Horan, is "allowing brand marketers to deliver these messages directly on [publisher pages]." This approach is about advertising art rather than science, and it's an opportunity that only a small fraction of the market seems to be chasing - or may be able to chase.
So, the battle continues, but in a rejuvenated ad market, is it any clearer what the right approach is?
Those focused on audience-driven ad sales see the market heading in their direction and away from direct relationships with publishers. "It's going 50-50, fast," says Apprendi. His company reports a 17 percent decline in the last three years of targeting by context, while "data-driven demographic targeting" and "behavioral targeting" continue to be the most popular strategies. "The money is going toward the exchange and away from the premium," agrees Dax Hamman, vice president of display ads at iCrossing, which was just bought by Hearst.
Those pushing audience-driven solutions don't ignore the allure of premium inventory and non-click-through-related engagement metrics. Collective, for one, is actively touting a 16 percent jump in time spent on display ads in its networks. The message is that, with the right technology and message, any publisher can drive interest in the ads they run. "The problem is a lot of that custom creative isn't really scalable," Apprendi explains.
Of course, claims from one side are leading to counterclaims from the other. A recent OPA study said the time people spend on display ads within networks has no effect on purchase intent. This, in turn, caused Russ Fradin, CEO of Adify, to write an editorial for Ad Age questioning whether "choosing between premium - as the OPA defines it - and ad networks [is] even the right debate to have." And so it goes.
The Adify Q1 2010 data shows CPM increases (or what it calls eCPM increases) across five of 11 content verticals, and a total increase in CPM to $5.24 - just under 10 percent from last year's $4.78. But four of the 11 - travel, news, moms and parents, and business - have declined since Q1 2009, even as the overall market went up. Adify speculates travel may have been hurt by marketers' experimentation with mobile, but doesn't explain the other declines.
But the incursion of mobile underscores the most logical explanation for continuing pressure on CPMs: that despite all the effort at moving them upward, there's too much inventory constantly being dumped onto the marketplace for that to happen. "Content keeps expanding, and ad dollars are not necessarily expanding," says Greg Smith, COO North America of WPP Group's Neo@Ogilvy. Smith thinks the solution will come from another source: consumers' wallets, as they learn to pay for content.
But getting people to pay for content is a separate initiative. For now, the market is still fixated on making the long tail monetize better. But while some CPMs are undeniably up, it's still unclear how it's going overall, particularly since numbers from Adify, comScore and Rubicon have almost no historical context - all of them started tracking this data last year. Their reports of CPM gains may just reflect a rebounding economy, nothing more.
Whatever the case, some think the bid to make CPMs for non-premium inventory rise is a fool's errand. Goldberg thinks the real opportunity is in the top 15 percent or so of inventory. Lifting its CPMs by a relatively small percentage, he says, would bring the same amount of money into the marketplace as raising the CPMs of remnant inventory by much more, not to mention the margins are better. "We have seen examples of 20 percent lift in premium many times over the last decade with new formats or simple inventory management. But we have seen no evidence of 50 percent uplift in remnant," he says. Eric Johnson, executive vice president of multimedia sales for ESPN, agrees the market should shift its perspective. "It feels like the industry is having the exact wrong conversation," he says. ESPN is one of a small group of major publishers that sells all its inventory directly to advertisers.
A Scarcity of Scarcity
Is it really easier to lift rates for premium and super-premium inventory? Well, those categories can make one argument that remnant will never be able to: that there's not much of it. Of course, it's the same argument made by network TV sales execs, and, in TV, it usually works. The networks closed their upfront season in June with CPM increases of as much as 10 percent.
The New York Times, like ESPN, doesn't see the point of engaging third parties to sell inventory, either. As for its promises to increase CPMs, Todd Haskell, who heads the Times digital sales, says: "The problem is the rates are so horrifically low to begin with, it doesn't make sense for us."
Maximizing the value of its premium pages is at the core of Yahoo's decision in June to offer advertisers an exclusive, premium position on its formerly ad-free log-in page. Mitch Spolan, vice president of North American field sales for Yahoo, explains, "It's really hard to replicate this. There's only one third-largest property on Yahoo." Just as with network TV, the property isn't what it once was, but Spolan says it's capable of reaching one in 10 Americans in a day.
There's circumstantial evidence, that, for some, it can pay to push premium, but for sites whose legacy business is print, robust online sales are no panacea. Rates are also difficult to get at, though it's often whispered that much premium sells in the $20-to-$30 CPM range and that units such as a home-page takeover can go north of $100. Whatever the case, the rates are exponentially larger than those for - as one example - social nets, which go for under $1, though the amount of inventory is far smaller.
Some evidence of success is more concrete. The Washington Post Co. reported an increase in online display revenue of 17 percent, based largely on Slate and washingtonpost.com. Overall, the NYT Co. saw an 18.3 percent jump. Those numbers are much better than the 5 percent gain in online display reported in the first quarter by Kantar Media.
There is other movement in the marketplace that speaks volumes as well: the small, but growing number of sites that are doing an ESPN - by pulling the plug on third-party vendors entirely. ESPN's Johnson says of its 2008 decision to do so: "Every reason that we made [to do it] still exists and there's no remorse about the direction we've taken." Turner, Forbes, the Times, CBS Sports and CNET (also part of CBS) have all made the same call. Other sites, including Yahoo, Federated Media and YouTube, have added OPA-style units to their offerings.
So, if many major publishers are embracing these ads, why don't we see them all over the Web? As was said earlier, they don't scale, and most publishers don't have the equivalent of the home page of YouTube - and never will. "Unfortunately, most advertisers are not ESPN," says Collective's Apprendi.
This will no doubt continue to drive smaller publishers to look for technology-based solutions, in hopes the whole of impressions on networks and exchanges will prove greater than the sum of the parts.
But there's always another angle. iCrossing's Hamman says to focus strictly on ad rates is to miss opportunities like selling site data to third parties. "How do you increase your CPM? You sell it twice," he explains. He touts "the invisible ad," a pixel placed on sites just for the purpose of collecting data.
Others point back to wringing out the market's inefficiencies, which may not improve prices, but will improve margins. "There are all these players that are taking money that in the traditional world [doesn't] exist," explains J.T. Batson, executive vice president of revenue and global development for Rubicon. He thinks both sides of the buy/sell equation need to reduce cost by 10 percent.
The problem is that Batson has a point, and so do Goldberg, and Apprendi, and Horan, and Neo@Ogilvy's Smith. They all come at the marketplace from a different perspective, and believe in different solutions. The reality is that, unless there's a shakeout of publishers so profound as to reduce the Internet to the size of other media, it will always be split into warring factions, trotting out their own point of view in name of the cause. And that's the medium's future, good economy or bad.