It's no secret that the Internet has deeply damaged traditional media when they have directly competed. In the case of music and newspaper classifieds, the Internet provided a superior way to consume content. In the case of radio, listenership held up but advertisers abandoned radio for the Internet. In the case of magazines, the Internet has cannibalized both readership and advertisers. Traditional broadcast and cable video advertising, on the other hand, has not been significantly harmed by the Internet and remains the most valuable form of large-scale advertising. That may soon change, as the emerging technology of real-time bidding has put video at risk of suffering the same fate as other forms of traditional media.
Performance Marketing Dominates Display
To date, much of the strength in internet advertising has been in performance marketing such as search advertising and lead generation. Performance marketing provides a tangible return on investment, the ability to purchase at scale and in the case of search marketing, a dynamic pricing regime. These benefits explain why search is the largest form of online advertising. Of course most of the time consumers spend on the internet is spent consuming content, not searching on Google. Yet the "display" ad inventory associated with online content only accounts for 38% of the $26 billion online advertising market, while search accounts for 46%. Display is under-monetized because it lacks the combined strengths of search marketing mentioned above.
Some display advertising is sold the old-fashioned way, with ad salesmen pitching inventory based on the demographics of the audience that can be inferred from the type of content on their website. The problem is that very few websites actually produce the scale of inventory to make this model work. Generally, the only way to buy display ad inventory in bulk is through ad networks. Ad networks provide advertisers with very little visibility into the underlying inventory, and are thus generally used by "spray and pray" lead generation players in large categories such as online education and mortgage finance.
The Real-Time Bidding Revolution
The real-time bidding (RTB) ecosystem has emerged to solve some of the shortcomings of display advertising relative to search advertising. The move to RTB is being driven largely by the ad agencies, which verifies the value that RTB brings to advertisers. It provides a platform to purchase display inventory at scale and with dynamic pricing. By directly accessing the targeted audience, brand advertisers get less demographic "leakage" and performance marketers get higher click-through rates. RTB should result in better sell-through rates and higher prices for banner and rich media advertisements.
Where RTB could be truly revolutionary, however, is in the world of video advertising. Currently, advertising on television is the most valuable form of advertising, given its superior medium and large reach. This is the case despite the large amount of demographic leakage that comes from merely inferring who is watching what shows at what times. If advertisers can target ads to specific demographics and the ads can be purchased at scale via a variable pricing model, advertisers should find the RTB model superior to traditional television advertising forcing the television industry to change or to be left behind like radio.
The art and glamour of producing and selling television advertising will become the science of buying and selling demographics. The art of producing video content to attract a large audience will shift to the science of producing content to attract the right audience against which to sell advertising at the right prices. For all we know, television becomes one giant Demand Media, focused on attracting viewers for shorter periods of time based on certain specific topics rather than conforming to the traditional half hour and hour time slots. It's hard to predict the precise effect on television economics, but it's easy to predict that the effect will be profound. Expect yet another victory of online technology over traditional media.