Online Ad Industry Still Dependent On A Few, Large Endemic Marketers For Growth

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The scale of a building under construction is ultimately defined -- and constrained -- by the breadth and strength of its foundation. Thus, the recent report from Pivotal Research’s Brian Wieser about the Internet ad industry’s increasing dependence on large endemic marketers for growth is cause for concern for some.

According to Wieser (a former colleague of mine) seven endemic Web advertisers -- Google, Amazon, EBay, Priceline, Expedia, Groupon and IAC -- collectively spent nearly $7 billion in U.S. online advertising in 2011. The good news is that spending was up dramatically from 2010, contributing to a 20% overall growth in the online ad market year over year. The not so good news is that excluding these seven companies, the rest of those who advertised only grew their online expenditures by 10% in 2011.

It’s great to have these Web companies growing their online ad spend so much, but you have to wonder what the long-term implications are for the market to depend so much on such a relatively small foundation of companies -- all of whom are primarily advertising services endemic to the Web. You would think that as the industry grew and matured, its advertiser base would expand and diversify, but it hasn’t.

Why has this happened? Offline marketers haven’t really committed to Web ads yet. Almost 20 years after the Web was launched, and about the same amount of time since the first Web ads were created, the online ad industry is still largely dependent on Web companies for marketing spend. Yes, I too read all of the news stories where marketers like Pepsi and P&G tell us they are about to dramatically increase their use of digital marketing. However, in spite of those pronouncements, we don’t see those companies among the top buyers of online ads.

This probably means that there will be little pricing leverage as inventory continues to grow. Like it or not, with the explosion of social media and other networked Web services, we are seeing the number of online media impressions grow at an extraordinary rate. Facebook represents 25% to 30% of all Web usage in the U.S. and didn’t even exist 10 years ago. It seems that the number of Web impressions are doubling every two to three years. Given that growth on the supply side, the limited pool of buyers with growing budgets probably means that inventory owners are going to be forever fighting a losing war over pricing. Unless online ad demand grows faster among more players, prices will continue to slide.

It also means that the online ad market size may be ultimately constrained. Ten and 15 years ago, we had visions that someday online advertising would be bigger than TV. Now, all these years later, the only companies really growing their online ad spend are endemic, response-focused marketers. That sounds like an industry that can and will be bigger than yellow pages and radio or newspapers. It doesn’t sound like one that will be bigger than TV.

Why is this happening? My own personal opinion is that Web advertisers are still struggling to find ways to use the medium to tell stories, and to tell them in meaningful and effective ways. Web ads almost never make us laugh, wince or cry. That has made it difficult for brand and mass awareness advertisers to commit their money in a big and growing way.

Is a modest Web ad market inevitable? I don’t think so. We are seeing a lot of progress with projects like the IAB’s Rising Stars Display Ad Units to create better formats for storytelling on the Web. Time will tell.

What do you think? Is the Web’s dependence on a few endemic marketers for its ad growth problematic?

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2 comments on "Online Ad Industry Still Dependent On A Few, Large Endemic Marketers For Growth".

1. Matt Straz from Namely
   

   commented on: March 16, 2012 at 2:57 p.m.
   The enduring success of the :30 spot speaks to its ability to interrupt, entertain and create an action. It may be that the format will never be outdone in this regard. The newer online ad formats succeed when they engage in ways that play to the strength of the medium: social, informative and self directed.
2. Tom Cunniff from Combe Incorporated
   

   commented on: April 10, 2012 at 7:35 a.m.
   I'd largely agree with Matt, but would add that TV enables the most effective kind of long-term selling: irrational, brand-focused and relationship-building. The web disables this almost entirely, and the reason is data. Once you have granular data it is nearly impossible to resist the gravitational pull toward rationality, offer-focus, and transactions. All of these are excellent for direct marketers, but counter-productive for brand marketers whose job it is to build irrational preference for one brand over another even when a cheaper and perfectly acceptable substitute is next to it on the shelf. Data by itself is neutral. But as Thoreau put it, humans have a tendency to become "the tools of our tools". We will *never* get better brand results online until we stop using DR metrics to guide us. They lead in entirely the wrong direction.

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