• by Brian Wieser , November 12, 2012

The health of premium web advertising has been permanently damaged in recent years. It's not dead yet, but the trend seems irreversible. The effects on the industry have been and will remain significant, with perpetually limited prospects for revenue growth and profitability at the core ad-supported properties managed by publishers such as Yahoo and AOL. Threats will remain continually pronounced for most entities which generate news or otherwise develop content which is expensive to produce and which is wholly dependent upon advertising. Google has positioned itself as the primary catalyst for the continuation of this trend, and also as the primary beneficiary of the resulting changes to the economics of the industry.

Advertising alongside premium inventory remains an important tactic for marketers(because of the perceived value of content adjacencies, the efficiencies associated with wide reaching advertising units, the relative-certainty of delivery of such inventory and because many premium publishers possess valuable first-party consumer data), but premium's share of total online advertising revenue is nonetheless falling. Secular weakness seems self-evident to us based on the underlying organic growth trends from the owners of these properties in recent years as well as in IAB data for the industry as a whole. These trends will become more clearly evident as industry profits continue to shift from the owners of content and towards the aggregators of advertising inventory, including Google and the other ad tech players which facilitate these trends.

But premium display advertising has faced a secular shift of preferences by advertisers. Advertisers have oriented themselves away from inventory adjacent to specified, premium content and towards inventory with data-driven attributes, often based around consumer actions or audience-based profiles instead. The use of ad networks and exchanges pair with the application of third-party data and information associated with cookies and make it possible to favor spending on "audiences" instead of content as they would in traditional media, regardless of what content those audiences are consuming on the web.

The lower CPMs which result for these audiences on what would otherwise have been remnant inventory make it possible for advertisers to truly do more with less. We argue that most advertisers' budgets don't change as a result of lower pricing, as we believe they are instead reallocated. With such a credible alternative to premium display, pricing is held in check as buyers continually have the advantage in their negotiations with the premium display owners.

Advertisers are put further ahead in their negotiations for web inventory because advertisers typically have better information to inform the prices at which they are willing to buy vs. the information publishers have to inform the prices at which they are willing to sell. In traditional media, neither side truly knows the outcomes associated with media buys and only the seller knows the demand for specific units of inventory. At least the seller knows all of the demand for specific inventory, and this proves to be a critical advantage. On the web, because of third party ad serving, only the advertiser and agency know what happened with a campaign most of the time (at least if the consumer viewing an ad leaves the publisher's site and goes to one controlled by the marketer) after a consumer clicks on an ad. Because of these preferences, the most important aspect of digital advertising becomes the ability to efficiently create scalable outcomes across the web.

Those entities which satisfy marketer goals across the broadest audiences, defined as best as the marketers want them to be defined (i.e. by applying more data to the determination of which audiences to buy), can thus become the most important among the aggregators. Those entities which can aggregate audiences and reduce overall transaction costs (which could otherwise be substantial given all of the processes involved in accomplishing marketers' desired outcomes) are even better positioned. Essentially, the players which do these things will capture profits from the industry that would otherwise accrue to publishers.

This primarily means Google has been emerging as the display industry's biggest winner and we expect it will continue to do so. With the largest exchange (AdX, formerly the Doubleclick Exchange), the Google Display Network, a DSP (formerly Invite Media) and an SSP (the former AdMeld) paired with more data than virtually any other industry participant, it's difficult for us to imagine otherwise. Yesterday's earnings results from Google confirmed to us as much. Service providers who help to manage any aspect of the technology required to execute campaigns - including advertising agencies - also continue to benefit.

Given all of this, what are conventional web publishers to do? Practical options are limited. The best option for any one publisher seeking to maintain its advertiser base is to find ways to become a "one-stop-shop" by making it possible to reach virtually everyone as often as a marketer desires. Other than Facebook there are few publishers who can do this for marketers seeking broad audiences. More narrowly targeted publishers may be able to do the same if they are the go-to owner of media in a particular vertical (thus the Wall Street Journal, which recently announced it would be launching a private exchange powered by Rubicon Project, provides an example of one publisher which may be able to overcome the aforementioned negative trends for publishers). Consolidation among publishers or other tie-ups of inventory to create more "one-stop-shops" should be another avenue, and we would see significant benefits from AOL, Yahoo and MSN working as closely as possible together. Otherwise, the only opportunities for growth we see are for a publisher to grow their traffic significantly or otherwise make significant product enhancements that allow the publisher to go after an increasing share of marketer budgets. Yet another approach we expect to continue is an increased reliance on consumer fees via paywalls.

If all of this seems bleak, we always try to remember that creative destruction seems to produce favorable results in the end. The Encylopedia business was initially hurt by Microsoft's EnCarta, and subsequently both were crushed by Wikipedia. We certainly prefer Wikipedia for our information-seeking endeavors, despite the fact that most of that enterprise depends on the work of volunteers and donations. While there is much high quality content across the web that is produced by amateurs today, it seems inevitable that UGC will only continue to grow in prominence in years ahead given the limits to support for higher-end professionally produced content.

Conveniently, Google already dominates UGC via YouTube of course (not to mention Blogger), and will inevitably be best positioned to continue capturing the bulk of the economics of that business in the future as well. As long as advertisers exhibit increasing indifferent towards the content around which their creative messaging sits, more and more UGC will eventually become supported by advertising from large brands, too. However, we should all be hopeful that the future of news and entertainment will at least feature more than a consumer reading the Wall Street Journal aloud while preparing to ride a skateboard with a cat.

Brian Wieser is senior research analyst of Pivotal Research Group. This column was reprinted with permission from the author.