• by Erik Sass  @eriksass1, February 14, 2007

With the departure of dMarc founders Chad and Ryan Steelberg last week, industry observers are buzzing about Google's ongoing attempt to penetrate the radio market with low-cost online ad sales and placement. One of the key issues is the quality of radio inventory Google can offer through dMarc's automated interface. Here, Google finds itself in a Catch-22.

Before it was acquired by Google, dMarc trafficked in remnant inventory--the "leftover" air time that stations sell at low prices at the last minute. To make dMarc's system attractive to advertisers, Google has to demonstrate that it's also effective in selling premium inventory. But they face a couple of major obstacles.

Foremost, Google doesn't allow advertisers to choose specific stations where their ads will run because they're selling remnant inventory. Station managers fear that identifying their station as the source of remnant inventory would undercut the price of their premium inventory. In short, advertisers might just wait until the station is desperate before buying.

According to the marketing materials Google sends to participating stations: "To protect your local [rate] card, we do not allow our advertisers to buy/target specific stations." This, in itself, is sufficient to deter most existing radio advertisers.

Conversely, station managers have their own reasons to be leery about turning over inventory--premium or remnant--to Google. dMarc's digital system begins selling remnant inventory automatically at the end of every business day, with no oversight from station employees. Managers don't know which ads will be broadcast the next morning. Although Google offers the option of reviewing and rejecting ads before they air, the "just-in-time" nature of the service makes this difficult in practice.

In addition, it costs about $75,000 to install dMarc. That's a pricey system, even for big radio stations that sell remnant inventory. Although Google offers a barter deal, installing the system for free in exchange for a certain quantity of remnant inventory, this involves charging a 50% commission on remnant ad sales over a period of several years--effectively removing any near-term incentive for station managers to participate.

Finally, radio stations in desirable markets employ sales teams to move their premium inventory, and station managers chafe at the idea of paying Google's commission on top of salaries (or agency fees). Sales executives also fear that cooperating with Google will undercut their sales teams.

In recent months, Google was reported to be negotiating with CBS Radio to buy more than $1 billion of premium inventory. But to offset the commission costs and the risk of sales "cannibalization," big radio groups like CBS will probably charge top dollar for their premium inventory.

Such an investment would constitute a risky gamble for Google--especially to fuel a system that hasn't yet attracted significant advertiser interest.

Investors have maintained unrelenting pressure on Google to keep share prices up, and they may find the high price tag of a big inventory deal excessive. Plus, Google's inability to offer premium inventory, in turn, means that demand will stay sluggish. Constrained by risk-averse shareholders, it will be difficult for Google to break out of this cycle of low demand and insufficient supply.

Adding to Google's woes, dMarc faces competition from other automated radio sales firms, like SoftWave Media Exchange. SoftWave allows marketers to choose stations and schedule their campaigns well ahead of time, while station managers can set prices and review campaigns before they run.

These capabilities have helped SoftWave build a network of stations in the top 50 markets that reach about 11 million listeners on an average quarter-hour basis, compared to just 947,000 for dMarc. Most importantly, station managers are comfortable selling premium inventory through SoftWave, with about 70% of its traffic falling in this category.

Meanwhile, Bid4Spots, a Los Angeles-based digital clearinghouse, employs a reverse-auction model in which multiple stations compete to sell their remnant inventory to a single buyer during weekly online auctions. Because stations have nothing to lose when unloading unwanted inventory, they drive prices down during the auctions, benefiting the buyers. More than 2,300 stations around the country are participating in the Bid4Spots system.