Commentary

Display CPMs Dropping?

  • by , Featured Contributor, August 16, 2007
There's been a lot of talk over the past two months about "softening" growth in the online display ad marketplace. Destination Web sites and portals, accustomed over the past year or two to 25-40% year-over-year revenue growth in their display ad revenues, found themselves facing flat or moderate year-over-year increases this past quarter. While the second quarter continued to deliver explosive growth at Google, the other search players, and many of the online ad networks, for some reason many of the destination sites were left behind. What happened? Should we all be surprised? Is the online display ad market really slowing down?

Most folks in the industry shouldn't have been surprised by what happened. Personally, I do not think that the online display ad market is slowing down, but I do think that it is in the start of what will be a rather dramatic transition phase.

What happened? Why did the growth slow? Consider the following:

  • First, as Goldman Sachs' analyst Anthony Noto observed earlier this year in the release of its Fifth Annual Online User Behavior Study, the overall growth in the average time U.S. users are spending online in 2007 is largely flat relative to 2006, and the time spent by these users online is continuing to fragment across a variety of activities. Whether it is email, search, playing games, reading news or shopping, U.S. consumers are doing more and different things online, but are no longer spending more overall time online.

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  • Second, CPM growth on many of the large destination Web sites slowed as advertisers shifted their buys to inventory that had previously been considered "non-premium." As both Noto and Bear Stearns analyst Bob Peck observed back in the early spring, many advertisers and agencies are now shifting their display ad buys from higher-priced contextual pages on branded destination sites to much lower-priced inventory aggregated by networks and targeted to users on social networks, small, "long tail" sites, and on non-contextual pages of larges Web sites.

  • Third, many of the large destination Web sites grew their revenue last year by creating more ad units on each of their pages. Noto's research identified that ad impressions in 2006 grew at a 25% rate year-over-year, while audience and page view growth was in the low single digits. Thus, with most of these Web pages now at full ad unit saturation, it is getting much harder for these sites to continue the same kind of revenue growth. Simply put, they just can't hang any more ads on their already cluttered best pages.

    Should we have been surprised by this? Certainly not. It is no secret that while advertisers over the past two years have been shifting more and more of their ad budgets online, the volume of high-quality ad inventory available at scale for those campaigns has not been increasing at the same rate. Instead, the largest Web sites have been increasing the rates on their best pages as well as forcing advertisers to take large volumes of untargeted non-premium inventory if they wanted to buy their best pages. This forced the online ad buyers to significantly build out their teams and their infrastructure to manage online media buys across many more companies and many more sites.

    Not only did more money flow through ad networks, much more money flowed directly to smaller sites. Given that the advertising business is becoming more focused on ROI, and there are more alternative channels for media and marketing expenditures, the fact that raising rates and reducing quality in the name of artificial scarcity is failing as a strategy shouldn't surprise anyone.

    Does this mean that the online display ad sector will continue to slow down? Are these challenges fatal? Absolutely not. Almost every analyst is calling for branded online advertising to grow faster than search by 2008 or 2009. This is big. More and more money is coming. Of course, it won't be uniformly shared among sites and networks. Clearly, those sites and networks with fast-growing audiences -- such as social networks -- are poised to do very well.

    Those companies that are able to aggregate audience from hundreds and thousands of sites and deliver just the audience or the results that advertisers want, and are able to do it at scale, will do well also, as will destination Web sites that are best able to leverage relationships with multiple networks and exchanges.

    Finally, those companies that are able to build and deliver deep, integrated and highly immersive brand experiences for advertisers, even with relatively small audiences, will also do well.

    The others? I'm not so sure. This industry is not going to slow down or stop changing just to make sure that yesterday's business models will still work. It just doesn't work that way. What do you think?

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    About the Author

    , CEO, founder, Simulmedia