• by Andy Atherton , February 25, 2009

There has been no shortage of commentary in recent months on the growing tension between publishers and ad networks.  A recent IAB-sponsored study by Bain & Company is typical in tone and among the best at framing the key issues (though somewhat off the mark with respect to proposed solutions -- more on that below). At the heart of it, publishers are eager for the additional monetization networks can provide, but increasingly leery of the large gap in CPMs between networks and direct sales efforts. For many high-quality publishers, CPMs from networks are only 5-10% of the CPMs from direct sales. 

This CPM gap and the fact that some ad networks stress "transparency" in their sales approach creates a very real concern about channel conflict  -- two different sales forces selling the same thing in different ways and/or on different terms, essentially competing with each other and damaging business outcomes. Channel conflict concerns create significant friction in many transactions between networks and publishers -- account block lists, vacillating policies, inconsistent pricing, etc. The current situation is complex at best and limits revenue opportunities for all involved. 

The Bain & Company study seems to recommend reducing supply. This would address the issue, but at the expense of significant revenue opportunities. Reducing supply can only increase revenue if sales teams negotiate proportionally higher rates with clients, which is very difficult unless enough publishers adopt this strategy to alter the overall supply/demand balance in the market at large -- unlikely without (illegal) coordinated action. A better path would be for publishers and networks to find a solution that mitigates channel conflict without relying on supply (and revenue) reduction to do it. Friction would be removed, revenue would be increased and all parties would be better off.

"Good fences make good neighbors" was a proverb before the U.S. was a country and it remains relevant today, as it points us toward just such a solution. Fencesare the key to addressing channel conflict between networks and publishers without restricting revenue opportunities. I mean this in a very specific way. A "fence" in the lexicon of pricing & yield management (PYM) is a rule which creates purchase and/or use restrictions on a product with the intent of inducing customers to segment themselves, thus facilitating segmented pricing. 

Good examples of PYM fences in the airline industry are the Saturday night stay or the 3-week advance booking. Airlines know that business travelers tend to want to be home for the weekend and tend to book at the last minute. They also know that business travelers are less price-sensitive than leisure travelers, so erecting these fences allow the airlines to easily determine what type of traveler is requesting a quote and thus what price to quote for that traveler. This customer/pricing segmentation essentially allows airlines to turn the same seat into multiple products that can be sold for different prices to different customer segments, maximizing profit on a given flight.

Similarly, in order to make publishers and networks better neighbors (i.e. higher revenue with reduced friction) we need to build the right fences. So, what are they? When I was VP, PYM for the global display business at Yahoo!, my team and I studied this issue extensively from the publisher perspective and came up with the following four fences publishers can use to prevent channel conflict with networks almost completely:

1)    Blind networks only

Do not allow networks to represent to their clients that you are a member of their network. "Transparent" networks mean more than one sales force is selling exactly the same product, which is a recipe for channel conflict.

2)      No delivery guarantees for networks

Keep all ad inventory available for your direct sales force to sell for as long as possible. Smooth, guaranteed delivery is a requirement for many attractive clients/campaigns and erecting a fence here reserves this capability exclusively for your direct sales force. This fence also reinforces blindness; even if a network lets your name slip -- unintentionally or otherwise -- they are incapable of guaranteeing a client delivery on your site, a fact your direct sales team can prominently tout. Several major publisher ad platforms allow for both guaranteed and non-guaranteed bookings and can manage this process for you.

3)      Auction-based delivery for networks

When you have excess inventory that was not sold directly, make sure you deliver the network that will give you the best CPM first. Several major publisher ad platforms allow for CPM prioritization in non-guaranteed delivery and can manage this process for you.

4)      Maintain creative standards

Never allow networks to run creative on your site that is lower quality than that you would permit direct clients to run. Doing so not only harms user experience and reduces the value of your inventory, it also telegraphs to the market at large that you have low direct sell-through. All creative should run through the same approval process -- a network that doesn't allow you to approve creative in advance should be highly suspect.

Publishers:  if these four criteria are met by your network partners, you can safely remove the friction of block lists and other policy barriers to maximize incremental revenue from networks without fear of undermining your direct sales channel. Indeed it's important that these other barriers are removed for the newly erected fences to translate into increased revenue. The fences themselves are friction -- they're just the minimum possible friction necessary to prevent undermining of the direct sales channel. Using these fences in combination with block lists and other policy barriers will intensify the drag on revenue, not mitigate it.

Do not be surprised if your direct sales team is less than enthusiastic about these changes. Sales and PYM initiatives often operate in a healthy tension. But it's difficult to argue thoughtfully that if each of the four criteria above is met, there's significant risk of channel conflict. A sales team maintaining that it cannot differentiate guaranteed placement on a specific, known site against a category- or user-based buy on a blind network is not making a very strong case for the value that it adds. Resist the temptation to unduly favor one channel over another. Maintain a level playing field, with all of your monetization alternatives in a balanced, well-coordinated competition to maximize what is most important -- sustained, consistent and profitable monetization for the business.