Wall Street: Is Online Ad Downturn Cyclical Or 'Secular?'

The recent downward pressure on online display ad prices is leading an influential Wall Street firm to raise a vexing question: "Is display advertising in secular decline?" The question, which is being posed in a new report from the Internet team at J.P.Morgan, comes as the online publishing industry has become flooded by a an oversupply of cheap inventory from the explosive social network marketplace, and from an array of third-party aggregators such as horizontal and vertical advertising networks, and online advertising exchanges, that appears to have saturated demand and driven prices down, even for premium publishers.

The inventory flood, unfortunately, also happens to coincide with a downward economy, which has put further pressure on advertising prices, not just for online media, but for the entire advertising marketplace. While some believe these pressures are cyclical, and demand and upward pricing pressure will rebound with the economy, J.P.Morgan is at least wondering whether there is something more fundamental going on here - something "secular."

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Noting that there currently are more than 236 million host names currently publishing on the Internet, and that the advent of social networking and the "ease of Web site creation," has expanded the supply of online display advertising "exponentially," the J.P.Morgan team wrote, "This growth has created concern over the sustainability of CPMs."

Since the impact on the online advertising marketplace is unprecedented, the J.P.Morgan analysts looked at the comparable impact on television CPMs, when cable and multichannel television dramatically expanded the supply of TV commercial advertising opportunities. The equities researchers say the found that TV's "premium property CPMs were sustainable during these periods," but stopped short of assuring that the same might be true for the online marketplace. Though hey did speculate that the problem may have less to do with the laws of supply-and-demand, and more to do with the way some online publishers have been managing their online advertising sales.

"As such, display ad CPM pressure in recent years could be execution based," J.P.Morgan wrote. "We think if TV can sustain pricing (especially at the premium level) despite inventory increases, then internet display advertising should also be able to do so. We believe that advertisers are looking for scale (i.e. a large audience) and the right context to promote their brand. We believe bigger sites are better positioned to leverage their content. As such, we think some of the CPM declines are due to weak execution and sales messaging by large publishers."

The analysts implied that based on the history of TV and other media, the anxiety surrounding the influx of online display inventory may be "overstated," and that better sales and inventory management will lead to improved yields and prices over time.

"With trends shifting towards more open platforms and easy inter-access, we think premium sites may be beneficiaries of extensive inventory levels as these smaller sites turn to them for traffic and monetization help," J.P.Morgan concluded.

The report even touts online display advertising king Yahoo as J.P.Morgan's "top pick" in the online display space.

"Yahoo display advertising is outperforming its peers. In the first quarter, Yahoo display advertising declined 13% year-over-year vs. AOL's display advertising which was down 18% and Microsoft whose display advertising was down more than 20% ," the analysts noted.

3 comments about "Wall Street: Is Online Ad Downturn Cyclical Or 'Secular?'".
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  1. Frank Garland from All American Games, June 12, 2009 at 2:28 p.m.

    The problem referred to is real and multifaceted. The comparison to Broadcast TV provides some great insight.

    Historically, network TV sales groups have been organized around dayparts. A network "News" sales person may call on the same client and compete internally at the same network with a "Sports" sales person. It was set up this way because the different dayparts and genres delivered different targets. They realized that from a sales perspective they are really not one company but 6 companies - Daytime, Prime, Late Night, News, Kids, Sports. And, Broadcast Networks have been able to maintain and grow their CPM's because they are by far the biggest audience in town and they do not sell to the advertisers who buy the lowest priced inventory. If you want big reach and you want it fast, no one delivers like Broadcast TV.

    Contrast this with the internet, particularly the biggest sites. The leading sales organizations like Yahoo have been set up where individual sales people are assigned to 1 or 2 clients and they try to sell everything they have to just that one client. So the sales person has to present many different products and targets --- dating, news, sports, music, finance, e-mail, social, celebrity, search, travel, weather, games, etc. If you have been on many sales calls you know how difficult it is to sell 2 or 3 properties (dayparts) well, much less 10 or 12+. So for example, The Weather Channel sells its site for premium CPMs because the sales people are experts at selling weather. The Yahoo sales people are not experts at anything and therefore sell their weather section at an "ad network" CPM. Which leads to another issue.

    In the world of Broadcast TV, they rarely allow "Direct Response" advertising on their networks which is equivalent to "Ad Network" inventory in the internet. But, the biggest internet sales groups --- Yahoo, AOL, etc. are very active sellers of Ad Network inventory and in fact accept lots of it. Broadcast Networks would never dream of being in this business. They know it screams out loud -- I can be had for cheap! But once the Internet company shareholders become accustomed to this revenue coming in, it is very painful to get off of it ... even though it diminishes the overall value of the big sites inventory.

    So now the internet companies are stuck .... and the solution is reorganized sales groups and a painful period of not accepting Ad Network CPM's for some period of time. In the long run, they are better off selling less inventory at a premium than more inventory at low prices. The big dogs need to act like leaders ... and in the long run it will pay off for them and the entire industry.

  2. Kip Cassino from Borrell Associates, June 12, 2009 at 2:37 p.m.

    Any analyst worth his or her salt can tell you whether a trend is cyclical or not. Without getting into great detail, it involves checking the trend components -- specifically, the "residual" or "irregular" component. As long as it remains small, the time series you are looking at is stable, so changes in it, by definition, are cyclical. However, when the residual/irregular component (i.e., the part of the trend that can't be explained by trend, seasonal, or cyclic changes) gets big, you will know that the trend is "broken." This typically means history is no longer a good indicator of what's coming. A new trend is beginning.
    That's exactly what is happening with online display. The online marketing world has changed, and demand has simply altered. It will not come back to previous levels, no matter how much overall demand for online advertising rises.

  3. Michael Senno from New York University, June 13, 2009 at 2:50 p.m.

    I agree wholeheartedly with Frank, and recognize the problem the article alludes to. Online sales has focused too much on quantity, and not enough on quality. The easy, low-cost distribution mechanisms that led to tons of content on the Internet created the supply-demand mismatch, and the problem is only getting worse. JP Morgan is right, its a systemic issue.

    However, its does not have to mean the end of online advertising value. Sales forces need to start selling smarter, reign in the inventory and create more integrated advertising opportunities.

    I often use the prime time TV analogy described above. Ad sales in online needs to find ways to increase value - moving away from blind, rotational ads and away from ad networks is a start.

    Overall, ad networks or the publishers and marketers that use them must fundamentally change for the industry to get back on track.

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