• by Michael Katz , August 19, 2009

The Online Publishers Association, with its recent report on ad effectiveness, hit a nerve with many people in ad networks and portals. Getting past the arguments about its definition of "effectiveness," (because that is another topic), it's important to examine the underlying arguments being made by the OPA -- we are gatekeepers of audiences -- and why they are happening now. I don't fault its attempts, but there's a lesson here for industries that have fought to maintain status quo. In the case of online publishers, they don't have to look far to see how others have fared.

Beginning with television advertising in the 1960's, advertisers aligned their message with specific programming content in order to reach their desired audience. Because there were only three networks, advertisers took advantage of the population density and naturally reached high concentrations of target audiences with ease. Networks were compensated for creating high quality content by effectively aggregating desirable audiences and selling access to them. However, the evolution of cable television fragmented audiences where reaching desired audiences became more difficult for advertisers. Audience fragmentation has occurred online as well but with one major difference.

The online model is based on ubiquity, not scarcity. With low barriers of entry online, there is no such thing as audience scarcity -- audiences can literally be found anywhere. Up until recently, digital advertisers targeted content to reach their desired audiences, much like traditional television where choice is limited. The difference is that while there are roughly 1,000 TV channels to choose from, there are millions of sites online to choose from. When choice isn't limited, content is no longer an effective proxy to reach consumers.

We have also seen this type of paradigm shift for compensating content creation in the music and newspaper industry. A couple of years ago, the digitalization of music completely changed the landscape and record companies were no longer the gate keepers to the distribution of music. The record labels experienced huge declines in revenue as the value add they provided was completely exposed. Similarly, newspaper companies have been the primary distribution mechanism for news wires like the AP; however, they have lost their ability to control distribution of content to several sources online including portals, blogs, and search engines. Losing control distribution, they lost control of audience accessibility and are currently in a state of peril. The problem with both is that there was considerable resistance to change instead of embracing new strategies.

Since the inception of advertising on the web, publishers have acted as the gate keepers to their audiences. Publishers employed a rent seeking model based on limited choice and audience scarcity, so that advertisers who want to access their audiences need to pay the "rent." As such, publishers dictated ad rates because if an advertiser didn't want access, a different advertiser would. Supply of audiences was constrained so demand followed, regardless whether or not value was being maximized at the current rates. This model followed the traditional television model. While complete efficiency was never assumed, there was no other way for advertisers to reach their desired audiences. Audience-level targeting changed everything.

Audience targeting enabled marketers to effectively segment several different like-minded audiences from within larger populations. Targeting just their desired audiences, advertisers were no longer forced to accept inefficiency as the standard. The question about scale came up, where ad networks presented a solution because it provided critical mass needed to capture the hyper fragmentation that exists across the Internet. By effectively segmenting like-minded audiences from broader populations, the network model drive efficiency for advertisers.

So why does it seem that the Online Publishers Association has an agenda against ad networks? The downturn in the economy served as a catalyst for advertisers to rethink the way they were spending their online ad budgets. There was no more tolerance for wasted ad spend. While brand experience is still important, as the OPA can attest to, the focus shifted to accountability and measurability. Online ad budgets shrunk slightly, but the bigger change was the shift from site based buys to arguably more efficient audience based buys provided by ad networks.

Publishers no longer control distribution to and access of their audience. This has resulted in a redistribution of wealth away from publishers to the ad networks. Publisher rates have dropped while network rates have increased, reflecting the relative amount of value being provided by each. A new equilibrium has been set. The supply curve, according to economic theory, remains vertical because the amount of total inventory is fixed. However, the demand curve for publisher inventory shifted inward, and price decreased tremendously.

Online publishers need to take a look at history if they hope to succeed in the coming years. Ad networks are not cannibalizing publisher inventory as some would believe. The ad network / publisher relationship is a mutually beneficial relationship. The fact is that another traditional model has been revolutionized by digital technology to fulfill unfilled demand. Publishers have every opportunity to partake in this revolution.