On Efficient Markets and Monetization of Internet Traffic

Last week, I participated in a panel discussion as part of Advertising Week. The panel was moderated by CNBC's David Faber, who asked a lot of insightful questions about the pressure faced by the ad agency business model. Clients want to pay less, but the complexity of reaching consumers has increased significantly.

The panel was pretty entertaining, in large part due to the largesse of one Miles Nadal, Chairman and CEO of MDC Partners, which owns controlling stakes in Crispin Porter, Kirshenbaum, and other top-tier marketing services firms.  Miles apparently wants his agencies to be paid like hedge funds, with upside based on the performance of campaigns, linked to exceeding a target number of Whoppers sold or Plum cards issued. Why not?  The hedge fund guys have done pretty well over time, to say the least.

And that got me to thinking. Maybe there are more similarities between advertising and finance.  There are ad exchanges patterned after financial exchanges.  There are more brokers of ads and stocks than anyone would have imagined.  Finally, financial markets are designed to take advantage of inefficiencies in a reasonably compressed period of time.  This belief forms the basis for the efficient markets theory.  But advertising seems so inefficient, almost at its core, almost by design. Is the ad market really a long-term inefficient one?

The Case in Point




An industry exec in the audience asked the panelists whether the Internet's continued growth in percentage of total media consumption would cause budgets to be sucked away from television.  According to a recent study from Forrester Research, television's share of ad dollars was holding firm at 31% despite a slowly waning 35% of media consumption, while Internet share of ad dollars has grown steadily to 12% of ad dollars vs. a surging 34% of total media consumption.

If the ad markets were really efficient, wouldn't this gap have narrowed more meaningfully?  As a believer in the long-run efficiency of markets, I think there is a reasonable answer...

Media consumption (i.e., hours in front of the computer or TV) may not correlate directly to the ability to influence brand selection or preference.  Nor does media consumption facilitate purchase directly. Instead, the attentiveness of the audience at the time of media consumption (or page view) is more indicative of a medium's true ability to influence consumers.  If true, it would explain the huge differential between the sites designed to facilitate hunting (search) and the sites that facilitate grazing (social).  

The Numbers Agree:  Search vs. Social Media

According to the IAB, 2008 U.S. Internet advertising totaled $23.4 billion, up $2.2 billion (+11%) vs. 2007.  Within that total, Google's revenue on its own U.S. search properties (not affiliate network) was $7 billion in 2008.  In fact, Google's O&O search revenues amounted to 30% of total interactive ad revenues in the U.S., massively over-indexing vs. its miniscule percentage of page views or time spent online (3-4%).  Social media, on the other hand, are trying to use data and incredible reach to offset the lack of attentiveness of the average social media consumer.  I hope the firms specializing in social media monetization (Facebook, MySpace or third parties) figure it out over time, rendering irrelevant my comparison of social media to Central Park. 

The Silver Lining:

Maybe this is good news for television, which may continue to hold its own over the long run, defying the dire predictions?

3 comments about "On Efficient Markets and Monetization of Internet Traffic ".
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  1. Michael Senno from New York University, October 1, 2009 at 10:02 a.m.

    Consumption and ad spend is not the right metric to measure market efficiency. It's ROI or customer conversion vs. consumption. Your article never focuses on why the numbers or skews or, if and when it will change. The key is standardized, detailed metrics - which will clamor for on these very message boards each week.

  2. David Steinberger from Gomper, October 1, 2009 at 5:20 p.m.

    you wrote..."But advertising seems so inefficient, almost at its core, almost by design."

    It amazes me how casually this point is mentioned. And not just by you. Every day there is an article talking about how inefficient th ad economy is.

    Everyone wants to fix the problem while staying within the status quo of an ineficiant model. But you're right. It's by design. Nothing gets fixed until the design of the ad economy changes.

    More on my

  3. Andy Atherton from, October 4, 2009 at 2:20 p.m.

    Interesting article Jordan - particularly your thoughts about the long-run efficiency of the ad market. I personally think the analogies between current ad exchanges and financial markets are a bit overdone at this point, though. Online ad exchanges still lack fundamental capabilities present in more evolved financial markets, but they definitely up the ante on demand-side players to build, buy or license tools that can meet their various marketing objectives in this dynamic, volatile inventory environment; the infrastructure and expertise required is non-trivial, particularly for brand marketers.

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