Commentary

Flaw in the System - Part I

One of the many debates that took place inside the walls of dot-com publishing companies during the formative years of online advertising in the late nineties was centered on what medium the Internet most resembled.

Former TV sellers who migrated to online advertising sales boasted that the medium was very much like television. "The computer screen looked like a TV screen" was part of their argument, and with the onset of broadband connectivity, full motion pictures and sound were available for advertisers to take advantage of. These former TV sellers walked as fast as they talked, and they talked mostly about massive reach and the integration that can be sold to advertisers across both online and television "programming." These former TV reps felt comfortable comparing this new medium to one they had already sold. That's the nature of media sales; sell what you know.

Supporting the argument that the Internet most closely resembled print in this ongoing debate were the former magazine sales reps that jumped into online advertising sales during the late nineties, of which I was one of them.

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Content was read, not viewed was their argument as they doused the marketplace with sales communication that was print-centric. More so than former TV reps however, former print sellers had a difficult time digesting this new medium. They struggled with the much faster sales pace of the Internet and had trouble understanding how to price and sell online inventory. Selling impressions based on a CPM and a client's budget did not at all equate to how a page rate was derived. Most eventually caught on, but some did not and ran back to the comfort of selling pages.

An influential type of sales person that helped shape this new medium during its formative years, and who sat on the sidelines during this debate between former print and TV reps were the online sales evangelists. These true pioneers, who sold the first banners, referred to a Web site's audience in terms of 'unique visitors' and compared the size of a Web site by its 'traffic.' Both were relatively new terms to media sales terminology.

Why this debate was so important, and the fact that it was never settled is at the core of the inherent mathematical flaw that exists in how online advertising is sold today.

But when the Internet became an advertising medium (the first banner ad was unofficially sold in September of 1994 by Hotwired, the Web offshoot to Wired magazine), the traditional publishing model from prior mediums was not embraced. The online sales evangelist, empowered by their belief that the future of advertising did not need to look at the past, developed a brand new model on how to price their inventory.

The salesperson who lays claim to selling the very first online ad banner once told me that he just simply asked, "What's your budget?" to the media buyer assigned to 'new media,' and the deal terms followed. For the mathematically challenged like me, this meant if the budget was $25,000 for example, the buyer and seller presumably agreed the CPM should represent a high value (perhaps $50), hence the first online ad buy must deliver 500,000 banner impressions.

And that was how online "ad banner" advertising was going to be sold. Tell me your budget, let's haggle over the value as reflected by a CPM, and then serve the allotted number of impressions. So where is the flaw in this approach?

It's simple. The cost to advertise is not directly tied to the size of the audience a Web site delivers. In other words, if a Web site experiences growth in traffic, the amount of available inventory for sale increases, but the cost to advertise does not. In all other mediums prior to the Internet, audited audience growth achieved by a publisher is rewarded directly with an increase in the cost to advertise.

As a result of this flaw, the rate cards for Web publishers do not have any rates on them. The open rate for a page-four, color ad in Sports Illustrated is $238,000 for example, as published on their rate card. However, there are no rates published on the rate card for Si.com while other major online publishers list the CPM's for various ad units, but no official rate or cost per entry.

The pricing model developed by the online sales evangelists, places publishers at the mercy of how much an advertiser feels like spending, versus how much something costs. In addition, they focused their negotiation skills primarily on the CPM for the inventory they were selling, and let the buyer have complete control over the amount required to spend and the length of time in which the advertiser's message will appear.

To illustrate the problems with this approach, how about we sit down and have a can of Diet Coke. A can of the soda costs anywhere between 75 cents and $1.25. The amount of soda in that can is fixed at 12 ounces. You, as the consumer, can't say, 'Gee I only have 40 cents on me, why don't you sell me a can of soda with 7 ounces.' The consumer is not empowered to dictate a custom amount of soda served for a custom price (that does not mean they are not given choices. They can purchase a two liter bottle or a six-pack of soda, which brings down the average cost per ounce of soda, but at the same time, increases the amount of money spent out of pocket).

But in the world of online advertising, publishers are asked and have agreed to create custom cans based on the amount of change being spent by the advertiser. Sure, this shows how flexible online publishers can be, and yes, perhaps a publisher can aim at getting a higher CPO (cost per ounce of soda sold) but the impact of creating custom cans is counterproductive to growing revenue.

Such dramatic customization negatively impacts a manufacturer's ability to monitor their inventory and subsequent sell through. One of the ways in which any manufacturer of a service or product grows revenue is by monitoring their inventory and using this information to properly price its product based on the laws of supply and demand. Even in a volume-based business, there is more revenue to be made if the price is increased ever so slightly to take advantage of increased market demand.

More to come on how to fix the flaw next week.

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