• by Jeff Hirsch , January 31, 2014

Recalling eighth-grade civics may not be the most exciting thing in the world. However, if you’ll bear with me, the fundamental principles of economics can help us understand some of the behind-the-scenes dynamics of the state of the digital economy.

The digital industry functions as a balance between advertisers, who buy ad space, and publishers, who sell ad space – that’s good old supply and demand. Nevertheless, on each side there are a variety of factors necessary to keep afloat. Publishers need the resources to create quality content, to attract quality audiences, to get their inventory to market and to complete the sale of that inventory. Advertisers need the resources to create their message, to find the right audience for it, to buy quality ad space and to deliver their message to the right person at the right time.

While that is a bit reductionist, the point is that it is imperative to consider both advertisers and publishers in order to keep the ecosystem growing and flourishing. Without understanding what is beneficial for both sides, there is inevitably inequity, which leads to poor performance and wasted investment.

However, that is not how the current system operates. 

Emerging technologies and services, for the most part, cater to one side or another. It makes sense (to an extent) that tech startups have to simplify their value propositions and avoid the “jack of all trades, master of none” pitfall. And they do this to make themselves attractive to VCs. In fact, VC investment, as important and beneficial as it is, has the side effect of widening the gap between the advertiser and publisher sides.  

Further, the appetite for supporting one side or the other can actually be mapped to the ebb and flow of the U.S. economy. If the economy is good, demand jumps and soaks up supply, and companies/single-point solutions arise that address the lagging supply side, yet pretty much ignore the demand side. When the economy is bad, demand drops while supply becomes more accessible, leading the startup and VC communities to focus on single-point solutions that address the demand side.  

For instance, the recent rise of programmatic platforms and RTB can be mapped to an abundance of publisher inventory coinciding with an improvement in the economy. Suddenly, advertisers had money to spend again. Conversely, there was too much data for them to effectively parse and too much inventory for them to evaluate and buy using legacy methods. Enter programmatic, which, through automation technology, tackled the gargantuan task of analyzing mountains of data, drawing insights from it and using that information to deliver targeted advertising messaging in real time. 

As ever, the market saw a need and answered it, and people made money. And when you bring a product to market, or invest in it, and you see returns, its hard to consider how it affects the industry overall. That’s competition in our beloved free market economy, after all. In fact, the rise of SSPs aiding the supply side of the business before the rise of DSPs aiding the demand side of the business is a map to these tendencies.  

These economic principles have held true across centuries and industries, so I don’t predict a shift anytime soon. Then again, the industry and the VC community can work together to mitigate their effects on our revenue potential. In fact, neither group profits from the status quo, or at least they don’t profit as much as they could, so a shift in their approaches is long past due.

Demand and supply will continue to follow the health of the economy. Still, by myopically addressing only that which is relevant at that moment in time, we do a disservice to the digital ecosystem. VC communities can help address the issue by making it a priority to invest in both buy- and sell-side solutions at the same time, with the faith that each will pay off at different times based on inevitable market shifts. The digital industry, in turn, can focus on nurturing both sides as well, through education and a focus on innovating more robust solutions that answer the needs of both advertisers and publishers.

Like most industries, digital has held fast to the principles of free market capitalism. However, it would serve us best to temper that with a consideration of how the health of the industry as a whole affects our own profits.