• by Nishat Mehta , July 28, 2014

I have a guilty pleasure: I enjoy eating candy at the movies. But often, the jumbo box of Junior Mints or Sour Patch Kids that looked so good before the show no longer does halfway through. I also never understood why a 5 oz. box of Red Vines costs the same as the 3 oz. box of Hot Tamales. For me, the introduction of buffet-like “pick-and-mix” stations was revolutionary. I get to pick each individual piece of candy I want and pay for exactly what I choose based on its weight. As a side benefit, the movie theater -- and, more important, the candy manufacturer -- gets accurate data about customer preferences (which will hopefully hasten the demise of buttered popcorn-flavored Jelly Belly jellybeans -- who eats those, anyway?).

Over the past decade, we have seen the disruption of many commercial models, often credited to the Internet, but more accurately due to the freer flow of information. For instance, the hated process of buying a car has been transformed by TrueCar, a crowd-sourced automobile pricing platform, enabling customers to understand what others pay for the same automobile. The music industry was changed forever when customers forced record labels to unbundle albums and be more transparent about the true price for a single track. In B2B, companies such as EDITD or Upstream Commerce scrape e-commerce sites to provide retailers with complete information on competitive pricing and assortment, making it difficult for a retailer to justify prices that massively deviate from the mean.

What was the common thread in each of these industries before being disrupted? Business models dependent on opacity are inherently unstable, as at least one party in the transaction, typically the customer, is left unsatisfied.

In digital media, the lack of transparency is staggering and should frustrate advertisers and publishers. Typically, a publisher receives as little as 25%-40% of ad spend, with the majority of spend paying for a complex ecosystem (e.g., Data Owners, DSPs, exchanges, etc.) made famous by LUMA Partners’ LUMAscapes. In comparison, 85%-90% of media spend in TV flows to the publisher. Additionally, digital media is fraught with viewability issues and questions about last-click attribution that make it even harder for advertisers to understand whether they paid a fair price. To compound the issue of neither party feeling they are getting what they deserve, digital media is held to a much higher measurement and effectiveness standard than TV has ever been.

Commercial models with this much confusion over what the buyer (advertiser) is actually getting, and so little flowing to the seller (publisher), are not good recipes for repeat business and therefore are inherently unstable. Thankfully, a few trends are moving us in the right direction. First, RTB enables each advertiser to value each impression uniquely (like the pick-and-mix station). Second, large publishers, in particular Google, have announced viewability standards to ensure advertisers get what they paid for. Third, digital measurement and attribution algorithms are improving to help advertisers better understand the performance of their media spend, enabling optimization of future campaigns. Fourth, consolidation in the industry is helping to lower the middlemen costs, delivering more of every ad dollar to the publisher or returning it to the advertiser. Finally, publishers benefit by getting granular data about the value of specific content and each user, through what advertisers are willing to pay for each impression.

In any introductory class to economics, we learn that the most efficient markets are ones with perfect information, where both sides of any transaction have equal information. In any introductory class in business, we learn that the most successful companies are those that respect their customers and treat them fairly. No business model, company or industry will survive in the long run when one side continues to pay for something they don’t fully understand and the other side feels they are not being paid enough for their service. With so many bright minds trying to solve this problem and so much room for improvement, the days of opacity in digital media are limited.