Commentary

Who Pays?

Rich media vendors (RMVs) play a prominent role in the online advertising ecosystem. They bridge the complexity gap between the buy side and publishers. Without them, rich media advertising would not come as far as it has. Without them, nobody would be calling 2005 the year of rich media. When it comes to payment for these services, the question isn't whether RMVs deserve payment; the question is who should pay them. Today there is no standard model for paying RMVs, and this is something the industry needs to address.

The economic principle here is ancient. Services with tenable value propositions are assigned prices that are paid by consumers. But RMVs have two consumers: For every agency wanting to use rich media, a publisher that will accept the RMV technology is required. RMVs therefore maintain two value propositions, one for the buy side and another for publishers. The buy-side proposition is clear: Richer, more compelling creative equals better performance. The publisher value proposition is more nuanced, but no less real: a better-performing network, access to more buys. Since RMV services have value for both agencies and publishers, it is reasonable that either could pay the RMVs' fees. That is exactly what happens today, and it has created disruptions.

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The agency-pay model (APM) is simple. Agencies or marketers establish direct relationships with RMVs, and then pay those RMVs for rich media campaigns. The APM is sensible, because it separates an agency's media costs from the costs of rich media service and campaign support. The APM is also virtuous, as it forces agencies to assign a value to the services of RMVs. Fundamentally, the APM assumes that the RMVs' buy-side value proposition is stronger than the proposition for publishers.

However, it is the publisher-pay model (PPM) that is primarily at work in the marketplace today. Under the PPM, publishers negotiate rate cards directly with RMVs, typically as a CPM-based fee. Some publishers bill back transparent RMV costs to agencies ("pass-through charge"); others capture the costs in the media fee ("rich media premiums"); while still others accept the charges as a business cost ("bundling"). Regardless of the scenario, money changes hands between the publisher and the RMV, rather than between agencies and RMVs.

This PPM model has benefits: Agencies can leverage a choice of RMV formats in buys without considering (and then having to explain to clients) the esoteric RMV fee. This simplicity benefits media buyers and publishers. The PPM also has drawbacks: If publishers are to recapture the RMV fee, either as pass-through charges or by baking them into media costs, an understanding that an RMV format will be used in a campaign must be known up front. But publishers often lack this knowledge until the time of creative trafficking, after media costs are established. Repricing media after a sale is disruptive, awkward, and often, impossible.

Bundling RMV fees is one solution. Publishers charge a single media price, and regardless of whether agencies submit a standard banner or a RMV format, the price does not change. The simplicity of this model is apparent; the drawbacks less so.

Bundling creates a business scenario whose sustainability is questionable. Demand is created in one place (the buy side), while remittance is taken from another (publishers). Bundling also asks a lot of publishers, since it stresses the margins of media costs. This is of particular concern in high-volume/low-yield buys. Fundamentally, bundling assumes that the publisher-side value proposition of RMV services is stronger than that of the buy-side proposition.

It is unlikely that these payment models can coexist forever. Agencies deserve simplicity. Publishers deserve reasonable margins. RMVs deserve consistent, sustainable revenue streams. The PPM in general, and bundling in particular, has provided the industry with flexibility and simplicity, something to which the growth in rich media advertising can, in part, be attributed. However, one questions whether it can be sustained in a CPM market less healthy than today's. The APM seems more sustainable, but has far less traction in today's marketplace. Agencies already place a value on the better performance of RMV formats and services. For the APM to work, and for the industry to provide RMVs the sustainable revenue streams they deserve, agencies must recognize that the better performance and service comes with a price. Either way, the industry needs a standard - and the sooner, the better.

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