Display Ad Networks at Risk?
DM CONFIDENTIAL — The biggest news this week certainly goes to the public launch of Google’s new browser, Google Chrome, which suckered us into a piece as we watch the browser try not to follow in the footsteps of the company’s other new release Google Lively. Both Google Chrome and the surprisingly quick to market upgrade to Internet Explorer, now in its eight version, offer enhanced privacy features, each of which on the surface sounds like they run counter to the aims of the billion-dollar plus display advertising business of both Google and Microsoft. The latter, whose beta version of Internet Explorer 8 just became available, offers a feature called “InPrivate” which, according to the company does not block ads from being served to the user or from advertisers counting views or clicks, but its approach of not storing any data such as browsing history and cached content, also means no cookie data. Not surprising InPrivate has already garnered the nickname “porn mode,” even though it probably won’t allow users to open Not Safe For Work emails at the office. The issue among marketers isn’t rising porn consumption (can it get higher?), but the specific cookie blocking feature of InPrivate that will hurt ad networks with a wide reach. After a set number of third-party impressions being served, InPrivate will disrupt the network’s tracking abilities. While not the same, Google’s Chrome has something similar to InPrivate, called “Incognito,” also designed for tracking-free browsing. As Ad Age reports, the list of impacted services by these blocking mechanisms includes not just ads, but site analytics among other third-party content. Neither privacy service comes turned on by default, but it still feels in some respects as though networks might receive the raw end of the deal.
Thinking about the new browser wars potential impact reminds of a study published earlier this month by the IAB and Bain Capital, that looks at the affects of digital pricing as it relates primarily to aggregators’ role in display advertising. The title reveals the most significant finding and why, “Use of ‘Ad Networks’ Surges Six-Fold as Media Companies Step Up Monetization of Unsold Online Advertising Inventory.” Those who have worked in the online ad space for at least the past few years, will find no surprise in the study’s headline. The watered down for general audience release that AdBumb still published, as we can only imagine his unique style of derisive comments applied such insights as, “…publishers who actively manage and use multiple ad networks can achieve higher revenues on display ads sold via networks,” along with “Large marketers continue to shift significant portions of their advertising budgets online and view ad networks as an effective way to achieve greater buying scale and drive down CPMs.” The study also offers well-intentioned but not easily actionable items such as, “Publishers must become more disciplined in managing ad inventory and deploy improved methods and tools to enhance yield management.” The interesting and decently rich data does confirm what most already knew or suspected, that ad networks account for well north of 80% of the total impressions served but make up only 30% of the revenue, compared with a little more than 10% of impressions for premium but 70% of the revenue. It’s not quite the 80/20 rule, but it’s quite close.
In fairness to the report itself, it covers topics much more complex than those suitable for a press release to a general audience. One interesting point the authors of the study raise says, “Ad networks growth and enhanced offerings could lead to significant CPM arbitrage,” and with a company like ContextWeb, who has raised a crap load of money, we see exactly that. The company, thanks to its technology but more its sales staff, figured out what publishers require for placement on their sites, and keeps the difference between their floor and what the sales staff brings in. It’s pure CPM arbitrage, but unlike a bidding system, the advertiser doesn’t pay a certain amount above and beyond the floor (or the floor with some markup), they pay the amount they are willing to pay for a certain type of contextual traffic. Ad networks have long used this approach, and it is the foundation of companies like Tacoda and Revenue Science. Instead of behavioral, though, ContextWeb uses contextual and throws in an exchange layer, combining a well established method with a hot new trend. The result has been fat margins, above and beyond what most networks make, and hence the insane amounts of money thrown its way. That strategy will face challenges, though, as an advertiser willing to pay $10 for a certain segment of traffic, matched with traffic that costs $2 leaves a price and performance gap that can’t go unnoticed, and once more widely known will leave a bad taste in both parties mouths. Good for them for figuring out a new angle in a very-tired space.
Arbitrage economics aside, though, contextual targeting will most likely survive, if for no other reason than Google’s reliance on it. End users have come to accept contextual despite its often less layered and inadequate performance compared to their behavioral counterparts. As for the impression overload, there isn’t any data yet that says reducing the number of impressions will raise the effective earnings by enough to compensate for the lost impressions. While it’s probably testable, it’s a behavior change that might be difficult to overcome. Displays playing second-fiddle could be self-fulfilling and not a technology, information, awareness gap, which is why Google is at work on a quality score system for display much like search. Better ads themselves could yield more revenue, but I’m not too bullish. Relevancy allowed search advertising to flourish. Targeting must improve for display, and that brings us back to cookies among other mechanisms. Increased awareness by the users generally leads to less tracking, not better. NebuAd’s ISP level targeting could have greatly enhanced the display ad experience, but too many people found it invasive. All of which leaves publishers doing what they know best - more ads per page, for more overall inventory, and naturally decreased yield per average impression.
Not to mentioned in the report that should be, three overarching factors that more than anything have driven average price down - a tough environment, fragmentation due to new networks, and the rise of social media creating far increased numbers of impressions to the ratio of both premium inventory and available advertisers, whether new or existing. Perhaps it’s not the networks fault after all. The never ending opportunity which so many continue to chase is the display equivalent to working old leads in the lead generation space. In that pile of refuse lies some gems, but generally there is a reason non-producing mines turn into tourist traps instead of increased investment. The cost to extract those hidden gems exceeds the gains, and the effort should go elsewhere. For now, the future is simple, publishers will show ads so long as the potential revenue outweighs the cost to serve and they experience an incremental yield.
Courtesy of the Editor at DM Confidential.
Reader Comments.
Terrific Article! Perhaps these privacy tools, if they are adopted, can help save quality publishing.
For the past 12 months, we have seen a strange moment in time where content has no longer been “king” — data is. In the example you cite, Content earns $2, and Data earns $8.
In other words, advertisers no longer have to target you by the publication you happen to be reading, they can target you with a vast array of contextual and behavioral data wherever you might be. And if it doesn’t matter what you happen to be reading, the quality really doesn’t have to be particularly good. And whatever the case, as more revenue chases the data, publishers have less and less money to spend on Content.
The behaviorally based networks will continue to race toward the bottom and drive “remnant” CPM’s lower and lower, regardless of quality.
If publishers were smart, they would promote the heck out of these tools, in the name of Privacy, but really in the name of preserving a dying business model: the creation of quality content.
If these tools take off, I wouldn’t be surprised if the new major Ad Networks (AOL, Yahoo!) start to offer consumers browsers with incentives for allowing them to cookie them … ie. get paid to surf with the AOL browser. They will take the revenue out of the ample profits they are making off of Publishers with their market domination, much the way credit card companies offer frequent flyer rewards from revenues extracted from merchants.
Anyway, the browser wars are on again…but they might be the white knight for the publishing industry.
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