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April 29, 2006
The Simple Online Inventory Equation
If we take it as a given that we are in the midst of a monumental shift of advertising dollars flowing from traditional venues towards online (cite your favorite report here; I’ll use last week’s IAB/PwC’s as an example), then there are a number of implications we can draw from the following simple equation:
In other words, the total advertising dollars spent on the internet is a function of two levers: the ability to monetize each page and the number of pages available. Some of the resulting deductions are natural. For example, if the dollars online spent continues to increase, then either CPM rates will rise, the amount of content available will increase, or both. As Mark Kvamme noted in his speech at Ad:Tech this week, the disparity between typical $65 CPM rates on television vs. $30 CPM premium internet or $10 CPM run-of-site is real, and arguably unsustainable.
Likewise, the amount of content that has and will continue to be created to support these advertising dollars continues to rise. The distinction to note, however, is that we’re not witnessing the creation of more of the same types of content (albeit improved), but rather augmenting the existing set with new types of information and content. I’d argue that the vast majority of pages being created today – whether user-generated or editorially-produced – are supplementing that which is already available, not improving upon it. So for every new product review or news page competing for the same fixed (albeit growing) audience, there are dozens of other pages containing conversations and information which wasn’t previously generated or available. And that is not to mention the recent move towards the proliferation of video online, which is creating vast amounts of content and ad inventory.
Taking the above equation literally, however, does not imply that television advertisers are absolutely getting “bad deal” or that current online ad rates are “on the cheap” ready to significantly rise. The beauty of the interactive medium is the ability to more effectively target the right consumer for the advertiser’s message. Whether advertisers realize it or not, the right metric to view media buys isn’t CPM, but rather effective cost per reaching the right target customer. And while television and print advertisers have striven towards improving this measure though demo- and geo- targeted buys, the interactive medium allows for much more granular targeting. Witness e-mail marketing, contextual CPC campaigns, and search. Now with behaviorally-targeted networks like Tacoda, advertisers can reach consumers with even more precision (e.g. demonstrated car buyers who are surfing ROS news, weather, or sports pages). So while publishers are earning higher CPMs for their pages (thus raising the weighted-average CPM on the ‘net), the technology allows advertisers to more effectively reach who they want, which is the true goal in the first place.
Finally, it appears that the shift away from non-digital to digital media consumption and corresponding advertising spending is also starting to give rise towards other types of “new new media,” but that’s a subject of another post.
What we’re left then, is the opportunity that the Simple Online Inventory Equation supports from a top-level theoretical perspective. If the increase of total dollars spent is our basic assumption, then any established company or startup which fundamentally capitalizes on the terms on the left-hand side of the equation will benefit: the creation of new content & new content types, and the ability to more effectively target the right customer at the right time towards inducing a transaction.
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Comments (2)
Cool blog and I think you mentioned some relevant aspects of contextual ads here. Of course, any web entrepreneur should know that the single most important resource of the Internet are website visitors. If you don't have them, you can't run a business… or, in our case, you won't find any advertisers that would take interest into displaying their links on your site. With my websites, I use a strategy that does not have immediate effects and deprives you of instant monetary satisfaction. I “age” my sites without the ads, marketing them and optimizing them without any contextual ad program on them. This makes it easy to get high PR link partners, have the site listed in various non-commercial directories and so on. In fact, I am doing exactly this with my website, Web2earn.com where I am also trying to develop different informational resources on online advertising and provide my visitors with contextual advertising information
Regards,
Mihai
Posted by Michael Rad | April 29, 2006 2:05 PM
Posted on April 29, 2006 14:05
Great post, David. But don't forget the third lever: in addition to the page CPM and number of pages, there's the number of readers per page! Many would argue that this is the major driver in the shift of ad dollars towards online: that more people are spending more time on the Internet (as opposed to TV, newspapers, etc.), which means that even if the CPM and number of pages stays constant, the dollars spent can still increase. So, to get really pedantic, I'd modify your equation to be:
CPM x Thousands of Readers per Page x Number of Pages = Total Dollars Spent Online
Just for reference, in getting my own head around all this, I tried to go through things systematically...the result is the doc I posted here (PDF).
I agree completely that a big takeaway from this is that targeting and new content types are key. After all, for any content, new or not, everyone is always trying to increase their readership; so the main lever left to increase value is CPM, which is most directly affected by targeting.
Thanks again for the great post!
Posted by Adam | May 3, 2006 12:34 PM
Posted on May 3, 2006 12:34