For anyone who is familiar with online advertising, you no doubt have read stories about how convoluted it is. You might have read stories about CPM’s fluctuating, more Web sites and publishers tinkering with a subscription model to offset pressure-packed margins from advertising, or even one story written in Mediaweek on the heels of the Interactive Advertising Bureau’s (IAB) Annual Meeting subtitled “Web publishers totally screwed or aren’t they?”
For anyone confused with how complex online advertising has become, you can thank the lack of complexity (and effectiveness) from traditional offline media, particularly print. Years ago, if you wanted to run an advertisement in a magazine that you felt fit your demographic, you would reach out to a magazine and they would quote you a price based on a “market-based” CPM. You would negotiate, and then place the advertisement. If a big brand advertiser, you would target high-end and high-cost publishers that fit your clientele and brand image. Direct-response advertisers might instead opt for advertising in a channel with a lower cost, such as Sunday circulars, knowing the campaign’s success was based on a quantifiable ROI. The two advertising worlds rarely actually had reason to collide.
Technology, and the growth of the online medium, changed the game entirely. In the example above, the advertiser agreed to pay a $5 CPM for a campaign, and the publisher collected the $5 CPM. Offline, it is relatively simple. Online, there are considerably many more players.
Tolman Geffs, from The Jordan Edmiston Group, estimates that in a similar online buying scenario with a $5 CPM, the agency gets $.75, the ad network gets $2, the data provider gets $.75, the ad exchange gets $.25, and the ad server gets $.25. What’s left for publishers? $1.
Combine these estimates with the fact that the online medium is much more widely used now, that there is more free content on the Internet, and there is major variation (and explosion) of the sites and types of sites people consume every day – and online publishers are rightly looking at alternatives to turn that $1 into something more.
A likely alternative for publishers? Charging subscriptions. In other words, making users pay to view the content on their site. This can work, but rarely does with any major scale. The Wall Street Journal Online has been covered extensively as an example of a Web property, as they have had considerable success with their subscription model. Newsday, on the other hand, spent $4 million redesigning their site as of January 2010, with a subscription pay wall. The result? 35 subscribers willing to pay $5/week – grossing only $9,000.
I conducted the very same analysis when I was driving the online business and marketing for Playboy. The web site got a ton of traffic and we moved to a subscription-based model, which worked famously. The content was unique and edgy, and we had a strong well-recognized brand, loyal following and it all added up perfectly for charging subscriptions.
But that was seven years ago, an Internet lifetime ago.
The challenge for premium publishers in monetizing their traffic via subscriptions is that so few sites now have content unique and strong enough to truly warrant a subscription fee. WSJ and a few others can. Most others can’t get away with it. However, make your content and inventory valuable, and you will increase demand and command a viable economic model.
Once the subscription model fails for most publishers, they are then faced with trying to switch back to advertising. The challenge here is that for the time they were attempting to make people pay to view their content, they lost traffic, as users figured they could get similar content for free and went elsewhere. Getting traffic back can be challenging, but it is an absolute necessity for advertising-based models. This is all viciously circular. It used to be that publishers held a specific audience captive and possessed the power in the advertising ecosystem, but this idea is being challenged lately.
At the root of this is a fundamental shift that has received a lot of press attention lately, and one that we, and other networks, have seen coming and called for years: Audience targeting. The Internet has changed the game for advertisers fundamentally because of the breadth and depth of advertising outlets. Traditionally, advertising in print or on TV provided a finite number of options. In other words, consumer audiences had a finite, though growing number of TV channels, and a finite number of magazines or newspapers to read. Their consumption patterns – or where they obtained information or content – were relatively limited. Smart advertisers of course go where their audience is, and given the finite number of places their audience COULD be, were willing to pay publishers a premium to reach that audience.
This all comes back to the basic concept of supply and demand. For advertisers 15 years ago, supply was low and demand was high, and therefore prices (CPM) were high. Premium publishers could control CPM and keep them high as long as they retained the right audience for advertisers and there was competition amongst advertisers for their ad inventory. Now, the model has flipped. There is any number of ways for advertisers to reach their audience on the Internet, and they don’t have to pay a high CPM to reach them. In addition, performance-based economic models like CPA have risen to prominence – and in fact have become the predominant model – because of it.
There is one more myth that needs to be debunked: that Ad Networks, as a major part of the online ecosystem described above, are contributing to the undermining of brand strategies online. In fact, my favorite story from Ad Age is subtitled “Networks are a gateway drug undermining your brand.” The article indicates that advertisers and publishers need to “quit relying” on networks that target audiences so effectively. The reason, the article states, that networks ruin branding is that they sometimes bypass premium Web site placements, where the inventory would otherwise be sold on a high CPM and instead target deeper pages on a site, or contextually relevant placements or search engines, or social media – none of which have traditionally been considered as places for premium brands to necessarily exist.
To combat this argument, I would suggest looking at Starbucks, or any of the other premium brands who are leveraging social media effectively. Or Pepsi, who pulled their Super Bowl advertising in lieu of greater online spend. Or any other countless number of brands that work with networks, or work with publishers and channels not previously considered “premium”.
These advertisers, and many others, understand the changing dynamic. The rules for them haven’t changed at all; they still want to go where their audience is. The challenge is that their audience is virtually “everywhere” and they smartly look to other channels or platforms to support their efforts.
Premium publishers will need to continue testing economic models. My guess is that they should test a hybrid model which is advertising-based in combination with micro-payments – or one-time fees – for exclusive or unique content worthy of being fee-based. If it is valuable content, people will pay. FT.com, as an example, has tested varying types of models (for instance, charging subscription fees for their serious readers, and making the site free for casual users).
Networks are good at delivering audience to advertisers and helping them sift through the expansiveness of the web efficiently and effectively. The opportunity is great, and networks (like Epic and our Online Intelligence subsidiary) are very attuned to the importance of not just maintaining the sanctity of brands across the ecosystem, but actually protecting and extending them.