Debunking the Myth of Infinite Online Advertising Inventory

by: Steve Hassett

Advertisers are not seeking impressions as much as the opportunity to get a slice of audience time to communicate their message. Resolving the inefficiency of paying per impression while seeking time would provide upside to premium online publishers.

It’s no news that online ad inventory is under increasing pressure from advertisers who treat publisher inventory as a commodity where impressions on one site can substitute for another and only ad networks profit. Scarcity, the pillar of premium pricing, continues to erode.

This week Comscore reported that U.S. display ad impressions reached 1.3 trillion in the third quarter, a 22% increase from a year earlier with Facebook supplying 23% of the total, followed by Yahoo (NASDAQ: YHOO) with 11%, Microsoft (NASDAQ: MSFT) with 5%, Fox Interactive Media (Nasdaq: NWS) and Google (NASDAQ: GOOG) with 2.7%. This caused Ad Week to trumpet that the “web is awash in ads.”
The cause is the perceived availability of limitless online inventory supported by the contention that publishers can create impressions by adding ad positions to pages, forcing refreshes, manufacturing page views with slide shows and other similar strategies. Ad Week said, “With display ad rates pitifully low compared to offline prices, many publishers have turned to more ads. That's led to the current glut of impressions and a vicious cycle that will only further commoditize ad inventory.”
True, by this definition, impressions are potentially limitless online, but apples to apples they are limitless in other media as well. Newspaper and magazines can add more pages or multiple ads per page, while television is a bit more restricted due to regulation; simply creating shorter spots would increase avails. Offline media chooses to self-limit because advertisers know that increasing impressions devalues the existing inventory and rewards the publisher for self imposed limits.
From another perspective, real ad inventory – on any medium - cannot be infinite. People only have limited amount of time per day that is allocated among their various activities, including media consumption. The reality that advertisers are not seeking impressions as much as the opportunity to get a slice of audience time sometimes gets lost, especially online. This is obvious in television and radio where pricing is generally proportionate to the length of the spot.
Before DVRs, or at least VCRs, TV ads were unavoidable. Radio spots still are. Online pre-roll video ads are like going back to 1990s before DVRs and VCRs had any impact. No wonder they are so valuable. They guarantee delivery of a slice of viewer time in order to deliver the advertiser’s message.
Print and online ads are passive, so the audience is not aware an exchange is taking place. Rather than trying to focus on time the audiences spends absorbing their message, lacking better metrics, many advertisers purchase online ads with the goal of minimizing CPM or CPC. They are using simple metrics to evaluate the cost of their campaigns, while mostly ignoring a big part of the value side of the equation – how that ad impacts brand and purchase intent.
Fragmentation is part of the problem. Consider the relative simplicity of valuing full-page magazine or newspaper ads between publications with same exercise for any of the huge number of ad supported web sites with standardized display ad units but not standardized pages or placements. No wonder pre-rolls for online video ads gain a universal premium. It’s simple and comparable.
While many publishers sell inventory at a premium, ad networks disproportionately profit from commoditization. Ad networks claim they synthesize broad reach on the long-tail of sites at low CPMs. Think you’re reaching 10 million people? Think again. Where was the ad? How many even had a chance to see it? Demographic targeting is a tool but not a solution. What good is it to reach the right audience but not get their time?
Publishers' strategies are beginning to shift. This week The Weather Channel introduced its own ad network to gain more control of monetization. According to The Wall Street Journal, AOL (NASDAQ: AOL) has reduced ads on its sites in an effort to improve consumer experience and make remaining ads more valuable.
Many sites now use full page interstitial ads, including video, to capture audience attention. As a consequence, they are making free content more time-expensive.
Consider the math. At a $50 CPM for a 30 second pre-roll, an advertiser is paying for each of those 1,000 viewers' time at a rate of five cents for each 30 seconds, or $6 per hour. In other words, viewers are yielding their time at less than minimum wage! One of the reasons many users are reluctant to pay for content is that the cost for not paying is too low. Perhaps the increased use of interstitial ads will increase value of subscriptions to an ad free environment.
If successful, this trend will result in better revenues for premium online publishers like Yahoo, AOL, CNN (NASDAQ: TWX) and The New York Times (NYSE: NYT), while the reduction in online inventory may harm and ad networks like Value Click (NASDAQ: VCLK) and even Google.
The current state is hugely inefficient. Like other inefficiencies, I expect this to get arbitraged away, providing revenue upside for premium online publishers.

Disclosure: Long YHOO