Early last year we did a major piece of work on the economcs of online advertising, and found that - lo and behold - there is not enough advertsing overall (never mind the 6% or so that is online) to support a freeconomic "Web 2.0" business world. The total global Adspend is about $0.5 trillion, of which about 6% - c $30bn - is online today. Given that the overall ICT marketplace is c $3 trillion, and the various media markets are greater than $0.5 trillion, it very quickly became clear that a world of Ad funded free services was going to be a non starter.
This didn't stop a whole heap of people from starting, of course, the logic being that if
your service could get there fastest with the mostest then you would scoop up some of that precious Ad revenue, and the devil would certainly take the hindmost.
Except it hasn't worked that way (we told ya....). As the number of pages that wanted Ads has exploded, the (more fixed) amount of revenue has been splashed over more and more pages, bringing down CPM rates across most Ad supported services.
This post today
from Quinthar outlines the generic trend (I saw it on Slashdot, the
discussion there is quite good too):
TechCrunch reports that Lookery, a company specializing in selling ad inventory on social networks, is barely breaking even despite selling 3 billion ads per month. And rather than raising prices to become profitable, they're actually in the uncomfortable position of lowering prices 40% -- from 12.5 cents to 7.5 CPM. It reminds me of the (often unintentional) joke "We lose money on every transaction, but we make it up in volume!"
All this has made them so gloomy about the prospects of their core business that they're thinking of switching horses mid-stream and resurrecting that Web 1.0 favorite: selling demographic data. I mean, it worked so well the first time, why won't it work now?
So far so predictable*. Readers of this blog will say we've already heard you say that. True...but
this I did not know:
Ok, so you might be saying "Sure, social network ads are crap, but Google's ads are solid, right? After all, they're set by the open market!" I thought that too, until recently I learned that rather than that market being open, it in fact is restricted by a series of minimum bids.
Don't believe me? Search for "Flash" and you'll see it has zero ads. In a totally free market, that means you have no competition, and thus should be able to bid as low as you want to get your ad to appear. But when you try to create an AdWord for the "Flash" keyword, you'll see it sets the minimum price at $0.10. So even if the market (me) only wants to pay $0.01, it's priced 10x higher than the market (I) will bear. Which is why there are no ads on the "Flash" keyword.
So Google, which owns upwards of 25%+ of the overall online Adspend market (depending on whose research you use), is possibly artificially keeping prices from plummeting even further - Quinthar draws the obvious conclusion here, if true:
Hopefully, most of Google's ads are competitively priced via the auction. This would suggest that they're priced "correctly" and that we're in for no major shocks to ad revenue (and, due to Google's market share, worldwide ad revenue).
But let's say that some high fraction -- 50%? 70%? -- of Google's ads are in fact not competitively priced, but are just set arbitrarily by Google, such as Flash's $0.10 minimum. In this scenario, Google's revenue is no more protected from price declines than Lookery and it's 40% "going out of business" sale....
....Sound crazy? It's not nearly as crazy as what's already happening in reality: ad arbitrage. It works like this:
You buy a really cheap adword from Google in order to direct a lot of traffic to some site. And then you fill that site with ads with high CPM and CPC (perhaps from other ad networks, it doesn't matter). The result is you buy a click for $0.10, and then turn around and sell it for $1.00. How is that possible? Why isn't everybody doing it?
Everybody was doing it -- in huge quantities -- until Google killed it. How? By raising minimum bids.
That's right, by fiat Google leveraged its near monopoly power and raised prices to stop buyers it didn't like (spammers) from taking advantage of the mysterious imbalance between the price of an AdWord and another network.
Now we can't confirm this thesis right now, and Quinthar goes on with some speculative analysis as to the "why" of all this, but I would like to stick to the general insight from the scenario painted here - that it is possible that a cocktail of Google policy plus it's market share is setting an unrealistic price for ads in the Googleverse, that are not possible to cover elsewhere. If true, there is clearly going to be an arbitrage there, so at some point it will be unsustainable.
One to keep a close eye on methinks.
* there is a counter argument that Lookery is trying to fund a change in strategy via higher volume sales at lower prices...we'll see....
