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(Originally published in iMediaConnection, October 2011) by Eric Picard

Despite all the excitement in our industry about programmatic buying and selling of inventory (via ad exchanges, DSPs, SSPs, and a variety of direct-to-publisher vehicles like private exchanges and private marketplaces), the vast majority of dollars today are still spent the “old fashioned” way.

Since display ads began being sold in the mid-1990s, very little has changed in the way that the vast majority of ad dollars are spent. Most ad dollars are spent via a guaranteed media buy — either a sponsorship (the brand is placed on a specific location for all impressions served to it) or a volume guarantee (ad space of a specific volume is reserved against either a specific location on a page, or a specific group of pages, but will rotate out dynamically on a per-page view).

Sponsorships are great for buyers and sellers because they’re easy to manage. The buyer gets a fixed location, takes over every impression delivered to that ad location, and the seller doesn’t need to worry much about over- or under-delivery. (Sometimes they will sign up for a volume guarantee here, but many times they don’t.) And generally while sponsorships tend to yield low CPMs for the publisher, the ad buys are frequently for solid brands and the size of a sponsorship tends to be large on a dollar figure, if not large on CPM basis (e.g., it may be a multi-million dollar buy, but the CPM is probably low).

The oft-misunderstood publisher benefit of sponsorships, despite the low CPM, is that the cost of sales tends to be much lower. A sponsorship buy can be executed quickly and doesn’t require a lot of labor after the fact. I’ll discuss more about the issue of cost of sales when I touch on efficiency. But don’t underestimate the importance here.

Guaranteed volume-based buys are in many ways the cause of vast problems in our industry, despite being generally more lucrative and higher yielding on a CPM basis than sponsorships. First, they tend to be very sales and operations intensive, which means the cost of sales is often extremely high (frequently above 30-40 percent, and sometimes significantly higher for some of the most complex campaigns). There are several reasons why guaranteed volume-based buys are complex and costly.

First is that when inventory is sold in advance, there is some degree of prediction involved to determine how much inventory of any specific type or location will exist in the future. This inventory prediction problem is still one of the biggest issues we face as an industry. The ability to predict how many users will visit a specific section or page of a site is quite difficult on its own. Given the guaranteed nature of these buys, the prediction methods need to be extremely accurate, and getting accurate predictions is hard, even just based on seasonality and one or two locations. Once additional parameters, like various types of targeting, frequency capping, and various competitive exclusions are applied, the calculations are near impossible to calculate accurately.

This difficulty with predicting specific inventory in advance is the root of the second problem — optimizing buys on the publisher side during the life of the campaign. This rears its head in general, but much more so when the buy is targeted. Most buyers have no idea of the complexity of delivering these buys and how much work happens behind the scenes at most publishers to pull it off. Frequently there are daily (sometimes multiple daily) optimizations done behind the scenes to make sure a targeted campaign delivers against its goals. This can involve making changes to prioritization in the ad delivery systems, spreading the buy to larger pools of inventory, and bumping lower-paying campaigns out of the same inventory pool (at least temporarily) in order to ensure delivery.

Most publishers are not aware of the vast amount of labor done by ad agencies on their buys across publishers in order to ensure that advertiser goals are met. This can range from just ensuring that volumes that were agreed to are met, to ensuring that click or conversion rates driven by the buy are meeting a performance goal (for the direct-response advertisers). In either case, the amount of work done by agencies to optimize these buys, frequently across dozens of publishers, is huge.

Buying and selling inventory must get more efficient
This brings us to our first big problem that must be solved. Media buying and selling needs to get more efficient. If you compare efficiency (i.e., costs) of buying and selling traditional media versus online media, there’s a very clear difference. I’ve been told by numerous sources that the efficiency is between 10-15 times less efficient for big spenders for buying online versus offline media. And certainly there is a similar lack of efficiency for selling of online media.

One way that both buying and selling can become more efficient is through basic automation. Much of the back and forth of a media buy between buyer and seller is manual. There are not simple standard efficient means of automating the media buying process. There are numerous tools on the market that try to do this in the guaranteed space, but adoption has remained small so far. Between TRAFFIQ (full disclosure: I run product and engineering at TRAFFIQ), Centro, FatTail, isocket, Donovan Data Systems, DoubleClick, and others, there is plenty of choice to automate buying and selling of guaranteed between systems focused on the buy or the sell side of the problem.

And despite the promise of programmatic buying and selling removing much of the inefficiency from the space, most publishers are so worried about putting premium inventory into exchanges that we are still relegating exchanges to massive repositories of remnant inventory. Publishers must start using the private exchange and marketplace functionality that’s available to represent premium inventory.

This doesn’t mean that salespeople go away, and it doesn’t mean that publishers lose control of their inventory. It just means that much of the inefficient order-taking and campaign optimization that is done on both sides of the media buy can be removed from the system and automated. Sales become a more evangelical process, less work goes on behind the scenes, and salespeople stop spending so much time “order-taking.” Today publishers can set dynamic floor prices against exchange cleared inventory, buyers can automate their bids, and at the end of the day, the whole marketplace can get more efficient.

Publishers often say they don’t want this to happen because they fear a drop in the CPM of their guaranteed buys. The reality is that the cost of sales is so extreme on guaranteed media buys — especially targeted or frequency-capped ones — that publishers could easily skim 20-30 percent off their floor price if the cost of sales was significantly reduced.

One major reason that we’re having such trouble in the display industry is the predominance of performance or DR spend in our space. This overemphasis on DR for display has huge consequences to our space — from depressed CPMs to a focus on metrics and methodologies that require a lot of work. This leads us to our second major change that must take place.

Online display must become a brand friendly medium
Let’s face it. As a brand advertiser, you’re much better off putting your message on television or in magazines than on almost any digital vehicle. Our ads are too small to give the brand a proper emotionally reactive vehicle to reach audiences. Even the “brand friendly” 300×250 ad unit is tiny on today’s modern high-resolution screens. Luckily the IAB is responding to this problem with action, and there are many new larger standard ad sizes being promoted across the industry. But publishers have got to adopt them, and buyers have got to demand them as part of their RFPs. We should be moving much faster here — especially when you consider how many new tablet form-factor devices are moving into the hands of consumers.

But beyond the simple size of the ad, the design of most web pages leaves a lot to be desired from the perspective of a brand advertiser. There are too many ad units, not enough “white space,” too much noise on the page, and not enough back-and-forth value to the site’s own visitors or to the brands from the “advertising experience,” meaning the way ads are integrated with content. In a perfect world, the audience and the brand should be at the very least “neutral” in tension, and ideally the ads should be adding value to the viewing experience.

But there hasn’t been a huge outcry from the brands to fix this because they don’t see online as a medium that caters to them or is brand friendly. The flat CPM pricing is fine, but the lack of available GRP or TRP measurement in order to provide some cross-media evaluative metrics is a major roadblock.

Another reason that the biggest brands haven’t come online, beyond both the efficiency and brand friendliness issues, is that the ad units are shared with numerous less brand-centric advertisers, many of which run creatives that no brand advertiser would ever want running alongside their own creatives. This massive over focus we have on direct response or performance advertisers has somewhat tainted online display, and the willingness of publishers to liquidate every single available impression at fire-sale prices has led to overall much lower CPMs than media that have focused on brands as their primary customers. This issue leads to our third and final major change that must happen in online display.

Online display must increase overall CPMs of inventory
If we can transform display into a high-quality space for brand advertising, we should be able to demand higher CPMs. This sounds nice and wonderful to most publishers, but many of the people reading this article will somewhat cynically push back at this point and talk about the “reality” we face in online display today.

So let me dispel a few myths by explaining the economics of our space in terms many of you have probably never heard.

Every emerging media that I have researched or lived through has focused initially on DR advertisers as their primary target in the very beginning. There is an economic theory that drives this: budget elasticity. The idea is that a DR advertiser is theoretically managing spend based on pure ROI. That is, they only buy ads that drive profitable sales of product or services (i.e., the budget is “elastic”). This, in theory, means they will spend as much as they can as long as the media buy creates more revenue than ad spend. And because the media experience is new in an emerging media, and the advertising is novel, response rates to those new ads in new media types tend to start out much higher, and then they will eventually plateau.

The problem with this theory is that it only works out well for publishers catering to DR buyers when the conversion rate on their inventory is high enough to drive high CPMs. The type of inventory that drives high conversion rates is typically extremely well-targeted inventory, typified in our space by paid search advertising, where the users tend to be searching for the very thing that the advertiser is selling. There are some forms of display advertising that also drive high conversion rates. They are frequently driven by retargeting of search queries, very lucrative behavioral segments that show a user’s propensity to buy is higher than average, or similar principles.

Like all other emerging media, when display advertising first started out, the focus was on getting DR advertisers in the door. And like all other emerging media, the response rates on ads were relatively high in the early days. But unlike all emerging media before online display, we wrote software that managed media buys online right at the beginning of this industry. And all of the DR “knobs and dials” were locked down in code, which made it much harder to evolve out of DR into brand advertising. If response rates had grown or remained high, this wouldn’t have mattered. But like most “top of purchase funnel” ad experiences, the response rates are too low to justify high CPMs by the DR advertisers.

When a media type does not drive a very high conversion rate, DR advertisers are only willing to spend a very low CPM. There’s a magic point at which the price of the inventory is low enough that the DR formula for positive ROI starts to make sense even for low performing inventory. This inventory is generally cheaper than 50 cents and frequently cheaper than 5 cents. And there’s a ton of it available in our space. This overemphasis on DR has numerous unintended or unrealized consequences.

Many large publishers sell their guaranteed inventory at well above $3 on average, and many publishers average between $5 and $9 for what is sold by hand. But this typically represents well under half of their inventory, and for many publishers it’s more like 30-40 percent of their total inventory. Once you dip below the conversion threshold of a DR buyer on most ad inventory, you’re driving very hard toward the basement on your prices. And if more than half of your inventory is sold off for less than 20 percent of your total revenue, then something is very wrong with the way we’re managing our space.

Publishers would be much better off stripping half the ads off of their site, redesigning the site to accommodate larger brand-friendly ad units, selling a lot more sponsorships with their human sales force, and selling the remainder of those ads mostly through a very automated sales channel, such as a private exchange, or at the very least automating their sales with one of the available tools.

Even selling10-20 percent more ad inventory through premium channels would significantly increase yield for most publishers than all of the remnant sales that take place today. Simply repurposing the sales and operations teams away from the remnant inventory problem and focusing them on selling premium could solve this.

To conclude, if we can make buying and selling inventory across the online display space more efficient, more brand friendly, and significantly increase our CPMs, then we’re going to have a rapidly growing and expanding space — one that would rival venerable offline media like print and television in size and scale. And that would become the perfect vehicle for those media to travel through as they become “tablet-ized” and “streamed.” But with such a huge overemphasis on DR, massive inefficiencies in buying, and low CPMs, we have a ways to go.