The Economics of Maximizing Publisher Ad Revenue - Part 2

In my last post, I addressed the need for digital publishers to segment their audience to fulfill demand across the entire demand curve and maximize revenue. In this post I’ll review the historically inefficient ways media has been bought and sold, and why those methods are yielding to more efficient transactional models.

Direct Media Sales

With the advent of digital media in the nineties, publishers quickly established a direct sales model to monetize online content. For large publishers, direct sales offered a simple way to monetize the most valuable, premium ad inventory while maintaining control over the impact to their brands. The direct sales model does not rely on intermediaries; it leverages relatively simple technology, and it is easy for publishers to control.

A direct sales model has been (and remains) an effective way to monetize the upper end of the demand curve for publishers with sufficient scale to support a direct sales team. However, the direct model is not effective at the mid to low end of the curve for a couple of reasons:

1. ROI from direct sales decreases the further you move down the demand curve. Sales overhead increases relative to ad revenue and costs become prohibitive for a direct sales team.
2. Direct sales are an inefficient means of matching advertisers with granular audience segments. Visitor attributes and segmentation increase the value of ad inventory when advertisers optimize against this data, but granular segments cannot be bought and sold through direct sales teams.

The following graph illustrates how direct sales address the high end of the demand curve and monetize the most valuable inventory. However, direct sales are not an effective way to meet demand across the mid to long tail.

Direct ad sales monetize the upper end of the demand curve

Display inventory is perishable and therefore loses its value once a page loads without an ad. Publishers who want to monetize inventory that is not sold by a direct sales team, and publishers who are too small to effectively utilize a direct team turned to “remnant” sales channels.

Remnant Media Sales

Remnant media solutions allowed publishers to monetize more inventory and allowed more advertisers to run display advertising campaigns, creating a larger display marketplace monetizing more area under the demand curve. Early remnant solutions, however, could only monetize the lowest price points on the curve because:

• Large quantities of inventory put downward pressure on CPMs
• Remnant systems included few controls and presented greater risks, delivering less value to both brand and performance advertisers
• Remnant was primarily an undifferentiated pool of ambiguous media

The graph below illustrates a combined Direct and Remnant strategy for selling media. These two strategies taken together monetized a greater portion of the demand curve for most publishers but presented additional problems in the form of channel conflict and data leakage.

Combined direct and remnant ad sales monetize the upper and lower ends of the demand curve

Channel Conflict & Data Leakage

A combined direct and remnant strategy tapped additional demand for display advertising but also introduced channel conflict for publishers. Advertisers willing to accept the uncertainty and risk of the remnant market sometimes found they could get high value ad impressions through the remnant channel at a fraction of the direct price. Publishers saw the value of their inventory decrease through direct channels and in some cases discontinued remnant sales.

Remnant marketplaces and an increasing number of ad networks proliferated tags on publisher sites to collect data and monetize remnant inventory. However, along with an increase in remnant monetization came an erosion of inventory value when third parties re-monetized data for their own benefit. Re-monetization through data leakage occurs both legally and illegally depending on the terms of access granted to third parties.

The loss of audience monetization for publishers due to data leakage is comparable to lost revenues sustained by the digital recording industry when consumers share digital IP without monetization flowing back to the rights holders.

The following graph illustrates the erosion of monetization due to channel conflict and data leakage. In addition to the lack of monetization across the mid-section of the demand curve, monetization of premium and remnant sales decreases.

Channel conflict and data leakage erode the value of advertising inventory

Summary

The display advertising marketplace is a large and fragmented collection of advertisers and publishers seeking more efficient ways of transacting media for optimal advertising results. The early mechanisms for buying and selling media were simple but inefficient. Technology and innovation are enabling better ways to transact media and I’ll discuss those in my next post.

• David Humpherys
• 0 responses
•  Omniture Business, Testing and Targeting

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