Weak economics

According to eMarketer, U.S. average CPMs by media type in 2008 were as follows:

Source: eMarketer, "How Much Ads Cost," April 23, 2009

It's generally understood that while people are spending about 30 percent of their media consumption time online, only about 10 percent of media budgets are dedicated to online. We know that paid search has great CPMs on average -- but relatively low volume. But why are we seeing such low CPMs on the online display inventory? Is it simply a case of low CPMs being driven by too much supply?

The chart below is cobbled together from several disparate data sources, but uses them to show one simple concept: that from an impression volume perspective, most media types are in the same "order of magnitude." Paid search has significantly lower volumes.

 
So given the CPMs we see above, and the fact that online display has a pretty high number of available impressions, we can imagine that there is a problem of supply and demand at work. But it's not so much higher that we can only ascribe basic economics. This tells me that the other issues I've been describing are part of the problem.

If we can provide brand advertisers with creative formats that enable them to evoke an emotional response, if we can automate the sales and operations processes such that it's easy to spend money online, and if we can provide significant value to brand advertisers as well as DR advertisers, we should see the CPM go up significantly in online display.

And this brings us to the conclusion -- the whole point of this article. Advertisers are spending money to advertise in order to sell enough products or services at a profit to survive and thrive. If their products or services are high quality and valuable, they'll succeed -- but only if enough potential customers know that their products or services exist, and if they can become educated enough to understand what the value is. Publishers are creating their own set of products in the form of some type of content that they hope consumers will ingest. They also are advertisers, selling the value of their content to the consumer. And in order for them to make enough money to create more valuable content to attract consumers, they need to be able to profit off of the advertising that they sell.

Right now the world is living on somewhat inverted principles. Much of the advertising being sold is not profitable enough to cover the production costs of the content that "hosts" it at any significant profit margin. This means that the vehicles that carry the ads -- the content -- are at risk of disappearing. And this means that the means for a company to put its message of value in front of a potential customer is eroding. This is a death spiral -- one that can't continue. So let's fix it, eh?

Eric Picard is the advertising technology advisor to the Advertising Platform Engineering team at Microsoft.

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