Monthly Archives: December 2007

Ad ecologies, consumer behavior and THE FUTURE

I encourage you to check out danah boyd’s thought-provoking post Who clicks on ads? And what might this mean?

danah makes a lot of good points and asks great questions in her post. She touches on the notion of a diverse advertiser ecology, but then sort of subsumes it in an observation about the anti-consumerist attitudes of “the classes” versus pro-consumerism among “the masses.” The point about who’s clicking across the internet globally is well-founded, but I’m guessing it’s informed at least in part by her repeated exposure to exactly what’s being clicked on in her area of study, social networking sites. The world of online display advertising can be divided into two camps, the ads from companies that everyone knows and loves from their offline existence, established brands, and everything else. Everything else overwhelmingly predominates on social networking sites, and I’m willing to bet is more aggressively click-oriented than any other type of online advertising. So I thought I’d share my thoughts on some of the reasons why that is the case.

The essential reason for the “two worlds” of advertising is a disconnect on the part of buyers (advertisers) between what a pageview is and what it is worth. Advertisers (and plenty of publishers) have yet to fully reconcile what is on a page, and the user behavior that elicits, with the inherent value of whomever happens to be viewing that page to them as a customer.

At the end of the day, ad inventory is as unique as the individual person viewing the page, but delivery technologies and business practices have not yet gotten sophisticated enough to bring the ideas of buying audience (putting your message in front of the right people) versus buying response (maximum click rate, conversion rate, etc) into balance. Both can be the correct end goal, depending on your situation, and for reasons danah makes clear, but if you believe in loyalty economics, in which the repeat customer is on average better than a new one, then most advertisers should care very much about who is getting the message (things that are always themselves “new” like movies, music, etc excepted).

And from the perspective of loyalty economics, this imbalance can hurt the advertisers. Every business with growth and longevity in mind ultimately needs the right customer, not just the most initially responsive customer. But for simplicity’s sake, and brand skittishness towards user-generated content (which with present technology carries with it the unfortunate inevitability that at some point, your brand will appear somewhere on the internet next to pornographic material), the media-buyer ecology (which spends the vast majority of Fortune 1000 online advertising dollars) has stuck more-or-less exclusively with editorial content (curated and cleansed for ad safety) despite its ever-dwindling share of the attention economy.

As an aside, the typical agency ad buyer is an obstacle as well, because they are not incentivized to learn the intricacies of what does and does not work long-term for their clients. They are allocating assets across a spectrum of media (broadcast, print and online) and relying on portfolio theory to ensure that at least one of their investments “hit” (eg. the TV campaign sucked, but the bus ads were a hit). And as far as online goes, the “dumb metrics” of click-through rates and imps on valuable demographics is a lot easier to use as an explanation (or mollification) for a client than convincing them that the narrow, huge cost-per-eyeball campaign is better because it goes deeper with the audience that the client actually cares about.

So… circling back to my point, this reality creates two tiers of ad inventory, premium and remnant. Premium is where the Fortune 1000 plays, and remnant is everything else, including pages on premium publisher sites that don’t “convert” ads as well for whatever reason, and social networking sites. While the people looking at premium and remnant are the same people (albeit not in the same socio-economic ratios), the pricing disparity between the two is dramatic, overvaluing premium but dramatically under-valuing remnant.

This is relevant to questions of the tenor and intent of online ads in the remnant space, because the massive mis-pricing of this inventory which is occuring allows businesses which would not be economically viable in its absence to flourish.

The under-pricing of remnant advertising currently permits businesses of a certain type to acquire customers so rapidly and cheaply that they can achieve scale and profitability on the back of a staggeringly high churn rate. Prime examples are ringtone and dating sites. These sorts of operations are not without precedent among larger companies and in the public markets, they are commonly known as “roll-ups,” and have been observed in all sorts of consumer retail sectors, from dry-cleaning to fast food to movie theatres. Acquisitions and expansion hide a fundamental inability of the business to generate repeat business at a level sufficient to maintain growth projections. Ultimately the other shoe drops (customers don’t come back enough), reversion to the mean being the one truth of market economies, projections are missed significantly, and stocks crater.

In the “old” economy, which we draw most of our lessons from, this would happen upon reaching geographic constraints… the high-density, high disposable income locales within the continental United States become saturated with the roll-up’s retail outlets, and the growth engine switches over to reliance on repeat business, cue disaster.

But in the “new” economy, all-growth-all-the-time-churn-rates-be-damned operations have two things going for them, the first is that they are unconstrained by geography, in fact, they probably perform better in more rural, sparsely populate areas, where the lower rungs of the socio-economic ladder are more strongly represented. So the moment of truth is prolonged, because their ability to expand is improved by their television-like distribution (direct to consumers inside the home, their safest enclave, and where their defenses are at their lowest point, and also having the readiest access to alcohol — which we’re culturally programmed to believe reduces our inhibitions, what it actually does is depress us, and make us more receptive to activities which will stimulate our reward pathways, such as the pleasure one feels at acquiring something shiny and new) at rock-bottom internet prices.

The second is that these companies are private, small and shadowy, they are just starting to get the faintest glimmers of attention from the mainstream media, a fact I can guarantee you they are profoundly unenthusiastic about, and ultimately have no stakeholders with long-term horizons, no pension funds on the board, this is snatch-and-grab until the well runs dry.

All of that said, the “model” for businesses has changed regardless of their motives. Advertising used to drive the bulk of its recipients to a physical space, a storefront, or at the very least to a voice on the phone with an agent or what-have-you. The end result was the opportunity on the part of the business to create some sort of p2p relationship with the consumer. The limits of geography and the powers of p2p persuasion both worked together to bolster the number of customers a company could consider loyal. On the internet, it is easier to compete with a given service, easier for consumers to discover and learn about the competition, and much much easier to switch your account or buying habits from one impersonal website (no matter how well-designed) to another.

But on the flipside, you have a global market reaching 1.2 billion consumers (19% of world pop) and still growing at over 10% per annum. No one has ever had access to consumers on this scale before, and as long as the tide continues to rise, there is perhaps little macro incentive to focus on the details and worry too much about customer loyalty (yes, this is glib, not many businesses can truly leverage the global reach of the internet, but it works on a nation-state scale, would the subprime crisis be what it is today without the online mortgage lead-generation “industry”?).

So what do I think will happen? Publishers are working furiously to prove to advertisers that the value of a pageview should be weighted to more heavily reflect the value of the person looking at it, and not what part of the site it happens to fall under. Calling Dave Morgan the “EVP of Global Ad Strategy for AOL” is perfectly accurate, what is far more relevant to the discussion is the fact that he founded TACODA, one of the most successful online behavioral targeting ad technologies on the market. He has proven you can cherry pick your audience online and still run ad campaigns that work. As the value (driven by performance) of online inventory becomes more accurately correlated to its audience, you will find increasing confidence among deep-pocketed advertisers to swim in these waters, the market will become more competitive, and businesses that depend on ultra-ultra-cheap customer acquisitions will be largely priced out of “mainstream” remnant and social-networking inventory.