Online display advertising sold through ad networks is generating cost-per-thousand (CPM) revenue of $0.60 to $1.10 for several major publishers vs. $10 to $20 CPM in direct-sold display advertising. A new IAB/Bain Digital Pricing Studybeing released this week by Bain & Company (available for free download at www.myersreport.com) reports that "while it's still too early in the game to measure the full impact of ad networks on online pricing, growth in marketer use of ad networks will likely lead to erosion of premium CPMs if publishers maintain their current behavior."
"The growth of ad networks is rapid, influenced by large marketers stepping into the medium," commented John Frelinghuysen, a partner in Bain & Company's Global Media Practice, in an exclusive interview with JackMyers Media Business Report. Ad networks represent the fastest growing category in online advertising today with ad network sales for publishers participating in the IAB/Bain study growing from five percent of their sales in 2006 to 30% in 2007. As greater cost efficiencies are made available to them, brand marketers and agency media buyers are increasing their online spend and allocating an increasing share to ad networks.
The important new report, which is being closely studied by the IAB and participating online publishers as well as agencies and marketers, suggests that the industry will move toward "enhanced ad network targeting and inventory management resulting in higher price realization on premium inventory from publishers" and that "further scale-up and (potential) consolidation of networks should enable higher margins." (Download the full report at no cost at www.myersreport.com).
Bain believes there is a market and demand for inventory that has a contextual and focused-interest orientation, says Frelinghuysen, and this will lead to a more premium content orientation. Ad networks will evolve, he suggests, to serve the needs of marketers whose objectives are focused on brand building and content environment. "Networks that are able to curate and provide consistency in content environment will be relevant to marketers," he explains. The opportunity is for publishers to "develop and nurture secondary channels that are vertically oriented, are consistent [in their content offerings] and are more supportive of brand objectives. From the perspective of publishers' revenue interests," he adds, "if ad networks can generate a secondary [premium] market, it could be very valuable for both the ad networks and the publishers."
Among the key findings of the IAB/Bain pricing study, the growth of ad networks in 2007 was driven primarily by increased monetization of publishers' existing traffic, and publishers continue to have substantial un-sold inventory. Publishers' success in increasing their sell-out levels for display advertising resulted from their making more inventory available to ad networks. However, with realized CPMs averaging under $1, monetization value has been limited. While ad network intermediaries account for an estimated 25% of total inventory sold, they comprise only twopercent of display revenue. Publishers' goals to increase their sell-out levels appear linked to greater use of ad network intermediaries and, therefore, to lower CPMs.
This reality, Frelinghuysen acknowledges, has led ESPNand other major sites to reconsider their use of ad networks, and some publishers have either launched or are exploring the launch of vertical ad networks they control in order to create a secondary channel that delivers consistent content at more efficient – but still premium -- CPM price points. "Publishers need to think about ways to develop other channels that would link and aggregate premium inventory," he points out. "Sales executives realize they should review how much inventory they are producing and if they are churning out too much inventory they might need to have multiple secondary channels, maybe even buying ad networks or launching ad networks. They need to respond to different sets of customers and different expectations of price points they have to serve against."
What does this mean for ad networks? Frelinghuysen's sense is that "ad networks have not been in the position where they needed to bid for more premium ad inventory and may not have yet sorted out how to integrate premium inventory as an advantage to them." He suggests that publishers and ad nets are now having this dialogue and are in the process of defining their respective points-of-view on their future relationships. But, the report adds, the lack of available inventory management and optimization data hinders publishers' ability to develop basic ad sales strategies.
The Bain & Company report recommends that publishers "develop pro-active strategies for managing inventory and better tools for yield management." This includes:
· "Enhancing service offerings to support/differentiate premium business and evaluate reducing inventory levels;
· "Develop and closely manage relationships with multiple secondary channels – including horizontal ad networks, vertical networks and other 'specialty' networks;
· "Evaluate entry into ad networks and/or partnering approaches with other publishers for sales of 'value' inventory."
For additional coverage on this study, click here.The IAB/Bain Digital Pricing Study is available for free download at www.myersreport.com. Bain & Company's John Frelinghuysen can be contacted at john.frelinghuysen@bain.com.