AOL's Programmatic Upfront: Inconceivable!

AOL has announced that it will be hosting a "Programmatic Upfront" event in New York on September 23. In a blog post on a corporate website, CEO Tim Armstrong wrote this week:

"Since the 1970s, TV has been the primary beneficiary of upfront buying. In the last two years, digital has also held Upfronts, with a heavy emphasis on video inventory. But as chief marketing officers and other brand stewards come to terms with the reality that proving ad spend ROI is "the new black", there is every reason to believe advertisers will soon be willing to pre-allocate media budgets against large scale display inventory

"CMO's can't embrace digital much further without a simpler connection between people and platforms. They can't shift their budgets from TV until we - as an industry - demonstrate the true power of digital to unlock creativity."

We offer a few modest critiques on this view, which relates to broader notions of television budgets shifting to the web espoused by many sellers of online advertising.

First, TV networks can force advertisers to participate in upfront marketplaces primarily because they sell out of inventory. On television there is a scarcity of individual units of highly desirable inventory. There is often an interest among advertisers in preventing competitors from securing specific kinds of inventory. These are among the reasons why large advertisers make what occasionally appear to be unwise decisions to commit budgets so far upfront, and outbid each other for the privilege. Few of the conditions which make TV Upfronts a "least-bad" alternative exist on the web, and it's unlikely those conditions will exist until a web publisher develops a must-have property for a segment of competitive brands which is exclusive to that publisher's environment.

Second, "ad spend ROI", while referred to by many in the industry, is an ephemeral concept for most advertisers. Whenever we hear industry participants speak about ROI, we are reminded of a scene in the film, The Princess Bride, where the character Inigo Montoya, played by Mandy Patinkin, responds to his boss' repeated reactions to the unfolding events as "inconceivable". Patinkin's character eventually says: "you keep using that word. I do not think it means what you think it means".

The world's largest advertisers tend to use television, primarily because an advertiser who is large often requires mass reach as one of their media goals, and only television has mass reach against essentially all audiences. They behave very differently than do the e-commerce advertisers who drive a disproportionate share of growth of online advertising. Our belief is that most large advertisers do not regularly calculate ROIs in assessing their media spending. Those who do might use econometric models which may justify incremental budget shifts, but many other factors come into play (as we illustrate below). More critically, the very definition of ROI may mean something that is inconsistent with how a financial analyst might define it. It rarely refers to the incremental and ongoing contribution to a business unit's cash flow or profitability that would not otherwise have occurred for a given incremental amount of spending on advertising. Within a specific medium, once a goal is defined there may be a notional ROI against which budgets are optimized across otherwise comparable media owners.

The most important reason why advertisers who buy TV don't shift more - or all - of their ad spending to the web is because those segments of advertisers who buy TV do so to reach virtually everyone inside of a demographic group. For whatever ROI the web can reach, it will only be against those audiences a brand is exposed to. While television does, effectively, reach everyone, the web does not, and those who it does reach are harder to find with an optimal balance of reach and frequency. This is hard to do with TV as well, but it's much easier than it is with web given fragmentation of publishers and measurement processes which even now have a hard time identifying (let alone anticipating) the unique reach of a campaign.

And then there is the perceived power of sight, sound and motion in a lean-back environment and the passive nature of advertising during TV campaigns vs. the intrusiveness of advertising while web-surfing. And the issues around convincing a wide range of constituents across a marketer's business eco-system why alternative approaches to marketing are superior (whether they are or not is largely beside the point. Ask a manufacturer how their retail distribution partners feel about not supporting a product launch with television advertising.)

While AOL may very well be able to prove itself as a successful provider of online inventory sold in a programmatic manner, it won't be for the reasons they highlighted in their blog post. Premium programmatic inventory has value to advertisers because it can cut operating costs out of the workflow. It can provide large advertisers who are uncomfortable with the notion of programmatic buying an enhanced degree of confidence in buying media this way. It will help AOL specifically if it helps cut the costs they incur in their sales efforts or if it helps AOL to capture market share in the short term. But will this initiative help AOL take share from television budgets that AOL wasn't already going to get? In a word, "Inconceivable!"

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are impacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications.

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