Online advertising in a Free Media Future Part 2

There are many innovations underway in online advertising, and more, higher quality media could accelerate these, namely:

1. Better Targeting: The fundamental rule of marketing is that in order to maximize revenue from a customer base, you have to engage in segmentation. The more information you have about your customers, the more finely you can segment them. Innovations in customer profiling for advertising started with site contextualization. Since Google AdSense started using contextual advertising, most ad networks have followed suit. Behavioral Targeting is a recent innovation but has caught on quickly, with currently about 25% of advertising networks using it. In the first generation of BT, much of this targeting was done at a very high level, such as a website visitor is male, in the age group 35-45, is interested in automotives and looking for insurance.

However, networks such as Adconion are pushing the envelope further using a combination of contextual and in-depth behavioral targeting with many subcategories. Larger publishers are beginning to use collaborative filtering, a form of social targeting, to fine tune their on site advertising. With greater use of multi format mobile internet traffic (smart phones and netbooks), especially with regards to consuming media (Comes with Music from Nokia, iTunes etc) geo-targeting will also increase.

Once ad networks and publishers become adept at profiling customers using these techniques, advertisers will be willing to pay premiums.

2. Tighter Privacy Controls: This is paradoxical with regards to the first point. However, in order for advertisers to target website visitors more accurately, these self same visitors will have to share highly personal information voluntarily. Visitors will only do so if there is some form of guarantee that this information is not retained for long periods of time, or shared widely. Therefore, in order to finely target website visitors, advertisers will have to ensure they not only respect privacy, but are also seen to do so.

Some moves in this direction involve customers having a ‘private wallet’ which contains detailed information. Website visitor then opt to share this information on a site specific level for a certain duration. This technology will become more widespread with consumers understanding that sharing private information with for example an online newspaper is a way to ‘pay’ for being able to read premium content. They will also understand that this allows them to be targeted or remarketed ads which might save them money on their online purchases.

3. Lower barriers to entry for new publishers and advertisers: User Generated Content (UGC) is well established today and many internet users have created and uploaded some content, be it blogs, photos or video. This trend is already accelerating with camera and internet equipped mobile phones ready to record and upload content instantly.

Currently, UGC content presents huge problems for large brands which pay the bulk of advertising dollars today, as they do not want to inadvertently associate themselves with objectionable content (adult, racist etc). As contextualization becomes better able to screen and categorize content, more content will be acceptable to the larger brands. This in turn will make it simpler and quicker for unknown artists to monetize their efforts, enticing more people to participate, creating a virtuous cycle.

As with all trends, smaller players should benefit disproportionately. Better filtering and targeting will make advertising even more accessible and attractive for smaller organizations. To lower ad network cost of sales and service, the self service online advertising model pioneered by Google AdWords will become widespread across display. This will provide small and medium sized businesses, SOHOs (small offices, home offices) and ordinary consumers access to local ad inventory. It could become commonplace to advertise clearance or garage sales or even charity cookie baking for a very low cost and effort.

4. More transparent pricing: Current online advertising pricing breaks down broadly into CPA, CPC and CPM. Online properties such as LinkedIn, which attract high income professionals, can command high eCPMs (effective CPMs) upwards of $25. Remnant inventory can be paid eCPMs close to zero.

There is tremendous variability in the market for the same inventory and publisher blogs are full of complaints that a particular network is underpaying them. This is partly driven by the fact that there are information assymetries that work against a standard pricing. Ad networks have varying levels of sophistication when it comes to targeting technology. Large ad networks such as Google AdSense have access to many advertisers and publishers, being both deep and broad. While many ad networks are open about the revenue split, AdSense can be opaque, as some small advertisers and publishers have little information and hence choice.

There are moves underway to disaggregate pricing from the rest of an ad network’s other activities. Companies like Quantcast are trying to categorize a publisher’s audience, and this information could easily be used to assign a market value. Over time, this could enable publishers to determine what their target price should be, and ad networks could openly take a margin of this for service or access.

More inventory, better targeting and lower entry barriers which will give rise to specialization and disaggregation, which could in turn result in a level playing field with more accurate and open pricing.

5. Some advertising formats will become indistinguishable from media: In the offline media world, we are already familiar with soap operas and product placements – media created by merchants/advertisers for the purpose of selling their product or increasing brand visibility. This process is already in full swing online with YouTube videos and Facebook games that are in effect product placements.

An interesting effect of this is that some ad networks have started producing quality content, so that they can monetize it (the traditional strategy of moving up the value chain). Not only is this a great way to differentiate yourself with proprietary content if you can do it well, the advertising (whether overlays or product placement) is guaranteed to be very highly targeted.

Ad networks, agencies and media planners will cooperate much more closely in the future. The choices available to advertisers will change from 15 different types of ad formats, to a spectrum that starts with static ads and ends with highly interactive role playing games that may well outlive the original campaigns.

In Summary

It is difficult for us to conceive these changes in today’s environment. Online advertising growth is slowing down, albeit not as quickly as offline. Startups that tried to survive on an advertising only model are being asked by their VCs to rethink their plans, or having the rug pulled from under their feet. It is beginning to look like the dot com crash all over again. However, I think that changes in online advertising are going to enable new business models we can only begin to imagine and much of it is going to be driven by the structural shift underway between free and paid media consumption.