Thursday, April 9, 2009

Online Publishing Insider: Ad Networks Are For Idiots -- And Here's The Math To Prove It

Ad Networks Are For Idiots -- And Here's The Math To Prove It

Ad networks are a tax on lazy publishers.

They are a cancer that slowly eats away at you from the inside, doing severe damage even though you feel fine. They are a cancer that has spread to nearly every publisher, and threaten to do irreversible damage to our industry.

Yet our response is lame and predictable.

We sit at countless industry conferences, self-righteous, nodding our heads in collective agreement about the perils of ad networks. We make the same boring, emotional arguments to feel better about ourselves. We have high hopes and good intentions, like the first day of a Weight Watchers program.

Then the next day we eat cake.

We are slaves to the short-term need to make the quarter; addicts who take the revenue boost despite the pain we will endure later. What is the cost of this reckless lifestyle?

Put another way: Would you risk your entire business for a chance to make one percent? Ultimately, that is exactly what you are doing. Here is a quantitative analysis of the bet you are making:

Competing for Scraps:
First, it is important to understand that the revenue distribution among publishers is an extremely non-linear curve. The top 10 publishers in the U.S. capture more than 70% of every online advertising dollar, and the top 50 publishers capture a whopping 91% of all online advertising dollars.

As for the other 9%? There are estimated to be more than 250,000 publishers using Google AdSense alone.

The long tail is very long, very crowded, and very poor.

It Only Makes Sense if You Can't Count:
Ad networks now generate a whopping 27-cent average CPM, while premium publishers rake in a $20.17 average CPM through direct sales.

Publishers earn 74.7 times more money per page when they sell ads direct.

The problem is that the average premium publisher only sells 30% of its inventory direct. This leaves every publisher with a critical decision: What to do with the other 70%?

This is where people start to use bad math.

If a publisher sells the entire 70% of remnant inventory through ad networks, that is equivalent to selling 0.93% more inventory direct. Less than 1%!

Figure out how to sell an incremental 0.93% as premium by innovating, not by betting the farm.

Dumber than Buying Lottery Tickets:
You are collectively paying more than $2 billion a year to ad networks to create a competitor to your own sales force, devalue your content and brand, and ultimately drive down your own CPMs.

When you buy a lottery ticket, the average value of that ticket is 20% to 50% of the cost. Lotteries are smart enough to realize that if they don't give you some of the money back, you will stop playing quickly.

Yet ad networks take a product worth $20.17, and give you back 27 cents.

After you include fees and unsold inventory, they often take more than 50%. You would be outraged if the government demanded more than 50% of your money in income tax, or a charity wasted more than 50% of your donation on administrative fees, so why do you accept this from an ad network?

If you are a very small publisher that cannot afford a single salesperson, then ad networks may be your only option. For all the rest of you, you are just being dumb.

The Right Answer:
Publishers need the courage to take the short-term revenue hit and turn off ad networks. It is the only chance you have to keep the cancer from spreading.

Search was just a hobby until Overture cracked the code on how to monetize it, and Google spent the next decade refining it. It is time for publishers to spend our collective efforts to crack the code on display advertising and start innovating on ad formats, reporting, measurements, and sales channels.

I will be at AdTech in a few weeks. I will be the guy wearing the "I Hate Ad Networks" pin and painfully listening to another boring argument about why ad networks are bad.

Want a matching pin? Let me know in the comments.


Hear Ye! Hear Ye! King Content Requests Your Input For OMMA Publish!

If content is king, then what is his Majesty's next move in this troubling environment? Is this the time to expand territory and grab land, experiment with new technologies for extended reach? Or should you trim sails, keep the powder dry and stay afloat in a storm? At the upcoming OMMA Publish, June 17, we will engage the best tactics and strategies for publishers in a challenging year. We are soliciting panel and speaker proposals around these topics now. If you're interested in speaking or leading a panel, please fill out the Speaker Proposal form here (only those who fill out the form will have proposals considered), or email Steve Smith at with more general suggestions.

David Koretz is President & CEO of BlueTie, Inc.

Online Publishing Insider for Thursday, April 9, 2009:

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