SpectatorBytes

Over the past couple of weeks, I have heard several publishers and advertising industry participants state that the online advertising model is broken. Their concerns about online advertising are caused by more than just the softening of demand.  The advertising inventory glut (i.e., no scarcity), the downward pressure on display CPMs, and advertiser dissatisfaction with existing formats has many industry participants worried about the prospects of online advertising.

Furthermore, social media products, which are increasingly capturing a significant portion of consumer time online, seem to have proven that they are unable to attract their share of advertising dollars.  At the latest Jefferies conference, David Kenny from Digitas, made an interesting statement. He said that while his clients are increasingly leveraging social media to find their community of enthusiasts, they are not paying to do so.  In other words, ad agencies can execute social media campaigns on behalf of their clients for free.  This is a bit concerning, especially coming from one of the largest interactive ad agencies.

In this context, it is easy to think that the online advertising market COULD fail to meet the expectations of analysts and industry players. This would mean that the online share of total ad spend (9% of total ad spend) does not catch up with the levels of consumer usage (28% of total time spent).  However, I have seen enough innovation, sales creativity and signals of success to lead me to believe that the online market will deliver on its potential long-term.

The following are some of the initiatives that are experiencing growth in this current economic environment:

- Vertical networks that offer premium custom solutions to advertisers
- Video advertising on high-quality programming – primarily pre-roll and custom solutions (e.g., sponsored content)
- Advertising networks offering greater transparency (ability to chose mix of specific sites) and better targeting (ie.,ability to pick specific audiences) to advertisers
- Publisher-centric optimization players
- Advertiser-centric optimization solutions — these are beginning to emerge
- Local advertisers migrating online – though local has yet to reach the tipping point

In light of this, there is reason for long-term optimism. However, several things can still be done during this downturn period to help position online advertising for explosive growth when the market returns. Here are a few examples:

- Establishing video advertising standards, both in terms of ad formats as well as metrics
- Developing an effective format for brand advertisers to support content at scale (particularly for the news category)
- Offering advertisers better tools to purchase, optimize and display online media — i.e., process needs to be simpler
- Enabling use of publisher data to further enhance targetability and thus overall performance; this feature could truly help set online apart from other media

Nevertheless, this optimism does not suggest that the advertising market will be able to support the economics of traditional media models (e.g, magazines, newspapers, TV stations).  Online models will have to be much more efficient due to hyper-competition, new technologies, measurability, low switching costs, etc.  Thus, publishers will need to be incredibly cost-efficient to survive and thrive in this environment.  The online ad model is certainly challenged in the near-term.

Yet, as in previous times, innovation will happen and lead to the next wave of growth in the market.