| Media Maven Volume 10, December 2011  Download PDF |
Unleashing the Digital Opportunity
The shift from traditional to digital advertising continues driven by innovation in online services and mobile access. As consumers spend increasing time online, marketers shift budgets and ad spend to digital channels to reach existing and new customers. As we continue to meet with senior executives of digital advertising companies, we have noted that two prominent themes in the digital marketplace this year are:
The Online Advertising Disconnect
Most industry participants have already seen some variation of the chart below showing the current disconnect between time spent online and advertising spent online. This gap in time spent and advertising spend equates to a $20 billion advertising opportunity for digital and mobile advertising. On the other hand, digital advertising's ability to close the gap between time spent and ad spend will likely persist as long as the costs of buying digital remain high relative to other media.
Source: eMarketer and KPCB
It continues to be considerably more expensive to transact in the digital space than it does in the traditional media space. As long as digital requires more people to transact this gap will narrow only slowly over time.
A look at any display advertising landscape chart clearly illustrates why the digital ecosystem is far more challenging to navigate (see chart below) than the traditional media ecosystem. The high volume, low dollar, high complexity nature of digital advertising makes it surprisingly among the most labor intensive medium in the ad industry. We've heard that the agency GroupM employs as many people in the digital sector as in all their other media sectors combined.
Source: AAAA Marketer's Guide
One reason for the increased transaction costs associated with digital is that digital lacks the repetitive development that can exist in a print or TV production where known inputs can provide an expected output at a consistent and predictable price. According to a report by the American Association of Ad Agencies (AAAA), if traditional services are assumed to require staffing and fees that imply an effective commission rate in the range of 12%-15% (with media planning and buying services assumed to be 1/3 of the total), digital can typically require resources equating to an effective commission rate ranging from 25%-30% (with media planning and buying services assumed to be 1/2 of the total).
A recent study by ad tech firm NextMark showed that the digital ad process was less wasteful: of a typical $500,000 digital ad buy, $40,000, or 8% of the media buy went to tasks such as trafficking ads, implementing and reporting the buy. Nevertheless, NextMark noted that high transaction costs included too many people involved in copying and pasting information from one system into another.
Given the complexity of the digital advertising ecosystem, it is no wonder that several hundred ad tech companies have sprung up in recent years to solve this problem by creating technologies that create efficiencies in the system. We see two major trends developing that are likely to simplify digital ad buying:
Google's Digital Dominance
No company in the advertising system has done more to simplify or streamline the ad ecosystem than Google which, through acquisitions, has very nearly created end-to-end solutions for advertisers and publishers, as shown below.
According to ZenithOptimedia, Google has tightened its grip on global search (raising its share of searches from 72% in 2006 to 85% today), and has established a lead in traditional display and online video with the acquisitions shown above plus the acquisition of YouTube. As a share of total online ad spending (search & display), Google has increased its share to 44% of the total, up from 35% in 2006. Conversely, Microsoft, AOL and Yahoo! have all lost share over the same period. On a combined basis, Microsoft, AOL and Yahoo! represent a 14% share of global internet ad spending, down from 33% in 2006.
As we noted in our September note (Display Advertising - 2011 Mid-Year Update), the share shifts among the top 5 online display advertising companies in the U.S. is striking, with Facebook leaping to the forefront while Google surges from 5th place in 2009 to 2nd in the current year, as shown in the chart below.
It has been estimated that the top 5 portals account for approximately 64% of total global digital advertising, with Google accounting for approximately 46% of worldwide digital advertising, significantly greater than Yahoo!'s 10% share (based on ZenithOptimedia's estimate of worldwide digital advertising).
Perhaps in response to Google's growing prominence in the display advertising ecosystem, we found a recurring theme to be effective ways in which other companies can counter or compete more effectively against Google. Examples include the Yahoo/Microsoft/AOL alliance and the OpenRTB.
The Portals Alliance - Yahoo/Microsoft/AOL
The Yahoo/Microsoft/AOL alliance was formally announced in early November. The alliance between these leading portals allows each of the companies to sell each other's unsold premium advertising (non-guaranteed or Class 2) inventory. The alliance is designed to be attractive to brand advertisers by broadening the potential reach of these advertisers in the search for premium inventory. Inventory will be accessed by integrating each other's real-time bidding technologies, which include Yahoo's Right Media Exchange and the Microsoft Advertising Exchange.
We view the alliance as a way to maintain share in the face of continued share gains made by Google and Facebook, each of which has rapidly become a leader in display. AOL, Microsoft and Yahoo are all projected to continue to lose share, with Facebook projected to surpass Yahoo for the first time this year. Arguably, the three portals are making a defensive move based on their relative weakness, in an attempt to create a compelling alternative to Google.
Open RTB
We attended the OpenRTB forum in New York City, which included several ad tech companies that are enabling the buying and selling of online advertising much like stocks are bought and sold on the NASDAQ exchange (fittingly, the meeting was held at the NASDAQ exchange). The forum was well attended by companies such as Adap.tv, Brightroll, Pulsepoint (formerly ContextWeb), Jumptap, MediaMath, Nexage, The Rubicon Project and Google. OpenRTB was formed to create both an alternative to Google, as well as a way to bring Google to the table (and work within industry parameters rather than create its own parameters). In effect, the question is whether OpenRTB would be a closed system in the making (Google's) or an open one (OpenRTB).
OpenRTB stands for "open standards for real-time bidding". The mission of OpenRTB is to spur greater growth in the real-time bidding advertising marketplace by providing open industry standards for communication between buyers of advertising and sellers of publishing inventory. The initial goal of OpenRTB Online is to reduce the cost and increase the consistency of managing the synchronization of advertiser requirements and publisher requirements with all players in the ecosystem. Key to this will be creating standards such as open ad server logs and cookie matches.
RTB is an online ad technology that enables buyers and sellers to trade display advertising inventory on an exchange platform on an impression by impression basis as each impression becomes available on a publishers web site. RTB enables buyers and sellers to adjust their prices based on real-time data and real-time feedback on the effectiveness of an ad campaign.
At the Pubmatic Premium Publisher Conference, IDC, a global provider of market intelligence, presented a study in which it forecast that RTB display ad sales in the U.S. reached $352 million in 2010, but is projected to grow by 213% to $1.1 billion in 2011. By 2015, IDC forecasts RTB transacted sales to reach $5.1 billion by 2015, a CAGR of 71%.
Source: IDC
The major driver in the development of the RTB marketplace is an improvement in ROI. Publishers stand to improve yield, while agencies and advertisers benefit from RTB-trading as it improves campaign efficiency and return on ad spend. Key to the growth of exchanges will be the preservation of pricing on premium inventory. Or, said differently, publishers are not likely to place increasing amounts of remnant inventory into exchanges if it has a negative effect on the pricing of premium inventory.
Final Thoughts
"If you don't like change, you're going to like irrelevance even less" - General Eric Shineksi, Retired Chief of Staff, U.S. Army
The advertising marketplace has changed dramatically in the last ten years driven, as usual, by changing consumer media consumption patterns. While it is logical to assume that the gap between online media consumption and online media ad spend will narrow, until costs of transacting online are reduced, the gap between online and all media will likely remain wide. It is clear, however, that significant steps are being taken by online industry heavyweights to more quickly narrow this gap by eliminating today's high transaction costs. While newspapers are currently suffering the share shift to digital, television, which continues to grow in spite of fragmenting audiences cannot afford to rest on its laurels.
Not adapting to the rapidly changing landscape is not an option. Media companies that adapt to this new reality by incorporating new media into to their strong advertiser proposition and advertiser relationships are likely to fare best over time. As we have stated on numerous occasions, those traditional media that succeed best are likely to be those that best marry their traditional media businesses (reach) with online and mobile opportunities (target-ability). As always, time will tell.
Sincerely,
Chris Ensley
(212) 901-4160
chrise@coadydiemar.com
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