The Remnant/Premium Double Standard

This article was originally published by Adotas on August 9th and August 13th, 2007 .

Since the early days of internet advertising, premium publishers have quietly sold online display advertising under a Double Standard:

While the largest, most powerful advertisers in the world pay single-to-triple-digit CPMs for premium inventory, smaller direct response advertisers pay pennies on the dollar for the exact same impressions.

Supply and Demand

At face value, the existence of a Double Standard is puzzling. Why would brand advertisers, with significantly greater clout and purchasing power than DR advertisers, overpay for media?

There are many factors that led to the emergence and longevity of the Double Standard, but the fundamental cause is rooted in simple supply/demand economics.

Although brand advertisers are willing to pay significant CPMs to reach a qualified audience, there’s simply too much inventory available on the top web properties for them to buy all of it. Many of the world’s most respected web sites are simply unable to sell their entire inventory each and every month.

Rather than let these excess impressions go to waste, top publishers sell their remnant inventory to highest bidders in direct marketing…usually at a cost well below $1 CPM.

A Quiet Behemoth and the Dangers of Inconsistent Pricing

This simple Double Standard has led to the emergence of a huge sub-vertical within online advertising. As eMarketer reports, of the $15.9 billion spent on online advertising in 2006, $10.5 billion was spent on direct response media.

Although less publicized and even less understood, the DR industry is worth almost twice the entire market for online brand advertising.

As brand marketers better understand the level to which they are overpaying for inventory, publishers will face significant pressure to either open up their unsold inventory directly to the brand marketers or to stop selling unsold inventory at the discounts currently allowed.

The stakes are high. Many premium content publishers cannot afford to publish quality content without the high CPMs garnered by brand advertisers. If brand advertisers stop paying premiums, the entire content industry could fall apart.

At the same time, publishers count on the income provided by selling their entire inventory – even if much is sold at bargain basement rates.

Square Peg/Round Hole

Although premium publishers have a few choices towards eradicating the double standard, none of the choices are particularly exciting.

First, publishers can simply refuse to sell remnant inventory and instead allocate the inventory to house ads. This can work for some publishers, particularly if they offer premium content products (e.g. subscription-based services) because it maintains rate card integrity but for the most part, this tends to hurt revenue numbers.

Second, publishers can donate their inventory to charities and non-profits. Google, for example, donates impressions to charities when its AdSense technology can’t display a contextually relevant ad. This does good for the world and simultaneously builds good will within the industry and the world at large. As with house ads, this option will cause the publisher to lose significant revenue.

Third, publishers can use excess inventory to bonus their paid advertiser campaigns. This is a great way to engender loyalty from advertisers but it may also lead a publisher down a slippery slope. It’s never good to provide too much bonus as eventually, the advertiser may to expect and demand it. Also important, in cases where the ratio of unsold inventory to total inventory gets too high, the offering of bonus inventory can end up undermining contract sizes as advertisers simply underbuy in hopes for gaining the bonus to fulfill their goals.

The sad reality for most publishers today is that there are few obvious, immediate ways to end the double standard cold-turkey.

A New Paradigm

Having talked with many publishers and advertisers, I believe that the answer may lie with behavioral targeting. Although our industry has hyped behavioral for quite some time, and it’s been around from almost the beginning, it’s still in relative infancy.

Most premium publishers today make almost all of their revenue from advertising based on consumers visiting their sites. It’s an obvious, intuitive model. But how many publishers are making money when their users are off their site? Behavioral targeting technologies today enable any publisher the ability to reach their audiences when they are off-site. If a pharmaceutical company is willing to pay a $75 CPM on a premium health site like WebMD, they should be willing to pay something more than the cost of unsold inventory on Yahoo Mail…and yet less than the price paid for contextually relevant inventory.

In other words, if publishers are willing to understand and embrace behavioral targeting technologies, they can clearly and swiftly eradicate the Double Standard. Whereas before, premium and remnant inventory were both on-site – now premium inventory is on-site…and remnant inventory is off-site.

By adopting this model, publishers can easily mitigate the losses caused by cutting off sales to DR firms…and more importantly, earn significantly more revenue than they ever did with sales to DR firms.

All possible parties win under this new model:

Premium publishers will earn significant revenues when their valuable audiences are away. This not only minimizes pricing inequities but it also reinforces the true value of contextual relevant. Enforced scarcity for on-site inventory can only help maintain pricing integrity.

Advertisers benefit from the behavioral model because they will now be able to reach premium audiences, on an incremental basis from contextual relevant locations, at a much cheaper cost than on-site placements.

Finally, top remnant inventory sellers (e.g. MySpace, Hotmail, etc) and participants in advertising exchanges (e.g. Right Media Exchange) will benefit by a continuing increase in payouts made for unsold inventory. This is made possible through the alchemy created by behavioral data.

Back to the Future

It’s ultimately up to publishers to eliminate the Premium/Remnant Double Standard. It won’t necessarily be easy, and there may be some pain before significant gains are achieved – but if we don’t address the issue, on a fundamental level, the entire medium is at risk.