3 reasons that data will save online advertising

It’s been nearly 15 years since Rick Boyce and HotWired famously popularized the use of banner advertising campaigns as a model for generating revenue online. Since then, there have been many, significant innovations in online advertising, including new ad formats, new pricing models, new targeting technologies and new metrics for effectiveness. Yet the value of online display advertising is being questioned now more than ever before, particularly in the current economic environment. Numerous organizations are projecting that online display advertising spend will be flat or slightly down in 2009. Growth is expected to recover in 2010, but at much lower rates than earlier in the decade and than search advertising. But the explosion of data and its increasingly effective use hold great promise for online display advertising. There are many types of data for online advertising, including keywords, contextual, behavioral, semantic, demographic, psychographic and social. The relative value of each of these forms of data is still an unknown, but I believe that the value (and cost) of data will soon exceed the value of inventory, which is already deteriorating. Here are three reasons that the use of data will save online ads and help restore their growth.

– Data makes media buying easier: Data from comScore, the IAB and others suggests that while the top 50 online publishers only account for 25%-35% of user attention, as measured by page views or time spent, they represent about 90% of online advertising spend. Why is that? As I’ve written before, the job of an online media buyer is seemingly impossible. Audience fragmentation, the proliferation of ad networks and the emergence of ad exchanges have created incredible amounts of complexity in the marketplace. Learning about all of these sources of inventory, let alone buying from them, is an unenviable task. On the other hand, buying from large, known publishers is simple. This is the default behavior for many online media buyers because it doesn’t entail extra effort or risk. Further, the buying of traditional media, rightly or wrongly, is done largely based on gross rating points, viewership, circulation, listenership, etc. Media buyers purchase audiences at scale. In the online world, media fragmentation has made it a necessity to buy from multiple places to achieve desired scale. Data allows traditional buying behavior (again, independent of whether it’s good or bad) to be replicated online. Data enables media buyers to purchase a specific, consistent audience at scale across many different publishers. Data makes the jobs of media buyers easier, allowing more dollars to be spent online.

– Data increases the value of remnant inventory: Somewhere between 30%-40% of online ad inventory at most major publishers goes unsold by their direct sales organizations. That number is closer to 80-90% for most social media sites, the fastest growing segment of inventory and the one with the most ad effectiveness challenges. Remnant inventory is the direct result of highly ineffective ads that are not relevant to the consumer. There was a time when NYTimes.com could sell its inventory because of the association with its brand. That time is long gone as metrics have told advertisers that they are not earning a return on their dollars. Getting value from advertising on social media, where consumers are largely not engaged in commercial activity, is even more difficult. And inventory, both premium and remnant is increasingly being commoditized by the ad exchanges. Effective use of data for targeting (with more engaging creatives) the right audience yields better ad performance and generates real value from remnant inventory. In the end, today’s gap between demand and supply diminishes as data-defined audiences, rather than impressions, are being purchased.

– Data is available to all: The traditional ad agency model is widely recognized as broken. The economics of the agency business dictate that they find more efficient and effective ways to engage consumers on behalf their advertising clients. Along these lines, agencies have come to realize that one of their greatest assets is their consumer and ad performance data. Data, in combination with more innovative creative, can target the right audience at the right time with the right conversation, interactivity and engagement. Publishers also see that it’s becoming more difficult to aggregate sizable audiences and to sell their ad real estate. Differentiation in the face of commoditization comes from their data. And ad networks know that they are in danger of being disintermediated unless they bring unique value to the both advertisers and publishers in the form of greater access to data or better targeting through data. Fortunately, all of these players have their own data assets and increasingly have access to data from traditional offline data vendors, such as Acxiom and TARGUSinfo, as well as from emerging online data exchanges, such as BlueKai (where I am an investor) and eXelate. The competitive dynamics in the online ad industry dictate that the various players leverage data to provide greater value to their constituents.

While data doesn’t solve all of the problems in the online advertising market, it’s clear that data is going to have a huge impact on the future of the industry. The companies that develop the platforms, tools and services to make it easier to aggregate, analyze and utilize data will be the next category of winners in the online ad market. More importantly, they will help grow the online advertising market for all of us. Even as the value of inventory decreases, the increasing use and value of data and the resulting greater sell-through of inventory will yield a larger online advertising market.

10 thoughts on “3 reasons that data will save online advertising

  1. Thank you for these important insights. There is no doubt that the proliferation of data by and about users as well as the availability of this data in different forms will drive online advertising in the foreseeable future. On Social Networks, user interest data can be used to target ads leading to greatly increased engagement and interest, but as you point out there can be some scaling problems with this because as targeting gets more precise, it also reduces the pool of targets. One way to solve this problem that my company Peerset is working on is to understand how interests are related to each other so you can gradually expand the targets to people who are interested in things that are related in a variety of ways to the ad. http://blog.peerset.com/Spreading-The-Net-Wide-When-Targeting-Ads

  2. Satya, spot on! The data revolution is coming, and it is only in it’s nascent stages. Never before have we had the amount of technology that is available to companies (like ours) to make the data revolution a reality. I was there 15 years ago when the banner became the carriage vehicle of choice for marketing on the web, and I am proud to say that I am at the epicenter of the revolution that will transform the “dumb” display ad into a smarter, sophisticated, guided marketing instrument that will come closer to the expectations of online marketing built over last 15 years. Thanks for making me smile today!

  3. Pingback: Lotame Learnings » Blog Archive » 3 Reasons why data will save online advertising

  4. Online advertising is receiving a lot of bad press lately about its effectiveness. The reality is the number of places to advertise has increased dramatically in the last 24 months. Giving a supply-demand ratio, it is only normal the competitiveness has driven ad costs down. This will only be followed by an increase in online advertising useage. This will drive the demand back up.

    Marketing is not what generates a sale or closes the sale. Marketing in any business is to attract a potential customer.

    Try Online Advertising with FreeKii.com, receive $5 Ad Credit With Account Activation.

  5. Satya, these are good insights. I would add that one impediment to the proliferation of data is a lack of tools to help publishers make sense of it all. Good forecasting and visualization, clear metrics on inventory value and overlaps, and tools to make sure that this new data doesn’t accidentally cannibalize existing premium inventory are all things publishers need to be successful. Fortunately, we have the solution to unlock the value of the data for publishers :-)…

    -ts-

  6. Great article Satya, and I also think there is another key point.

    Data ultimately drove the dot.com crash. No-one knew how to turn this ethereal data into tangible business sense – until pay-per-click came on the scene. The key point of data is in fact “measurement” – and you simply cannot measure and justify online advertising effectiveness by clicks. You are talking about such a tiny slither of user activity that you have missed the key effectiveness of emotional connection or interactive engagement that happens before and aside from a “click”. Clicks may work in search, but until people in the online space realize advertising in all media is about taking a message to a consumer where they are, as opposed to consumers online ‘clicking’ elsewhere to see a message, the entire industry is heading for a fall. That is why there has to be a move to cross-channel measurements.

    Have written about this on my blog, such as:
    http://deandonaldson.wordpress.com/2009/03/26/why-internet-advertising-will-not-fail/

    Else in press, such as:
    http://www.imediaconnection.com/content/21906.asp
    http://chiefmarketer.com/advertising/digital/0415-online-advertising-branding/

  7. Pingback: Venture Generated Content

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s