It’s true that there’s an imbalance between supply and demand, which is putting downward pressure on rates as highlighted in this morning’s WSJ article “Future Shock for Internet Ads?”. However, I think there are some important details missing that would add richness and perspective to this article and other similar ones.
First off, the writer cites PubMatic data at the beginning of the article. I have every confidence that the PubMatic data is accurate for what it is, but articles quoting the data rarely mention that it reflects a very specific sub-segment of the overall online ad market. That is direct response campaigns running on primarily small publishers with poor average content quality (with many exceptions I am sure) and weak/non-existent direct sales channels (likely not many exceptions here). This market sub-segment is the most volatile and most sensitive to changing market conditions so in that sense the trend numbers (48% Y/Y decline in Q4) really represent a “worst case”. The absolute numbers ($0.26 average CPM in Q4) are similarly non-representative; the significant majority of money that was spent in the display market during Q4 was spent at CPMs an order of magnitude higher than that. PubMatic actually makes some attempt to clarify in the text of the report itself, but in general these numbers are too often represented to be a broad barometer of display advertising, which they simply are not.
Two other important points: In general much of the online ad supply that’s being created is not being created in areas that advertisers have figured out how to use yet. Social networking sites and long tail content sites are good examples. The consumer applications are evolving so rapidly that effective ad models are lagging behind, so spend stays concentrated in areas that advertisers understand better.
Finally, in any analysis of supply/demand balance and particularly when CPMs are involved, it’s important to note that there are two distinct high-level market segments in online ads – Direct response and Brand. Across all measured media, Brand spend is 2x DR spend but this dynamic is very different online. Nearly 30% of DR spend is now online, but only 5% of Brand spend is. This imbalance is a big reason why the overall supply/demand balance is out of whack. The author mentions this at the end of the WSJ article I reference above but I think these more specific details help clarify why this is happening.