Shortage of Inventory, of Quality, or Just Pairing of the Two?

Last week’s TNS report (see Clickz) on 2006 ad spending put numbers to an obvious trend: Online advertising is the growth leader (up 17.3%), while print is mostly down and TV (minus Spanish-language) is just barely above flat.

Within online, the report also surfaced a less obvious trend, that large marketers are moving dollars to online display advertising more slowly than smaller-budget advertisers. On average, marketers in 2006 allocated 6.5% of their budgets to online while blue chip brands put only 4% against Internet ads. TNS Senior VP of Research Jon Swallen chalked up the slower adoption by the big spenders to an availability problem: “it’s hard to find inventory to spend more on.”

Huh?! Not enough online inventory? Even at top brands like Yahoo, certain large swaths of the site (Mail, My Yahoo, Groups, etc.) run house ads and cut-rate remnant deals. Ad networks don’t have anywhere near 100% fill rates for participating publishers, and the most efficient ad network of all — Google’s AdSense program — serves PSAs a fair amount of the time.

Market Inefficiency v. Lack of Inventory

Clearly there’s not an inventory problem online, but instead a quality inventory problem. There is limited inventory adjacent to high-quality content, and — maybe this is what Swallen meant — it’s still very hard to find it and sponsor it. There’s a market inefficiency problem that the ad networks and Google aren’t yet solving. The vertical publishers (think CNET’s tech sites or Jupiter Media or Nickelodeon Online) have quality, but not enough of it; the ad networks and Google have scale but can’t yet guarantee quality.

The Story of Google’s Effective Ad Rates

The two sides of Google’s money machine illustrate the point. Google takes a purely rational approach to advertising: Advertisers in a competitive-bidding situation will pay higher and higher cost-per-click rates until the costs approach the immediate revenues generated by that click. The average CPC paid by Google advertisers is around $0.50. When people use Google’s engine to search for something specific, 17% of them will click on one of these advertisers’ ads (see ChasNote). The algorithm that matches keyword advertisers with keywords entered into a search box works great for all involved. Users of Google’s search engine are seeing highly relevant ads (a perfect match 17% of the time!); marketers aren’t paying a nickel more than the value they get from each click; and Google makes about $68 for every thousand search-results pages they serve up.

But Google’s other system, the AdSense publisher network, tries to match those same key-word advertisers with prospective clickers on other sites based on content rather than key-words entered into a search box, and doesn’t work as well. That 17% click-through rate on Google’s own pages, a proxy for how well the ad-server logic delivers ads to people who want to click on those ads, drops to something closer to 1% on non-Google sites. (Consumer mindset, searching versus reading, is another factor.) Direct-response marketers may or may not care about the lower click-through rate: They’re only paying for the completed click.

Brand Marketers Demand Scale, Quality and Safety

Brand marketers, however, are paying for more than click-through performance alone, and they hold media partners to different standards. Even infrequent snafus that put their brand — and the implied endorsement by their brand — alongside homophobic rants by Ann Coulter (ask Verizon or Washington Mutual, see CNN) or on sites that promote illegal behavior (ask Microsoft or Wal-Mart, see Variety) become unacceptable PR disasters. Brand advertisers need a combination of scale, quality and safety (more on this from Battelle, see Searchblog), and the existing artificial intelligence solutions aren’t there yet. The bots get better every day, but to accelerate the migration of brand dollars to the Internet, we still need human insight to facilitate the process.

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