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Online ad rates in the UK are plummeting. This model is broken

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According to a recent opinion piece on E-Consultancy, the online marketing community, with vast amounts of online advertising inventory available due to the rise of broadband, increased competition, dropping response rates and a limitless supply page impressions, many online media owners – and that includes web startups trying to sell advertising – are seeing their display advertising CPM rates plummeting to as low as £0.50 CPM. Long gone is the day of being able to charge £20 CPM for broad run of site display advertising. Er, yes, you could say that. Apparently advertisers now want increased flexibility and new formats in order to protect margins.

So with inventory over-supplied, millions of impressions are going unsold every month and CPM rates have inevitably fallen, hitting margins. We are told that Rich Media, in-stream video, “Page take-overs”, podcast sponsorship, advertorial content and mobile are going to come to our rescue.

But this is basically a joke, right? Is there really any point in continuing with the ridiculous over-emphasis on CPM? The problem is only going to get worse. What we have here is hyper-inflation. And page-takeovers? That will really get the users clicking. Clicking away.

As the Wall Street journal reports Google is having a harder time than it expected generating ad revenue on social-networking sites. But there is a clue to the answer here. MySpace’s ‘hyper-targetting’ systems (targeting ads based on the users’ profile) are working out well. Other sites and other systems will improve on this, especially in the mobile arena. So the implication here is that it is not more inventory we need at the moment, but better and better targeting, and more advertising based on action and interaction not on CPM. Or am I wrong? What do you think?

  • http://www.journalism.co.uk John Thompson

    I am not sure there is such an emphasis on CPM (cost per thousand views), Mike. Google Ads pretty much destroyed that with their own cost-per-click (CPC) model.

    Hyper-targeting is a nice idea but it risks excluding a potential market for advertisers that they might not necessarily know exists. It’s also only really going to work on sites with massive user bases and also relies heavily on people providing accurate information about themselves. I suspect inevitably a lot of stuff is going to be horribly mis-targeted (so nothing new there then).

    Also where does brand building fit into all this? That’s about getting a product or service name inside your head for some time in the future when you might need actually need it. No amount of profiling can predict your future needs.

  • http://blog.kitchentwo.com Gary Reid

    I don’t think you are wrong. But agencies like selling Rich Media, in-stream video, “Page take-overs”, podcast sponsorship, advertorial content because it allows them to charge for ‘creative’.

    Which, helps them make up for the huge costs of managing the campaign.

    CPM has been the prom queen of online advertising for so long it’s going to take something either very special or very drastic for targeting and action based metrics/charging, which are the unwanted step-child under the stairs, to come into mainstream usage.

    At some point there has to be a real shake up of the whole economics of advertising.

  • http://www.zencudo.co.uk James Penman

    I think you’re right.

    There’s going to be ever increasing amounts of inventory/content chasing a (relatively) gently increasing advertising pot. For most publishers, I think this will translate to having to work on a CPA basis with only the big sites such as Sky, BBC (when they go fully commercial) etc having the luxury of working on a CPM and even CPC basis on highly trafficked pages for brand building etc.

    Sure, this’ll take years to play out but the massive over supply of inventory and accountability of web advertising can surely lead in one direction for most: CPA?

  • http://nmk.co.uk Ian Delaney

    Publishers are sensibly resistant to CPA or CPC alternatives, though. Their biggest asset is the ability to generate loads of traffic. Such campaigns also make it impossible to budget – you are at the mercy of how good the advertised products are and how well the ad is executed, neither of which you can control.

    So the winners will be niche publications that can guarantee a targeted audience for advertisers, thus generating decent CTRs. Losers will be general publications for anyone and the advertisers of general goods for anyone – a recipe for poor CTRs and growing dissatisfaction with buying on CPM – newspaper sites come to mind, unfortunately. Socnets, too, perhaps, unless they can do effective profile matching.

    OTOH, most budget is still in the hands of fairly traditional advertising agencies. They don’t want to talk to this army of niche, independent publishers who only have an online presence. They want to talk to their old mate Quentin from the FT or Raef from the Observer.

  • http://www.ecademy.com Julian Bond

    Let’s here it again for the mid-sized and smaller websites. They’re really very badly served by the advertising industry in the UK. Your inventory is too small to really get the attention of the agencies. And Google Adsense rarely generates more than beer money unless you specifically tailor the site to AdSense revenue.

    What’s mildly irritating here is that discussion about online advertising seems to revolve around the Advertiser and the Agency and rarely mentions the Publisher apart from a few mega sites. Nut Advertising is a three cornered stool where all three are necessary. It’s further skewed because the biggest player, Google, acts as both Agency and Publisher.

    I wonder what this means for UK based web startups? Bootstrapping or using Angel money will get harder if your early growth is dependent on advertising revenue and your ability to get that is fading even while your costs rise with your growth.

    It did look for a while as if self service systems like Adify might fill the gap by disintermediating the Agencies. But in reality they’re undercutting the Agency rates and contributing to the overall decline in rates.

    In the light of all this, it’s worth re-visiting Guy Kawasaki’s comments from last year about how to reach $50m in revenue.

  • http://tioti.com paulpod

    Wasn’t the point of online advertising the cost efficiencies brought about by paying much less for ‘eyeballs’ (brandbuilding impressions) and getting accurate costs for user interactions whether that is a sign-up for a service, a product purchase or similar. Bigger ads for impressions based campaigns have got to be the worst way forward here. Better interaction, conversation, promotion and deeper relationships with users offer loads of untapped potential for growth.

    No it’s not as easy. Get a better agency, build a smarter relationship with the sites you market on.

  • http://londonbikers.com Jay Adair

    I agree with Ian and Julian’s comments. There’s not enough representation for niche or medium sized websites in the UK. This is a huge market and someone’s missing out on a great opportunity to develop advertising here. Also, what sort of site-owner allows Page-Takeovers on their site? I sure as hell wouldn’t. I want my readers to come back!

  • Jamiroquai

    I regularly notice advertising, whether banners or skyscrapers. Sometimes they affect my purchasing behaviour. Other times they simply affect my views on a brand.

    I don’t recall *ever* clicking on an ad though. Its a poor metric when used in isolation.

    For instance, I am on Facebook right now and see an ad for Coke. Why would I want to click through a coke ad? Or right now on MSN is an ad to do Tesco online shopping. Why would I stop everything I am doing and buy from Tesco.com at that moment? I will however, take notice of it and consider the option the next time I need to do my shopping.

    Besides, there is so much inventory out there that I don’t think it really matters too much when compared to other mediums.

  • Peter Dantic

    Publishers are not experiencing a drop in CPMs if they continue to invest in editorial excellence, audience growth, cover their subjects comprehensively and invest in agency relations.

    Sites who do not have the scale or who, due either to their size or maturity (or both) are unable to invest in (enough) editorial quality/output and professional sales relations with the ad agencies, are suffering a fall.

    Sites looking to increase CPM from the ad sales networks will also be disappointed. Thise companies know about sales, they do not know about selling a particualr site and generating a long-term relationship (2+ years) around that site and its advertisers. They go for the bulk money and suffer first as agencies try to depress CPMs. Their corporate view is not brand-focused, it’s network focused. High CPMs are about individual brands, not networks.

    Sites need to work on brand, quality and representation to maintain or grow CPMS. Until your site is at that stage, your CPMs will be low and your yield dominated by sub £5 CPMs, Adsense and affiliates – all of whcih do not care for the quality of your audience, but really only for the number.

  • James N

    I am totally perplexed by what Peter has written immediately above.

    Firstly our CPM is falling. Secondly our pageviews are going up and our CTR is the same as ever.

    Our editorial quality is such that we are actually suing print magazines who are competitors for copyright infringement. They lift articles wholesale. We top Digg, Reddit and so on with our stories on a regular basis without them being frivolously written.

    We have companies at the very top of the profession we cover (architecture) actually running blogs on our site written by their principles as a way of adding to our content. We are top of Google with all the search terms for our sector. We get more readers than the websites from the three top print magazines combined.

    Despite this, despite a damn good reputation (enough to get yours truly on Channel 4 news a couple of weeks ago, interviewed by the evening standard the week before and in the Guardian last weekend, all as an expert on the subject) our ad turnover has slumped. It slumped in September and has not gone back up since whilst we struggle, and I mean struggle to attract good quality advertising.

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