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Tuesday, 6 September 2011

An online ad-funding correction is due

The UK online advertising sector is worth £4bn, and, any way I do the maths, content providers seem to be getting a very raw deal.  In my post on Bad Culture I look at a couple of examples - a large and a small content provider - arriving at the conclusion that approximately 10% of the money spent on internet advertising gets to the companies actually generating content.

Comparisons with other forms of advertising, specifically looking at what content can be funded exclusively through advertising, show a clear gulf between the online and physical media worlds.

Print and broadcast media adverts can fund an entire TV channel, free City newspapers and commercial radio, yet online equivalents struggle; and since the online ad sector is worth more than any other ad sector, this can't be due to a lack or cash or confidence in the medium.

The market for online advertising is skewed by several factors, including:
  1. Relative youth of the sector means net pioneers such as ad brokers are able to cream huge profits
  2. An abundance of content creates an illusion that content is even less valuable than it should be if ad income was more evenly distributed by traffic or audience share.  Advertisers are on the front foot, able to cherry-pick great deals.
  3. Audience measurements are skewed by high-traffic, low-cost-of-creation content sites - usually User Generated Content (UGC) sites, and again by a lingering fundamental misunderstanding by advertisers of  target audience and the importance (or not) of click-through.
Over the next decade, the market will mature.  The huge profits possible will encourage competition in the sector, driving-down overheads and improving the deal for content providers. 

At the same time, advertisers will start to understand what works, and what doesn't; leading to a revaluing of what ad space on any given type of website is worth.  

The first thing advertisers understood was the value of click-through.  It was measurable, and, in many industries, each click-through had real discernible value; 20% of click-throughs could be turned into a sale, netting on average X in revenue.

One problem comes when selling or promoting high value goods.  Not everyone contemplating buying the latest Land Rover or BMW will be motivated to click on a banner and read the specs.

Not everyone viewing the advert will be aware that they are contemplating buying a new car - one of the functions of advertising being to infect the psyche of the consumer, introducing people to new products and services.

Herein lies the folly of using targeted or interest-based adverts for many campaigns; if the targeting works as intended, one only ever reaches consumers who have shown some prior intention of being interested in the product.

Even without further growth in the value of the sector, it is inevitable that popular online content will become far more valuable, attracting far more in ad revenue for an equivalent slice of audience share and opening-up funding models not previously viable.

What we don't know is whether this will drive a further explosion in online content.  With very low barriers to entry, if even small blogs provide the writer a living wage, will more people enter the market?

Even if cash drives an increase in content, there's no reason why popular websites like those of national newspapers won't maintain their audience share, meaning they should see digital revenues surge as the ad market corrects.  Unless they decide in the mean time to kill their digital offering by erecting a paywall!

@JamesFirth

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