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The Maturing Online Media Market, 2001

  |  December 27, 2001   |  Comments

Happy New Year? For media buyers at least, the future is looking brighter.

The online media market has been in decline for over 18 months, but it appears we're closing in on equilibrium. Although a big part of the downturn had to do with overall tech market conditions, a large part of the weakened industry was due to simple supply-and-demand economics. There were too many publishers offering comparable media at inflated prices. Many publishers sold ads at unsustainable price levels or on performance-based sales terms, forcing a number of players out of the industry.

In the wake of Internet publishing carnage, the economics of the industry have matured. Web site traffic continues to rise, but demand and pricing have tapered off to the point where the bottom of the cycle appears to be near. Over the past three months, I've read forecasts for online media recovery to begin as soon as Q1 2002 and as late as Q3 2003. It's a tough call. We all view the industry from different perspectives and evaluate different criteria.

I vividly recall purchasing online media two years ago, when the industry was white hot. It was baffling that in a few circumstances, I was able to purchase identical media placements on both cost-per-thousand (CPM) and cost-per-click (CPC) terms. I recall dealing with certain ad networks (a few still exist) and being able to buy the same placements, running through channels or across entire networks, at prices in the $10 CPM range or $0.40 per click-through on banners. At the time, banners were attaining average click rates around 0.5 percent. Compared that to today's 0.25 percent.

In this situation, $10,000 could buy 1 million ad impressions and generate roughly 5,000 visitors when purchased on regular CPM terms. Purchased on a performance basis, the same spend could yield 25,000 visitors. By doing the math backwards, this would result in approximately 5 million ad impressions. Clearly, it was a no-brainer at the time.

A huge number of marketers refuse to purchase media on a performance basis, insisting it is unsustainable. They are right to an extent, but many media companies have been successful with this model. I'm the first to admit that measuring success through click-through rates is the wrong way to go, but a situation that could stretch a dollar more than 300 percent for identical inventory is nothing to sneeze at. These were great opportunities, similar to rare arbitrage scenarios in the financial world.

Opportunities such as these still occur on occasion, but much less frequently. I placed a few media buys for a client recently to generate some site traffic. I spoke to a few publishers that sell inventory on both terms. One company, representing a group of large portals, was offering $5 CPM or $1 CPC for banner ads. Purchased on CPM terms (assuming a 0.25 percent click rate), a $10,000 spend could achieve 2 million ad impressions and deliver roughly 5,000 visitors. If the same inventory were purchased on the $1 CPC terms, only 10,000 visitors could be generated, with just over 4 million impressions.

The margin of difference has narrowed. The industry is growing up. Elimination of arbitrage opportunities is generally a good indicator of maturation. Around this time last year, I wrote an article that discussed this very arbitrage scenario as being readily available. As I compare these two scenarios a year later, I see how dramatically the market has changed since then and how it continues to move toward an equilibrium point. It's far closer than it was a year ago. We are also seeing other indications of rapid maturity, such as continued convergence and the dominance of larger, cash-heavy players and small niche-oriented properties that deliver specialized audiences.

Although the industry has been on the decline long enough for the memories of the glory days to seem very distant, we've seen positive signs for a few months. It's encouraging to see progress as we go into '02 after all the volatility we've witnessed this year.

Happy holidays.

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Adam Posman

Adam Posman is a strategic planner with BAM Strategy, a leading digital agency with offices in Montreal and Toronto. BAM's core services include strategic planning, media buying, creative production, online contests, email marketing, and customized marketing technologies.

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