Negotiating the Best Deal for Online Ad Inventory

It is inevitable that Microsoft will incorporate advertising as one of the many revenue streams from its $8.5 billion acquisition of Skype in May 2011. Skype is synonymous to the cost-free nature of the Internet with more than 200 million active users calling each other with the free VOIP service. Online display or rich media advertising is the natural progression for the firm to take advantage of the numerically superior market size and geographically diverse reach on the Internet.

Crowded Space With Established Incumbents

But online display advertising is not a new advertising unit. It is currently dominated by established online publishers, vertically focused niche portals, and e-commerce sites of all stripes, many of which have extended their inventory availability to Asian-based advertisers. In the absence of a first mover advantage, new entrants such as Skype and other emerging online sites aspiring to offer inventory for display advertising will find it difficult to differentiate from these incumbents. Indeed, the incumbents would have optimized their sales and ad-unit delivery operations, taking into account the competing strategies from their peers in the already crowded display advertising space.

How Should Advertisers React to This New Entrant in An Already Crowded Display Advertising Space?

Brands today have no shortage of display ad inventory to place their marketing dollars. The premise that drives the allocation of the ad budget lies in:

  • Functionality and features of the inventory to deliver the advantages in the brand’s value proposition to its target audience.
  • The inventory’s cost elements to ensure that it remains affordable to advertisers.
  • Appropriate data metrics for these variables to measure the inventory’s performance against benchmarks set by the advertiser.

Let’s use online communication services such as Skype and instant messaging services such as eBuddy to apply the above premises. Firstly, online users use these services to connect through voice, text, and other multimedia content delivered over an Internet Protocol (IP) network. In this context, the ability to display targeted online advertising is dependent on:

  • Restricted consumer demographic information that is disclosed following the user’s acceptance to use the predominately free communication services.
  • Geographical and location information based on the IP addresses of the communicating parties.
  • Platform used for the online communication as such services today are delivered on computers, tablets, and smartphones.

Assuming what I have described above is true for these online communication services, the collective data will translate into a data set that creates a targeting logic to display the most appropriate display ad message for the communicating parties.

However, the above data sets have three limitations for advertisers. Firstly, the nature of online communication services is that the subject matter of any interaction is privy to the communicating parties. In this context, these online communication services are no different from the “dumb pipes” argument made by telecommunication operators where subscribers view their service providers as conduits to the Internet. In the absence of any contextual information behind such interaction, online communication services will find it difficult to offer inventory to advertisers that are willing to invest in higher valued targeted segments.

Second, advertisers will have to assess the value of cross-border interaction in such communication services if their marketing campaigns are nationally focused. It is fair to say that the nature of instant messaging is likely to be more nationally focused vis-a-vis online calls made through Skype. Indeed, the value of voice calls made through Skype is presumably the cost-savings enjoyed if such calls were made through the user’s mobile subscription plans. As a result, advertisers will need to take into account the geographical significance of their advertising messages on these sites so as to ensure the ROI is maximized for such placement.

Lastly, online communication is no longer fixed on the desktop as users increasingly use smartphones with applications such as Skype to interact through the Internet. The nature of these interactions plays an important role in determining how the user will “consume” the online display message. For instance, calls made through Skype with users listening on their handset will inevitably point to the fact that the display message is not “consumed” visually by the user as the screen is not within sight.

Expect Responses From the Incumbents

It is too simple to suggest that the availability of new online display inventory results in brands diverting their marketing budget to these emerging entrants. Online advertising is a highly competitive sector, and one response that established incumbents would use to fend off the entrant’s challenge is to offer incentives to advertisers so as to prevent them diverting their marketing dollars.

This response changes the behavior of advertisers mulling over the value of experimenting with this new online inventory as it gives them the incentive to commit themselves to the incumbents and prolong the lock-in between the parties.

Hence, advertisers should take heed over the changing competitive dynamics of the online display ad space, and use appropriate negotiating strategies to exert the best possible deal from inventory providers.

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