The Economics of Online Media Pricing

I attended a seminar a few weeks ago at which one of the main topics of discussion was online media pricing and media buyers’ growing aggressiveness in demanding certain prices. Many attendees felt that shrinking prices are not conducive to sustaining the interactive media industry in the long run.

A few media sales reps in the group voiced the concern that their sites’ audience demographics do not get the recognition and value they deserve from buyers. In the offline world, they pointed out, this factor is generally right at the top of media buying criteria. It does seem that pricing is often given the highest priority when weighing criteria for online ad placements.

The obvious conclusion is that buyers and sellers do not ascribe value to online media in the same way. Many web site developers strive to deliver unique, specialized content that will attract a specific user demographic to the site, with the hopes that they’ll be able to sell ad inventory at a premium to a buyer looking to target this type of audience.

Instead, what has happened is that the value of the available inventory does not get recognized. Has there been some sort of miscommunication? Why are there such opposing views here? Why aren’t buyers beating down doors for this targeted inventory and creating bidding wars?

The answer is simple and has applied to most other industries throughout the course of history: It’s a matter of straightforward supply-and-demand economics.

Surplus Inventory

Online media publishing is growing at such a rapid rate that there is a huge surplus of ad inventory that simply cannot be sold due to limited demand. The amount of media bought, of course, is also expanding, but it hasn’t kept up with all that’s being published. As with most other products and services, at any given price, there will be a naturally determined quantity supplied and quantity demanded by the market. Over time, markets will shake out until a common ground is settled on.

The Internet is growing at an unprecedented pace. According to the most recent AdKnowledge study for 3Q 2000, the number of sites and ad networks seeking advertising has grown by 35 percent over the three-month period. The study also states that the Internet ad industry is maturing and prices are beginning to stabilize. However, the study finds that the average rate card CPM was $33.64 (ouch!) in September (not that rate cards usually represent pricing).

From my point of view, if selling at this “mature” price means that the majority of inventory is left unsold, then traditional market forces should bring about shakeouts and price decreases until the entire inventory supplied by online publishers can be sold at similar rates. With a huge proportion of sites and networks sharing very similar demographics, it is only normal that price, as is often the case, will be the parameter that will drive the market toward equilibrium. This is unless the market magically recovers and companies go back to blowing their budgets any- and everywhere.

What Will Drive Demand

But we all know this is an unrealistic prediction. (Although it would be nice; those days were fun!) Competition continues to increase, with new options for advertisers arising all the time. Prices have not yet settled and still have a way to go until that break-even point is established.

On the other hand, one factor that should help stabilize ad prices online is the current trend of traditional advertisers adding a small number of online placements to their media mix. With increasingly more traditional retailers, multinationals, government parties, and small businesses starting to include interactive media as part of their overall marketing strategies, a larger, more consistent flow of dollars should continue to be allocated to web advertising. This should help drive demand, although keeping pace with a snowballing supply of ad inventory is still going to be very hard.

No doubt, the shakeout still has some way to go. But we should eventually see sales and spending converge as pricing truly matures across the industry. Unfortunately, once this equilibrium point is truly established, buyers will likely see pricing on the rise again.

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