March 17th, 2007

Why Online Advertising Economics Are So Messed Up

by

We’ve all heard that page views are dying. Jeremy Liew of Lightspeed pointed out a few weeks ago the problem with scaling an online advertising business based on revenue per thousand page views, an analysis which has now been picked up by the Dan Mitchell at the NYT. Jeremy’s analysis is correct, on one level, but it also exposes a deep flaw in the way online media is currently valued and sold to advertisers.

According to Jeremy, untargeted, run-of-site page views are worth about $1 per thousand. It’s RPM because it’s taking into account ALL forms of advertising on the page, including display ads sold on a cost per thousand impressions basis, pay-per-click ads, and pay-per-action ads. $1 per thousand sounds about right, but it’s also deeply disturbing.

Part of the problem is that there’s a disconnect between page views and human beings. On a site with very low page views per user, a thousand page views could be generated by a thousand people. Or, across a month, it could represent the activity of a single highly active user. So imagine a page with three display ads sold on a cost per thousand basis. An advertiser could, in theory, be paying $1 OR LESS to reach a thousand people with all three display ads.

In what other medium can you pay $1 to reach a thousand people with three ads each???

At that rate, you could reach 1 million people for $1,000. Now, granted most thousand page views are generated by less than a thousand people (in many cases far less). And granted we’re talking about untarget advertising. A highly targeted site can earn a revenue per thousand pages of, say, $20. But still, $20 is a pretty good deal to reach as many as a thousand people with your advertising. And if you assume that $20 is from multiple ad sources on each page, then each source is paying less than $20 to reach a highly targeted audience of up to a thousand people.

Compared to other media, online publishers are pretty much giving it away. Because the reality is that EVERY page view is in viewed by someone who has some value to some advertiser. The problem is when you DON’T KNOW who your users are.

This is the problem with all the focus (particularly in Web 2.0 circles) on total traffic numbers — 10 million uniques is great, but not so much if you don’t know who these people are.

Of course, you know why so many sites are valuing their traffic in bulk — Google AdSense, which doesn’t care who your users are, as long as they click on ads. Pay-per-click advertising is, on one level, all about targeting, but on another level it’s a volume game.

Is it possible that Google, the great driver of efficiency in online advertising — and the great democratizer of online ad revenue — has in fact dragged down the average value of ALL page views?

So what is online media to do? It already commands a third of total media attention, rivaling television, the ultimate monopoly medium. So why can’t websites charge monopoly prices? Well, the handful of big online media brands, like Yahoo, AOL, MySpace (homepage), MSNBC, CNN, etc. DO charge premium prices for their premium inventory. The top online destinations can and do price like high-priced offline media.

But for as the long tail — it just doesn’t scale.

Comments (53 Responses so far)

  1. Measurement is also critical for the Web 2.0 business model – advertising. If you can’t measure RSS properly then you can’t set prices for advertisers. Consequently, ads in RSS feeds currently generate a fraction of the revenue of ads on a website (see Scott Karp’s post today on online advertising economics as further indication). If we are already on the unholy topic of business models or ads, the anonymity of RSS feeds, both in terms of registration and usage patterns, makes those readers less monetizable.

  2. the go, which aligns with the “topic specialists” I proposed. Matt Terenzio says that we will move towards “true value” in how advertising dollars are allocated. It’s very hard to think why this won’t be the case in the long term. However Scott Karp seems to believe that value has got misaligned, with Google a possible culprit in driving down advertising revenue. Mathew Ingram thinks a “measure of engagement” will help identify the value of pricing. There is indeed great value in developing the mechanisms that

  3. are, at some point you’ve got to draw a line in the sand. The big question is where exactly did you draw yours? Update: The NYT is thinking similar thoughts about the scale needed to make money from a niche site, and there are some great ideas over at Publishing 2.0: Is it possible that Google, the great driver of efficiency in online advertising — and the great democratizer of online ad revenue — has in fact dragged down the average value of ALL page views?

  4. other sites as well. These articles raise an interesting point, mainly why is the value for online ads only $1 per thousand page views? Traditional media has better demographics I’d like to take the opportunity to point out that traditional media has established

  5. Is it possible that Google, the great driver of efficiency in online advertising — and the great democratizer of online ad revenue — has in fact dragged down the average value of ALL page views? — Scott Karp

  6. Why Online Advertising Economics Are So Messed Up — We’ve all heard that page views are dying. Jeremy Liew of Lightspeed pointed out a few weeks ago the problem with scaling an online advertising business based on revenue per thousand page views, an analysis which has now been picked up by the

  7. pretty small beer in most circles — a site would have to have about gazillion page views a month (I’m rounding up). As the ever-insightful Scott Karp of Publishing 2.0 writes, this rather depressing arithmetic exposes a fundamental problem with online advertising: namely, that the pricing is all out of whack when compared with regular print media, or pretty much any other “real world” media for that matter. In a nutshell, most advertisers and ad agencies still see online advertising

  8. Why Online Advertising Economics Are So Messed Up » Publishing 2.0

  9. the go, which aligns with the “topic specialists” I proposed. Matt Terenzio says that we will move towards “true value” in how advertising dollars are allocated. It’s very hard to think why this won’t be the case in the long term. However Scott Karp seems to believe that value has got misaligned, with Google a possible culprit in driving down advertising revenue. Mathew Ingram thinks a “measure of engagement” will help identify the value of pricing. There is indeed great value in developing the mechanisms that

  10. Why Online Advertising Economics Are So Messed Up

  11. Why Online Advertising Economics Are So Messed Up » Publishing 2.0

  12. Why Online Advertising Economics Are So Messed Up [IMG]

  13. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it:

  14. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it: “10 million

  15. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it:

  16. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it: “10 million

  17. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it: “10 million

  18. Know More: advertising Online advertising is one of the most confusing and messed up form of advertisements. There are all forms of advertising available on the internet. Just to name a few – pay per click, page per view and pay per action. There a lot more than this really. It depends on how the

  19. Obviously, most people and even most website publishers aren’t seriously trying to grab $50 million in yearly revenue. People are online for many different reasons, with different goals and aspirations. Scott Karp of Publishing 2.0 is disturbed by the fact that the current online advertising marketplace is such that only the top online media properties, such as CNN and Yahoo, are able to charge premium prices (akin to other forms of media) for premium ad space.

  20. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it:

  21. Publishing 2.0 Blog Post

  22. the scale a business has to achieve to get to $50M in revenue. I have summarized the scenarios from Jeremy’s post in the table below: [IMG] RPM = Revenue per thousand impressions (including CPM, CPC, and CPA models) Scott Karp of Publishing 2.0 had an interesting take on Jeremy’s piece, saying that it “exposes a deep flaw in the way online media is currently valued and sold to advertisers”. Scott’s view is that the real issue is who is viewing your site. Or as Scott put it: “10 million

  23. and the same problem of multiple access points for the same person. So instead of delivering advertising to people, we deliver it to pages. And when you charge by the page/impression, the more pages the better. That’s why online advertising economics are so messed up. Actually, there are two online advertising economies. There’s search advertising, which ingeniously targets ads to keywords, which are a direct reflection of what’s on someone’s mind. No demographics, cookies, or individual identifiers

  24. Statistiques, pages vues et revenus publicite Certains commencent ouvertement à dénoncer la “tyrannie” des “pages vues” et “visiteurs uniques” qui règnent en quasi monopoles sur la valorisation publicitaire des sites. (voir http://publishing2.com/2007/03/17/why-online-advertising-economics-are-so-messed-up/ et http://scobleizer.com/2007/05/13/we-need-better-statistics/ et http://publishing2.com/2007/05/13/how-to-make-10-billion-in-ad-revenue-without-measuring-unique-vistors-or-page-views/ ) Il est vrai que si l

  25. Rota, Is Social Capital Persistent? Comparative Measurement in the Nineteenth and Twentieth Centuries The Bright Side of Spite Revealed – Yahoo! News Brainwashing by Boras — The Hardball Times FETP Economics Glossary Why Online Advertising Economics Are So Messed Up » Publishing 2.0

  26. [...] Why Online Advertising Economics Are So Messed Up. Scott Karp says web sites are practically giving away the advertising, which doesn’t bode well for anyone other than the top players. [...]

  27. [...] usually on the same page as Scott Karp, but not [...]

  28. I posted a rebuttal but then realized I think I misread what you were suggesting (It’s St. Patricks day)

    http://everybuddy.org/2007/03/17/the-value-of-online-advertising/

  29. [...] owns your attention anyway? Too deeply buried in the (very interesting) discussion here  and here bout how hard it is to get enough traffic to a website to make it generate big money is a more [...]

  30. There are new ways to determine if video content, for example, is worth advertising on or on a website that serves up this content.

    http://www.divinityassets.com See their scope technology

  31. [...] Online Advertising Economics and the value of a PageImpression Scott Karp is discussing Why Online Advertising Economics Are So Messed Up and refers to a recent article in the NYT about Popularity Might Not Be Enough. The discussion is [...]

  32. Hi Scott, thanks for noticing the post.

    I think you identify a broader issue with advertising in a new medium – that there is a large disconnect between time spent and CPM/RPM, and that this disconnect lasts a long time. Even Cable TV which has been around 30-40 years still sells at a discount to Broadcast on a $ per GRP (gross rating point) basis! And GRP counts “uniques”! It isn’t “fair” but it seems to be the way things work. To reach a targeted demographic in a traditional media will likely command $20 and up CPMs, multiples of what you can get online, and that hasn’t changed much over the last few years. Maybe the change is coming soon – I certainly hope so – but I am not going to count on it!

  33. To create a $50m online business, companies must maximize mass appeal and niche

    I’ve argued that New Media means rapidly increasing customer segments, but in order to maximize value, online sites must play a difficult game, they have to be niche, but also have a majority market share. Let’s say there are 100 sites devoted to New Media news. Initially, these sites are very fragmented because they are owned by 100 people. Today ads on these sites are worth only $1 per thousand page views because the space is fragmented and advertisers don’t know anything about demographics. I believe this best explains the low value per page view.

    Creating “niche market monopolies” will maximize ad revenue

    In order to increase the value of ads, online companies need to create a monopoly on a niche market. If I could buy 60 of these sites and control 95% of the traffic to New Media news, I would no longer want to use Google to place ads on my site. Instead, I would market my sites as the “exclusive distributor” of New Media news ads on the internet. Suddenly, advertisers will realize they can either buy cheap ads on Google (for the remaining 5% of traffic), or they can go with me, because I am the majority supplier of ads for New Media news on the internet. This should dramatically increase value per page views because there are less options (less supply) for the same demand in a given demographic/target subject.

    Here is my post on the subject: http://themediaage.com/?p=29

  34. [...] for many different reasons, with different goals and aspirations. Scott Karp of Publishing 2.0 is disturbed by the fact that the current online advertising marketplace is such that only the top online media [...]

  35. [...] life is much harder than that. This post about Why Online Advertising Economics are So Messed Up, does bring to light the inherent problem about how pageviews are ceasing to be a valid metric in [...]

  36. [...] the ever-insightful Scott Karp of Publishing 2.0 writes, this rather depressing arithmetic exposes a fundamental problem with online advertising: namely, that the pricing is all out of whack when compared with regular [...]

  37. [...] Click here to read the full story Posted by David Sheardown | [...]

  38. Many low traffic AdSense sites average over $50 CPM. Largely the issues with cheap ad prices are
    – glut of inventory where few matching profitable business models exist (blogs, etc.)
    – advertising on sites where the audience is largely ad blind
    – poor ad placement (right rail, top of page, etc.)
    – poor ad targeting due to CMS issues and people writing on a diverse set of topics

    Another big issue with web ads is the plainness of many of them…105 text characters near other ads is nowhere near as good as 15 seconds of undivided attention.

  39. [...] Karp at Publishing 2.0 argues that publishers are undervaluing online inventory. In what other medium can you pay $1 to reach a thousand people with three ads [...]

  40. [...] Why Online Advertising Economics Are So Messed Up » Publishing 2.0 (tags: advertising fordhamclass) [...]

  41. Scott, I think your $1 CPM number is way off for many sites. Look at what TheStreet.com and VA Software (publisher of Slashdot) said about their CPMs on their most recent conference calls:

    http://internet.seekingalpha.com/article/27834

    http://internet.seekingalpha.com/article/27229

  42. [...] Why Online Advertising Economics Are So Messed Up » Publishing 2.0 “there’s a disconnect between page views and human beings… In what other medium can you pay $1 to reach a thousand people with three ads each?” (tags: internet advertising revenue economics trends) [...]

  43. [...] Scott Karp writes: We’ve all heard that page views are dying. Jeremy Liew of Lightspeed pointed out a few weeks ago the problem with scaling an online advertising business based on revenue per thousand page views, an analysis which has now been picked up by the Dan Mitchell at the NYT. Jeremy’s analysis is correct, on one level, but it also exposes a deep flaw in the way online media is currently valued and sold to advertisers. [...]

  44. [...] Scott Karp of Publishing 2.0 has an interesting take on Jeremy’s piece: Jeremy’s analysis is correct, on one level, but it also exposes a deep flaw in the way online media is currently valued and sold to advertisers. [...]

  45. [...] Why Online Advertising Economics Are So Messed Up » Publishing 2.0 “there’s a disconnect between page views and human beings… In what other medium can you pay $1 to reach a thousand people with three ads each?” (tags: internet advertising revenue economics trends) [...]

  46. [...] l’objectif est difficilement atteignable dans les trois cas.  Scott Karp, Publishing 2.0, fait aussi remarquer que les milliards de pages vues ne signifient pas forcement un nombre proportionnel de visiteurs [...]

  47. [...] measures that keep the dynamic web locked into antiquated ad sales processes and ruin the online advertising economics of most media [...]

  48. [...] measures that keep the dynamic web locked into antiquated ad sales processes and ruin the online advertising economics of most media [...]

  49. why do game web sight’s and outher say “” free “”
    are nat at all “”free “” isint that fraud and if i did that !!!… i’d be in Jail… so tell “” ALL “” web’s to tell the truth and stop the B.S. we Don’t need it there like a bad date she sead yes and now it’s JAIL…. Thank’s for at Least Looking…
    Robin DeArcos Peoria,il

  50. [...] the problem with this perspective — and why digital publishers have so much trouble monetizing their content through advertising — it assumes that all content monetization is a volume game. For all the targetability of [...]

  51. [...] why online advertising economics are so messed up. Actually, there are two online advertising [...]

  52. Believe it or not, there is actually a very simple reason that online ads are not yet valued like real-world ads: volume.

    As the market fragments across thousands or hundreds of thousands of sites, what ad buyer can afford to make the tiny, targeted buys — or even know where to make these buys. It simply isn’t worth their time.

    If you’re buying ads for, say, Sony, you’d much rather stick with an old-school medium — like TV — or an enormous web property — like Yahoo — where you can drop your million bucks and be done with it.

    Until ad networks become savvier, more powerful, and more, let’s face it, monopolistic (with control over virtually all the ad inventory out there), no one but the biggest fish in the pond will be commanding the really high CPMs.

    Oh and also, the ability to perfectly measure your traffic is a curse. Think of how traditional newspapers sell advertising — they tell advertisers how many subscribers they have. But how many of their subscribers didn’t even read the paper that day? Or never saw the specific ad that was paid for? I’m sure if there were a print-world equivalent of Google Analytics, that had the same level of fidelity, advertisers wouldn’t stand for their low ad impression rates and print advertising rates would fall off a cliff — frankly, the whole thing is built on an illusion.

  53. What is the reasonable CPM? It depends.

    What Is Your Goal?

    Legacy publications, like a magazine or local newspaper, don’t target $50 million businesses. A publication with $500,000 income can be highly profitable and sustainable. Thousands of publishers have followed this formula to profitable, long lasting ventures…

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