The Future of Online Advertising

TechCrunch is hosting a Steel Cage Debate on the future of the online advertising industry between Danny Sullivan, the search guru and editor of SearchEngineLand, and Eric Clemons, Professor of Operations and Information Management at Wharton (UPenn). Clemons started a blogstorm on TechCrunch last weekend when he put up a post titled “Why Advertising is Failing on the Internet.” I had major disagreements with Clemons’ article and posted my response on TechCrunch, debunking many of the assertions he had made in his article.

My thoughts on the Steel Cage Debate follow:
Overall, I’m squarely on Danny Sullivan’s side. While he doesn’t necessarily address all of Prof. Clemons’ arguments in the original post and largely focuses on the search advertising area, he makes convincing arguments to debunk Prof. Clemons’ general premise using largely qualitative arguments based on his 15 years of experience in the field.
Thoughts on a few specifics:
  • The idea that search advertising is “misdirection” is overblown and shows a total lack of experience in this area on Clemons’ part. He focuses on the topic of competitive bidding on brand term searches and mentions that he’s been “hearing this complaint from senior vice presidents in travel companies for years, and this year the chorus has been joined by retailers and manufacturers” and implies that Mr. Sullivan is out of touch. Being deeply involved in search marketing in a variety of roles during the last five years, I have come across this argument on a few occasions, but this is far from being serious enough of a problem to dissuade advertisers from using search advertising as a medium. Moreover, the vast majority of searches do no involve brand terms. In short, search marketing brings value to all constituents in the equation: Users get advertising/offers/content that is highly relevant to their searches; Advertisers get to show their messages to highly targeted and engaged consumers; and publishers (i.e. Google/Yahoo/MSN and their search partners) get to monetize the free search service that they provide to the vast masses. This 3-way value exchange is what makes search marketing a unique and very effective advertising/marketing medium. Sullivan deftly takes apart this misdirection argument using his 15 years of experience in the search space (vs. Clemons’ non-experience).
  • In fact, Google (and Yahoo and MSN to a lesser degree) are in a constant battle to ensure that there is as little misdirection as possible, primarily through the constant updates of their Quality Score algorithm. Their goal is to make sure that the most relevant advertising shows up for any given search, resulting in a win-win-win scenario for all three parties in the value-exchange (user-advertiser-Google). While one can argue that Google is self-serving and does these updates to continually increase their RPS (revenue-per-search), one cannot deny the associated benefits to the user experience as well as to the “right” subset of advertisers.
  • Additionally, search engines realize that brand searches could potentially present potential “redirection” problems to brand owners and have tried to address it in a variety of ways. For the last few years, Yahoo! did not allow non-brand-owners to bid on popular brand terms.  More recently, Yahoo! has developed functionality to provide better “ownership” of these searches to brand owners, with the recent launch of the Rich Ads In Search (RAIS) product, of which I was an early contributor and proponent while working at the company. No doubt Google and MSN will follow suit with similar offerings.
Beyond the search misdirection argument, Prof. Clemons’ main argument is as follows:
  • Users don’t trust ads.
  • Users don’t want to view ads.
  • Users don’t need ads.
  • Ads cannot be the sole source of funding for the Internet.
  • Ad revenue will diminish because of oversupply of inventory and will be replaced by other revenue models such as micropayments and subscription payments for content.
  • There are many other business models that will work on the net.
Danny Sullivan does not directly address these points, so I will do so here:
  • Users don’t trust ads.  I would argue that it does not matter. Users know that advertising is biased, but there have been countless studies that show that advertising has a significant impact on user behavior in favor of the product/service being advertised.  As a matter of fact, the entire offline advertising industry is based on this premise and its astronomical growth over the past century is proof that trust is not necessary for advertising to be effective.
  • Users don’t want to view ads.  This is naive.  I offer two counter-arguments to this. One, consumers do not need to like advertising for advertising to work. They merely have to learn to live with it, understanding that the high quality free content that are viewing is only possible because of advertising. In general, no one likes TV advertising but that has not prevented the continual growth of TV broadcast and cable industries as well as the massive television advertising industry. Two, the Internet has the potential to make advertising a medium that users may actually like and demand. With personalized offers for products, services, and information, the advertising could be much more targeted than what’s been possible in traditional offline media. Search advertising is by far the best example of this and all indications point to similar developments in other online ad channels. Danny Sullivan makes a good argument for online advertising in this regard, pointing out that online ads are much more targeted than offline advertising and are much less of an interruption to the viewer.
  • Users don’t need ads.  My response: So what? People don’t need big screen TVs or $5 Starbucks lattes, but those things still exist and thrive in our economy (well, at least till very recently 🙂 ).
  • Ads cannot be the sole source of funding for the Internet.  I absolutely agree with this (as would anyone else I’m guessing), but this is not much of an argument to argue that online advertising will fail.
  • Ad revenue will diminish because of oversupply of inventory.  I think that non-search ad pricing will diminish because of oversupply of inventory, but overall ad revenues will continue to increase once economic conditions improve. The structural changes in the media consumption and advertising industry will necessitate this — specifically, massive flow of consumer attention to online and mobile channels, followed by the flow advertising budgets to these media. This is already taking place in large ways and will continue to take place as soon as the economy improves. Additionally, innovation such as behavioral targeting, vertical content aggregators such as Adify, and dynamic ad formats such as Yahoo! Smart Ads and Tumri will help maintain premium pricing for highly targeted advertising, counteracting the impact of oversupply of inventory.
  • There are numerous other business models that will work on the net.  I absolutely agree with this, but again, it does not necessarily imply the downfall of the online ad industry. There can be multiple monetization models in existence concurrently (such as ad-supported, subscription, micropayments, virtual currencies, hybrid, etc). However, at this point, there hasn’t been a non-ad-based model that is poised to dominate, yet. We shall see. Danny Sullivan points out that some of these have been tried (e.g. access to newspaper content) but haven’t been very successful, leading to ad based models.
In retrospect, Prof. Clemons’ original premise wasn’t clearly defined. What did he originally mean by online advertising will fail? That online ad revenues have peaked and will continue to decline for the foreseeable future? He wasn’t specific enough. In his final rebuttal, Prof. Clemens says that online ad revenues will end up being less than 20% of overall online (non-ecommerce) revenues, and as such online advertising would have failed. No one knows what the breakdown will look like in 5-10 years, but I am willing to bet that overall advertising spending will be significantly higher in five years than it is today.

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