My friend John Krystynak finally got around to reading my old post, Supply of What?. In it I argue that a surplus of advertising inventory online is not the cause of low CPMs. He vehemently disagrees:
First you say "there is not appreciably more inventory". HA. Prima Facie ridiculous. Are you talking about online? THERE'S A TON MORE INVENTORY now online, maybe a factor of 500? or 5000? YouTube + Google alone would be enough to prove my point.My point is that what we call advertising inventory (space on a page) is not really what advertising inventory is. This is confusing, so let me say it differently. I'll agree to call space on a page inventory if you agree that what media companies sell is not inventory, but attention.
That is: media companies do not sell advertising space, they sell access to the consumers of their media.*
I mean, they do sell advertising space, but not really. When Advertisers buy a page in a magazine that sells a million copies, they are not paying to get 1 million pieces of paper, they are paying for the attention of 1 million people. The advertiser is not buying space and the media is not selling space, they are buying and selling audience attention. They simply measure it in pages distributed.
Let's say the advertiser was paying $0.01 per page printed, or $10,000. Now lets say the publisher decided to print 2 million copies of the magazine, but still only sold 1 million copies (the other half went unread.) The advertiser would still only pay $10,000, right? So the price per page printed would halve. That's because the advertiser is not paying for space, they are paying for audience attention.
The supply here is not advertising "inventory", but people paying attention to the inventory.
So, is there more attention being sold now, or less? There is more on the internet itself, but this is certainly offset by less being sold in other media. If we are spending less time with media overall, then this has to be true. Let's assume hours spent with media as a proxy for attention available to be sold by media. If this is true, then we can say two things for certain:
- There is less attention, and
- That attention has become extremely fragmented.
So all of this brings up two other possibilities about low online CPMs, but I'm going to break those out in a different post.
* Advertising is a two-sided market. Consumers and advertisers interact through the platform of the media. There's been some really interesting analysis of this, like Anderson and Gabszewicz's A Tale of Two-Sided Markets. But I have not yet seen a fully-articulated two-sided market model that provides any explanation of price levels. It doesn't seem like it would be hard to build a simulation, but I suspect the simulation would be very sensitive to the assumptions, whereas the real world--at least the old media real world--does not seem to be especially sensitive to changes in exogenous variables, like media consumption per capita, roi of marketing spend, etc. If this is true, the model would probably not be very useful.