More on Ad Dollars per Hour

My friend Rob Leathern, over at CPM Advisors* was blogging about the same thing I was blogging about in Details, Details (unbeknownst to me, since he keeps changing where he's blogging from.)

We used the same approach, but seem to have come up with different conclusions. I don't have time today to figure out why, I'll do it tomorrow. In the meantime, read these:

Online Time Not Worth What It Should Be

More Television vs. Online “revenue per user hour”


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* Blogger disclosure: I'm an investor in CPM Advisors.

The 300%-500% Lift Meme

I talk to a lot of people trying to make internet advertising more effective, most of them startups or people socializing a new idea before starting a company. Over the past two years, I think about two-thirds of them have told me that their new technology/process is going to provide a "300%-500% lift."

I even heard a story of a VC, after being pitched on a more reasonable lift, say "your approach is interesting, but we need to see you deliver a 300%-500% lift to be competitive in the market." ( I looked at this VC's website and found no ad targeting companies in his portfolio.)

Sometimes upon hearing this, I drift into a daydream about combining behavioral targeting, social targeting, retargeting, creative optimization, rich media, distribution optimization, contextual targeting and offer optimization technologies into one super-arbitrage strategy. The resulting 328,050% - 19,531,250% lift would allow me to buy $0.50 CPMs and pretty much overnight control the US economy*.

Assuming, of course, that these lifts are real, are the average lifts, are replicable at scale, are actually the result of the data/process/technology itself and not some artifact of attention (i.e. the Hawthorne Effect), and are orthogonal (which I'd expect if they are real and not artifacts, maybe not to the extent of the last paragraph, but between, at least: targeting, distribution, creative/offer/media.)

Not sure where this meme originated, but it very clearly says one thing: noone knows nothing. How well any of this technology works is an open question.

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* I suppose, in a way, this is kind of what Google did, so I'm not saying it's not possible, just that I doubt we can all sit down at our laptops and replicate it.

Those projects that come to nothing

After I pulled data from umpteen sources and crunched it for Details, Details, I looked at the resulting graph and saw that I had found... nothing. If I was a journalist, I'm sure my hard-bitten, cigar-chomping editor would have chewed me out, "There's no story here, Neumann!"

But that's the way it is. I was hoping for some trend or abrupt change that would tell me something I didn't know, some result I could attribute to a cause.

Let's look again at the nothing, the ad dollars per hour of online use. I'm going to correct for changes in overall spending per hour of media use, because the period in question was a bit up and down for the ad world. Below is a graph of Online ad dollars per hour as a percent of total ad dollars per hour, from 2001 to 2007.

Data sources the same as for Details, Details.

Why is this not much? Because it is a graph of efficacy. This is what we online marketing people do. The online media folk and the online app folk and even the Verizon DSL technicians get people online and get people to spend more time there. This graph factors that out.

Macroeconomic conditions determine how much is spent on advertising. This graph factors that out.

All this graph shows is how much an advertiser is willing to pay to get their message to a consumer over the course of an hour online as a percent of what they are willing to pay over all media. If it is 50%, then that probably means the advertiser feels they are about 50% as likely to sell something in an hour as they would be otherwise. The ads are half as effective.

So, an increase of 5% over four years is not much of anything. Nothing, really.

What happened in this period? Here's a few things that apparently changed nothing:

Starting in 2000, Google revolutionized the purchase of intent.

Starting in 2002, Tacoda and the scores of companies following its lead, revolutionized what advertisers know about the people seeing their ads, allowing precision targeting.

Starting in 2005 (or thereabouts), Right Media and its followers revolutionized the purchasing of ads across the huge internet media landscape.

What has all the work done over the past ten years to build the infrastructure for a true one-to-one ad marketplace gotten us? Are advertisers, with all the data and mathematics and optimizing they have available, really getting no more for their money than they were ten years ago? I find it hard to believe, personally. What am I missing? Or, what are we all missing?

No starting gun

Chris Dixon's blog post, The Ideal Startup Career Path is spot on: if you want to start a company, go work for a startup. I'd add: find a company started by someone who comes out of the entrepreneurial community and has a really big idea, join as early in the company's lifecycle as possible, and make it clear through your actions that you will wear any hat needing a head on any given day.

At my last startup, we actively looked for and hired entrepreneurial people and several of them went on to found their own companies. The ones I've given support to include Greg Yardley with Pinch Media, Viva Chu with Handipoints, and Rob Leathern with CPM Advisors. There are others, and then others who will or are starting something. For a company that only had some 30-odd employees, that's a pretty good conversion rate.

I'm tempted to say that we made it look easy, but I'm pretty sure what went through their heads was "if these idiots can do it, then I certainly can." This realization, in its many forms, is certainly the spur to more startup formation than any other factor ever will be. I meet so many would-be entrepreneurs with good ideas who just can't figure out how to start. Who worry about knowing what to do next. Who are waiting for some intangible starting gun to go off, some sign from heaven. There is no starting gun, there will be no sign from heaven. You just need to know that it isn't really that hard.

Watching someone else manage the building of a company provides the crucial lesson: there's no special secret magic. Go work for a startup, and you'll see.

Details, details

"An important lesson... is that details may matter."
- Kyle Bagwell, The Economic Analysis of Advertising

Supply in the ad market market is impressions created, people seeing an ad. Everything else can be viewed in terms of this. Demand is impressions bought.

Supply = Impressions created = Hours viewing media x Impressions per hour
Demand = Impressions bought = Ad spend x 1000 / CPM

Supply = demand, so:

CPM = Ad Spend / Thousands of hours x Impressions per hour

Here's a graph of total US ad spend divided by total US hours spent with media, both online and offline.

Average CPMs would be this amount divided by average ad impressions per hour.

1) Online spend per hour is much less than offline spend per hour. This is partly a result of people moving online faster than ad spend, as John K. made me aware last week. But also note that offline ad spend per hour was rising until 2007, which means that--absent offline efficacy having improved over the last ten years (ha!)--marketers are getting worse ROI offline than they had been. In fact, the projections say that when the ad market recovers, this trend will continue. Perhaps internet ad spend will grow faster than the forecasters think? The alternative is that marketers are hidebound and insensitive to wasting money. You choose.

2) The difference between online and offline ad spend/hour is significant and not shrinking. If this were entirely marketer ignorance, the gap would have shrunk over the last five years, as knowledgeable online people became more mainstream in the agencies. My lead generator friends are arbitraging the difference between the high price of offline advertising that is built into the cost structure of most products and the low price of online advertising, so the gap can't be entirely efficacy. What else is there? I think the answer has to be uncertainty about what, exactly, the advertiser is buying. There was a time when a media buyer could flip through the newspaper or magazine or watch the TV show and know how his ad fit. When he's out buying a million disparate impressions through an exchange or network, he can't. He could be buying one display ad in a sea of ads, or one in a pristine page. But it could be something else entirely.

3) CPMs. The online CPM is the above number divided by impressions per hour. Note that the online spend/hour is pretty steady from 2002 to 2008, between $58 and $66 per thousand hours. The decline in online CPMs can't be attributed to this, unless there was a large increase in ads/hour. This may be so (I can think of arguments both ways, but have no idea what the facts are) but who cares, really? If I spend an hour on the NYT site and they show me 30 ads at a $2 CPM or 6 ads at a $10 CPM, they make the same amount of money: I assume they show the number of ads that maximizes their revenue. So, two hypotheses:

• Fragmentation of online time: people spend less time on each site, spreading the money around and making it seem like less money is being made; and/or
• Ads are being put where there were no ads before so money is being made by people who didn't make money before, and that money is coming out of the pockets of the established online media.

Both of these would lower CPMs because there are more ads. This is the only 'supply' argument that seems reasonable to me.

4) As Niki Scevak noted in the comments yesterday, search is 5% of the time and 50% of the revenue. Since the numbers in the graph are averages across all online, one explanation for declining display CPMs could be increasing search eCPMs. In any case, if Niki's stat is true, then it might also be that we are simply noticing, as the display ad infrastructure is extended, how low display ad CPMs have always been.

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Data sources: US population, US Census Bureau; Internet Users, ITU and Nielsen (last three via InternetWorldStats.com); time spend on internet, USC Annenberg Center for the Digital Future, Digital Futures Report press releases and IAB summary (too expensive to get actual report); time spent on media, Veronis Suhler Communications Industry Forecast (my friends at VSS use to give me a copy of this every year... I need to invent a reason to go visit them soon); ad spend through 2008, CMR/TNS; ad growth 2009-2014, eMarketer.

Two (More) Hypotheses on Low Online CPMs

1. If low online CPMs were a result of oversupply, why haven't CPMs in other media dropped by the same amounts? If oversupply were why prices are so low, not efficacy, then online media would be a substitute for other media and ad spend would shift to the low-cost medium, equalizing prices. This is not what seems to be happening.

But if online ad spend has not yet caught up with online attention, that supply is temporarily exceeding demand. One way to test this would be to see if offline CPMs are increasing (because demand there would exceed supply, driving up prices.) If it were true, it means that online CPMs should increase over the next few years back to "normal" levels.

2. Since media sells attention but is paid by the impression, then the fragmentation of time spent on media might lower CPMs as the "bad money" of low-attention impressions drives out the "good money" of high-attention impressions.

Media has always been an attention economy

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:

1. There is less attention, and
2. That attention has become extremely fragmented.

People used to spend some hours a day reading newspapers. They now spend some of that time on the internet. But if they spend 10 minutes on YouTube, 20 minutes looking at Facebook messages, 15 minutes reading their Gmail, 5 minutes searching on Google and 10 minutes looking at a friend's vacation photos on Flickr, they still will only pay attention to the same amount of advertising as if they spent an hour reading a newspaper.

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.
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* 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.

What is it worth?

Maybe this is obvious.

Things are worth different things to different people. Companies, pork bellies, advertising inventory. Any things. If the thing is worth more to someone other than its current owner, the owner might sell it to that person, creating value for both.

The value to the buyer (b in the picture below) has to be greater than the value to the seller (a). At any value between a and b, both parties are better off. So what price, between a and b, will be paid?
One of my mentors in the valuation business insisted that any value greater than a was strategic value and that the seller did not deserve any of it: the price paid should be as close as possible to a. In an efficient auction, however, the price paid is pretty close to b.

Both the buyer and seller do best by figuring out what the value of the thing is to the other party, and negotiating to that value. If both buyer and seller know the value to the other party, the negotiation over price can be very difficult, because there is no right answer*. So people try to hide how much something is worth to them: whoever has better information ends up with most of the excess value.

Advertising inventory is worth next to nothing to the publisher itself. It's worth something to the advertiser. The excess value, the gap between a and b, is very large. The advertiser knows exactly what the inventory is worth to the publisher. But the publisher has no idea whatsoever what it is worth to the advertiser.

Guess who gets the excess value?

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* Non-iterated.

You Are Here

Shirky: Advertising Now Priced at its Real Value

Clay Shirky, in a fairly recent talk, observes

[Newspaper's making their money from advertising] was the historic circumstance, and it lasted for decades. But it was an accident. There was a set of forces that made that possible. And they weren’t deep truths — the commercial success of newspapers and their linking of that to accountability journalism wasn’t a deep truth about reality. Best Buy was not willing to support the Baghdad bureau because Best Buy cared about news from Baghdad. They just didn’t have any other good choices.

and

[Newspaper] advertisers were forced to overpay for the services they received, because there weren’t many alternatives for reaching people with display ads — or especially things like coupons.

and

The second characteristic of the happy state of the 20th-century newspapering was that the advertisers were not only overcharged, they were underserved. Not only did they have to deliver more money to the newspapers than they would have wanted, they didn’t even get to say: “And don’t report on my industry, please.”... Neither of those, neither the overpaying or the underserving, is true in the current market any longer, because media is now created by demand rather than supply — which is to say the next web page is printed when someone wants it to be printed, not printed and stored in a warehouse in advance if someone who may want it. Turned out that when you have an advertising market that balances supply and demand efficiently, the price plummets. And so for a long time, people could say analog dollars to digital dimes as if — well, when do we get the digital dimes? The answer may be never. The answer may be that we are seeing advertising priced at its real value for the first time in history, and that value is a tiny fraction of what we had gotten used to.

These are just the parts relevant to advertising. Read the whole thing. Clay is--as always--the smartest commentator on the newspaper business I know (yes, this is like being the tallest dwarf, but still.)

I wonder whether he's right about what the real price of advertising should be. He's the first person I've heard categorically claim that newspaper CPMs were (and thus are, to some extent) not good value. His assumption that advertising markets used to be inefficient and are now efficient perhaps gives too much credit to the current online system.

If newspaper CPMs were not good value--that is, if the ROI on newspaper advertising was less than the applicable advertiser hurdle rate--then why did advertisers buy them at all? Clay's answer, that they had no other choice, is non-sensical in terms of value (if we agree that newspaper advertisers were not each very stupid for a very long time.) Perhaps what he means is that the negotiating leverage has changed. But this is a rather weaker claim.

Skidelsky on Scapegoating

Here's something I've been trying to say for a year, poorly. Skidelsky in his new book, Keynes: The Return of the Master, says it succinctly:

Whenever anything goes badly wrong, our first instinct is to blame those in charge--in this case, bankers, credit agencies, regulators, central bankers and governments. We turn to blame the ideas only when it becomes obvious that those in charge were not exceptionally venal, greedy or incompetent, but were acting on what they believed to be sound principles: bankers in relying on risk-management systems they believed to be robust, governments in relying on markets they believed to be stable, investors in believing what the experts told them. In other words, our first reaction to crisis is scapegoating; it is only by delving deeper into the sources of the mistakes that the finger can be pointed to the system of ideas which gave rise to them.

As the crisis fades and everyone turns their attention elsewhere, I don't want to forget the lesson learned: what we know about economics is incomplete. Even more, no serious student of economics can now claim that any of the current "systems of ideas" are more than simplistic, directional models. No one knows nothing, and the people who claim to are fooling themselves.

Is the Time for Angels Past?

In the past month I've had two companies that I've committed to investing in come back and say a VC has decided to take the whole round. These were the best two deals in my funnel. The next two best companies are asking for non-standard deal terms. I don't do non-standard deal terms (after twelve years of professional venture investing, I've realized non-standard deal terms are just not worth the hassle.)

The last 18 months have been a great time to be an angel. Only the hardest-core company-building VCs--like USV and First Round--were systematically investing in seed stage companies. This left room for people like me to invest.

Now the VCs who sat out the last year scared have realized that if they want to put money into successful companies at reasonable prices, then they need to have invested in those companies before they became successful. And this option value means they can offer entrepreneurs a better deal than I can (my optionality is limited by my relatively meager investable funds.)

The people I've co-invested with over the past couple of years have been a huge resource to the companies we're in. I'd hate to see that strategic value squeezed out in favor of investors who are more money-manager than company-builder. But that, I think, is what is about to happen.