Supply & Demand 2.0

"The Drift" has been on hiatus for the past few months. And now, with no particular logic or explanation, we're back. Let's just leave it at that, OK?

Over the past year a profound shift has been taking place in the online advertising market, and it's completely scrambled the math and sunk many of the assumptions that have driven the buyer/seller relationship for the past decade. "Inventory" is no longer plentiful. In fact, it's no longer even inventory.

Now that the sleeping giant of mainstream advertiser commitment is stirring, and big money is flowing onto the net, the myth of unlimited supply is collapsing under its own weight. True, online inventory is dynamic and user-generated, so it isn't constrained in the way the number of broadcast or radio spots may be. But the big-ticket advertisers who are setting the pace for online advertising are setting their own parameters for where and how they will advertise, and those standards are creating a very tight market for available space.

Way back in 2002, I wrote that the Internet advertising market was splitting in two. On the one hand, we had "the prime time Internet," awash with fresh content, clean environments and strong brands. On "the other Internet" it's always 1:30 in the morning and there's nothing on but F-Troop reruns and per-inquiry spots for the Garden Weasel. It seems now that many blue chip advertisers might be seeing things the same way. They want their efficiencies and their hard numbers, sure. But they also care - a lot - where their brands will be seen. Leading sites with strong brands are in demand. Those who have invested in content are being rewarded. Sites with a solid understanding of consumer usage and strong, recurring relationships with those consumers will occupy a place of importance with the advertiser.

If you talk to online publishers as I have, you hear a consistent story of constrained supply. And it isn't just key positions like front pages and financial adjacencies that are in short supply. Advertisers are buying deep and they're buying fast. Adjacencies that were once considered "secondary inventory" are being snapped up as well. So what, then, are the implications?

  • MARKETING PRICING CORRECTION: It's just possible that the collapse of Internet ad pricing in first part of this decade drove prices below their natural level. We could now be in the early stages of a major correction. Look for pricing on strong sites to rise pretty dramatically in the coming months. Not just because it can, but because it should. The impact of an online ad has long been severely undervalued and underpriced. That's about to change.
  • RESEARCH RENAISSANCE: Look for a boom in research that helps the site truly define the quality of its customer base and the impact of advertising. Publishers will pay dearly for this kind of insight, because it will help them position themselves as "prime time" players. But pressure will be put on research vendors to perform and innovate at a new level. Status quo brand impact studies and panel data aren't going to get it done.
  • AUDIENCE MANAGEMENT ASCENT CONTINUES: Publishers will continue to invest in inventory management solutions like Tacoda and Revenue Science, but with a twist. Instead of simply using targeting to add value to secondary pages, sites will begin to use audience management to raise the value of all inventory on their sites and networks. Heck, we might even start to hear terms like "coverage" and "composition" make a comeback.
  • RESELLERS CHALLENGED: Those who buy inventory in bulk from publishers, then optimize and resell it will also feel the pinch. Only the very strongest resellers - those who add tremendous value, enjoy technical superiority and employ great sellers - will survive. The "also-ran" networks - and they are already springing out of the ground - will not get serious traction this time around. They simply won't be able to get quality inventory at the bargain prices they have in the past.
  • DEEPER BUYS: Driven both by the shortage of key positions and the strengthening negotiating posture of the seller, advertisers will buy much deeper and broader within the top sites and networks. We're already seeing packaging and bundling of inventory at many top sites, and it's not going to be a short-term phenomenon. A willingness to buy deep will become the "table stakes" for those advertisers who hope to secure the best adjacencies on the best sites.
  • TWO KINDS OF AGENCIES: Increasingly, those ad agencies and media buyers who make their bones by holding or reducing prices for their clients will face challenges. Those who add value through superior strategy and messaging will be rewarded. And it's going to be harder and harder to keep a foot in both of these spaces.

In case any sellers are reading this and feeling a bit smug, let me also point out the challenges you'll face in the coming months. You will be under enormous pressure to innovate, strategize and execute. You will have every opportunity to get top dollar for your space, but in the end you must earn it. To those who see this as a chance to simply raise prices, it will be a pyrrhic victory. To those who see this as an opportunity to deepen and expand the relationship with the advertiser, here's your shot at building a great marketing and media business that will carry you for years to come.

Send your comments and questions directly to Doug Weaver