Ad inventory: an attention deficit disorder

Inflation, deflation, arbitrage, and debt.

No, I won't be posting on the causes of the next two years' economic de-leveraging. But these terms do have an analogy in online advertising which, despite what some say some of the time, can have an economic impact.

First, inventory inflation: Ad sellers rely on ad inventory to define pricing...tighter inventory usually means higher prices. Online, of course, the potential inventory of ad space is ever expanding as ad networks encompass more and more sites in their network...and people like you and me create more and more sites for narrowly targetted friends, aquaintances and peers. The potential inventory of impressions is, essentially, infinite. When supply of something moves toward infinity and beyond, you get...deflation.

Price deflation: Pricing on a cost per thousand impression (CPM) basis has been the norm for offline and online display advertising. CPM rates will, expectedly, suffer pricing pressures as inventory exceeds demand. Here's an early example of the cheap revolution in display ads...Lookery sells several billion ads a month and they are struggling to make money at 12.5 cents CPM...how many advertisers have paid 7.5 cents CPM lately? A lot more may be soon.

Ad Arbitrage: You know those annoying pages that sometimes show up when you click a sponsored link and it's just another page full of links? That's arbitrage. Someone has bid on a word with a low cost per click or CPM price and sent users to a page full of links with higher CPM or cost per click links. They may be annoying, but they did serve a purpose in leveraging inefficiencies in the market to someone's advantage. These sites have become less visible though because Google has limited the market pricing mechanisms for their network using minimum bids. A preset minimum is not market driven. Think of Google as the Federal Reserve setting interest rates at the consumer level. What you would get is a non-market driven influence on prices...forcing people to pay more or spend nothing. Forcing others to pay less than they willingly would. Eventually any market prices the external influence in--or out--of its assets...in this case, the asset for online advertisers is inventory and the pricing unit is CPM.

Debt: In a pattern at play in the larger economy, the artificial pricing being propped up by Google with its minimum bids means that an imbalance is building in the market for online ad inventory. A deficit in demand if you will. Because a few networks are artificially creating a floor for CPM values, an external downturn in advertiser spending might be the impetus for driving inventory levels even higher. At some point, the inability to fill inventory requires that prices be lowered...and when that happens, you'll want to be the buyer, not the seller. If you are Google, you may not be be able to fill inventory if the market pricing can't support demand.

And when cost per click and other performance models deflate, you can bet the cost per impression models will already have beaten the deflationary path ahed of them. The only way to hold value is to earn it...from the end user...and the end user alone. Impressions can't do that. Attention is paid to relevant, engaging experiences. Only the end user gets to decide what those terms mean online. It's the difference between buying impressions and earning attention (see prior post).

Shout out to the following influences for this post

Quinthar
TechCrunch