Reprise Media Managing Partner Peter Hershberg talks about the history of interactive advertising and why we may be on the eve of a ‘third revolution’ in the industry.
In my previous post, Death of the SEMs – Greatly Exaggerated?, I responded to the position many had taken that says the days of the standalone SEM firm are numbered. After reading my post, you probably agreed that the SEMs do provide a set of services above and beyond what the engines could ever offer – not to mention that it’s still, and will always be, a bad idea to share back-end conversion data with the publisher from which you’re buying inventory.
Still, there remains a second camp of naysayers who say that search will ultimately be absorbed by the larger brand strategies and purchased alongside all other forms of interactive media. As a result, advertisers will be most interested in working with a single point of contact who can manage all of their interactive advertising across various channels (search, email, graphical, etc).
While I don’t disagree with this perspective, I will once again reiterate that it is the SEM firm – which has mastered the art and science of bidding on keywords in an auction-based environment that may involve millions of variables – that will remain the best equipped to rise to this challenge.
Before we get into the reasons why, let’s recap what’s happened in interactive advertising since the mid-late ’90s.
The History Lesson
Interactive advertising initially took off, largely fostered by a culture where advertisers weren’t pressed to measure their effectiveness. It wasn’t long before the bubble burst, leaving big brand advertisers feeling burned, interactive shops bankrupt, and the online markets all but evaporated. Around this time companies like GoTo developed auction-based models that allowed advertisers to buy only the advertising that could meet their needs or accomplish their goals. Small-medium sized advertisers now had a completely automated means of advertising on the web.
GoTo was eventually able to change their infrastructure from a consumer destination to a syndication model, creating a win-win for both the advertiser and the web publisher. Advertisers were able to pay “fair value” for their advertising, work with a single vendor and reach millions of web users. Publishers could secure high-value ad inventory without having dedicated sales personnel trawling for original content or singular advertising partners.
Over time, even graphical, CPM-based advertisers turned to sponsored search. Once they got past the notion that branding requires big graphical ads, they realized a whole new paradigm for interactive advertising. In line with this trend, Google amended their own paid listings product in 2002 so it was no longer sold on a CPM basis, but on a more measurable CPC instead.
Fast forward a few years. Paid search has basically saved interactive marketing. A variety of fledgling web publishers not only bounced back, but came to thrive by syndicating their content to the engines’ search results pages. Google and Overture have rebuilt the internet economy, and a variety of Tier II players are staking their claims as well.
With big growth, however, comes equally big limitations. The growth potential of each of these businesses is hampered by the overall volume of searches that take place every day. Luckily, for every challenge savvy entrepreneurs offer a solution.
Innovation
In June 2003 Google launched AdSense, accomplishing three main goals. It created incremental inventory, allowing Google to continue on their revenue growth trajectory. It gave advertisers an opportunity to secure additional valuable inventory. Finally, it provided small publishers with a means of amassing high-value inventory across their own sites (meager as they might be, taken individually).
Several problems were inherent with this new medium called “contextual advertising.” Because sites were placed into “channels” based on the types of content they generally featured, advertisers had little to no control over the inventory they were buying. Targeting was overly broad and it was arduous – if not impossible – to optimize a campaign to improve its effectiveness. Advertisers were also forced to negotiate rates and placements with salespeople at each of these networks. This often resulted in a situation where the advertiser – or the publisher – wasn’t receiving fair value. Once a deal was signed, the publisher had to dedicate time and effort to the manual processes required to launch a campaign. Simply put, the market’s mechanism wasn’t fluid enough.
The Genius of Automation
Automating the process of buying and selling advertising – as Google has done – alleviated all of these problems. Opening an advertising account, bidding on inventory, and measuring its effectiveness has never been easier.
At the same time, deriving revenue from advertising became easier for publishers. You sign up for an AdSense account, paste some code into your site pages and you’re on your way to making money. Publishers never have to speak or negotiate with advertisers, rarely interact with the network, and get to do what they initially set out to do, which is build the content they care about.
The Domino Effect
It didn’t take long for the rest of the advertising world to catch on to these trends. Google now has any number of competitors on the “contextual” side of their business – companies ranging from Yahoo *ypn to Kanoodle, to Quigo and many others. MSN made their eagerly anticipated announcement about the MSN adCenter several weeks ago – layering demographic targeting over the PPC marketplace advertisers have become accustomed to.
Coda
So what does this all have to do with the death of SEM? Well, back to the original question my business partner and I were faced with – of whether search is a big enough business for search engine marketing firms – it’s actually become irrelevant. SEMs haven’t had to migrate towards offering other ad programs because the market has actually migrated towards them instead. We’ve seen this manifest in bids on ads in RSS, bids on behavioral advertising, bids on the “automotive” category in Quigo’s AdSonar network…It’s like one broad pool of content networked together by advertising.
Everyone wants to be in this business. Web analytics companies, including WebSide Story and Omniture are developing bid management technologies. New vertical search engines are offering niche advertising opportunities across narrow categories. There are even sites that have been around for years – like Homestore.com – that have realized their content and offerings are specific enough to support an auction-based marketplace. Finally, Google’s launched their Image Ads program, offering the opportunity to run all the IAB-approved graphical ad-units within Google’s auction-based environments.
This is all happening because bid-auctions are logical and efficient. Advertisers don’t need to speak to publishers to buy or optimize, and publishers don’t need to speak to each advertiser who wants to advertise on their sites. Essentially, search provides an opportunity, as Lloyd Dobler said, to make a good living without buying anything bought, sold or processed, selling anything sold, bought or processed, or processing anything bought, sold or processed.
For all of these reasons, it seems fairly obvious that this model represents the future of advertising. And that’s what puts SEMs in a position of strength relative to traditional and interactive agencies. These agencies are going to have to develop – or more likely acquire – such competencies if they’re to become competitive in the future.
The Third Stage Of Evolution
Perhaps most important is that we recognize how interactive advertising is entering its third major evolution. We’ve gone from a medium where advertisers initially bought impressions (CPM) to one where advertisers are purchasing visitors (CPC). The new future of advertising is emerging as something called “sell-side” advertising. The mechanism of bid-market based advertising has leveled the playing field between inventory surplus, its mark-up, and the drive for brands to acquire customers.
As it evolves, this form of advertising will create a central marketplace where everything buyers and sellers expect of each other is laid on the table and everybody gets to make an informed decision. Most likely there’ll be a band of skilled marketers who’ve learned how to ply the markets, and they make their money off the arbitrage.
But for the first time ever, both the consumer and the brand will be cognizant of their role within the process. And thus, both parties will find themselves immensely empowered. Where we’ll ultimately end up (and what we’re starting to see) is a world where advertisers are purchasing customers directly from publishers (CPA).
Once we’ve moved to a CPA pricing environment, the days of ad agencies charging their clients excessive setup fees and exorbitant hourly rates will be a thing of the past. Because interactive advertising is so measurable, ad agencies won’t be able to hide behind their Madison Avenue monikers.
I predict that the standalone SEM firm, that is being written off by some today, will control a substantial portion of the advertising budgets of the world’s largest advertisers, placing those dollars into auctions taking place across all forms of online and perhaps offline channels.
