This is a very short post explaining, from a media house’s perspective, how to manage the two-sided online ad market.
Why does quality matter, more than you think?
The success or failure of online advertising takes place through QUALITY. My argument rests on the notion of two-sided markets, along with their distinctive element of network effects. In more detail, bad ads impose a negative indirect network effect geared towards the end users of media. As a result, ad block usage is increasing rapidly in the world. See the graph from the fresh Kleiner Perkins report on Internet trends.
The answer to this, and many other problems of online display advertising, is not more ads (in contrast, it needs to be less, to avoid clutter) or better targeting, but rather the focus on quality.
Why do I say better targeting is not the answer?
Well, many media houses seem to have this wishful thinking that technology provides the answer to what essentially is a human problem. People don’t want to see crappy, intrusive advertising. “Crappy” here means uninteresting, poorly conceived creative implementations – something that is not hard to see if one browses any given media site. Intrusive means the ads jump to your face. While the latter ensures “guaranteed delivery” for one market side – namely the advertiser, it destroys the satisfaction of the other. And a two-sided market cannot function without both parties on board. New media formats, another convenient solution sought by media houses, are also not the answer. While they may fix the intrusiveness, they cannot amend for low-quality ads that are a much bigger problem.
How to solve the quality problem, then?
First of all, ad platforms and media companies need to be stricter with their clients – not every advertiser should in fact have the right to show online ads. It makes more sense in the long term for publishing houses to refuse bad advertisers (and possibly educate them) than to take the easy money in the short term. But in the current climate, where Facebook and Google are eating their lunch, media companies are tempted to clinch to every dollar and sell to everyone who wants to buy. In general, it’s not a wise business decision to cater all customer types, and in this particular case where ad quality is not uniformly distributed, it’s a decision of shooting yourself in the leg.
In practice, publishing houses need to create strict rule-based systems to control advertising impressions, instead of guaranteeing delivery, which is currently the case for many of them. Although advertisers may want guaranteed delivery, this is not the best choice for the overall (two-sided) market because of the aforementioned quality problem. If guaranteed delivery is to be given at any circumstances, there needs to be a credible commitment from the advertiser’s part to deliver high-quality ads. And how can this be confirmed? By running limited pilot campaigns and verifying the end user response is satisfactory. By no means the verification is a question of a marketing executive saying “Oh, these banners look nice, so this must be high-quality advertising.” That approach is old-fashioned and detrimental to both the industry and the individual company.
Moreover, media companies also need to practice vertical integration by offering creative services and data on best practices with online advertising. They need to show commitment for improving ad quality, both to end users and to advertisers. In strategic terms, they need to become “channel captains” that drive the positive change. Eventually, this will lead to a triple-win scenario where the end users are shown high-quality advertising, advertisers get satisfactory results and media houses in consequence receive a higher share of their clients’ media spend. In the current situation, none of these outcomes are realized.
Targeting and new media formats can be a part of the solution, but they will never be the core solution to the problem which is essentially a human problem. Only humans, not technology, can fix that. Thus, better creative implementations are needed — and the industry needs to collectively move from quantity to quality, or else the triumph of ad blocking persists. Media companies need to take charge and accept their responsibility of the future of online advertising – like Google and Facebook, they need to start accounting and demanding for quality from their clients. The old “anything goes” mentality needs to change, and it needs to change fast.
The author wrote his Master’s thesis on online advertising exchange (available here) and Doctoral dissertation on two-sided markets (available here). He is currently working as a Post-Doc Research at the Turku School of Economics.