As we close out 2006, it is tempting to distribute the standard “here’s what we did this year memo.” In fact, that was my plan, and there’s nothing wrong with looking back. However, this year I’m inclined to look forward. Now, having committed myself to looking forward, let’s start with a look back. Way back to 2001…

In 2001, online advertising was a bit of a mess. The dot-com ad budgets that had propelled our industry were drying up. Ad sales reps that had enthusiastically left print, TV, and radio sales jobs in search of internet fortunes returned to traditional media jobs where the parties were inferior, but the ground was steady. Online ad insiders had traded their copies of The Industry Standard, where they used to read about the blindingly bright future of online advertising, for the pages of FuckedCompany.com, where the crumbling of our industry was chronicled by insiders in excruciating detail. These were not our best years. We had been overconfident and paid for it. But we learned lessons. And even in those difficult days there were hopeful signs.

Internet adoption continued, broadband penetration grew, and entrepreneurs licked their wounds, reflected on lessons learned and waited for the right time to try again. It felt like a three year winter, but it would only be a matter of time before the sun would shine a little brighter, and the frozen sap of capital, ad spending and new ideas would begin to slowly flow again.

Even during the depths of the online advertising winter of 2001–2003, there were signs of vitality. In southern California Bill Gross and a group of innovators at Overture (then called GoTo.com) had revolutionized the means of turning search queries into dollars, pennies at a time. In northern California, Google was improving on the innovation of Overture. This story has been well told by others, and doesn’t need repeating here.

Here are some things about that time that may surprise you:

In 2001, Forrester research didn’t even bother to forecast search as a distinct category of online advertising, instead lumping it in with “display” advertising. Giants of the internet like Yahoo! and AOL had de-prioritized search in favor of their portal strategies. Only one year later, the US search market was forecasted to be $3 billion in 2006, a number that seemed unthinkably high.

As it turned out, we missed the number by a long shot. 2006 search spending in the US is expected be roughly $8 billion, and no one seems certain when the growth rate will slow. Stocks of players involved in search move wildly on market-share announcements and delays in critical initiatives. Google, the company that cracked the monetization code for search, and controls roughly 50% of the search market (and 25% of the online ad market) is valued at $140 billion. In the course of five years, the out-performance of search has contributed an unexpected $5 billion to US ad spending (roughly 1/3 of the total US online ad market). Our industry has gone bonkers for search…and why not?

Many questions come to mind. Why were we so off in our projection of the search market in 2001 and 2002? What drove such tremendous growth? Which areas of the market are poised to outperform in the next six years, the way search has outperformed in the last six? Why?

You might also be wondering why I’m fixating on search advertising (a part of the market we don’t touch today). While search is often credited as the savior of online advertising, the reality is that many innovative companies have contributed to the resurgence. Entire industry segments have outperformed, just not as remarkably as search has. That’s what makes the deconstruction of why the search market did what it did so interesting…and vital to predicting where it will happen next.

Search growth predictions in 2002 did not factor in the strides that would be made in monetizing each search query. The introduction of the auction methodology and CPC pricing by GoTo was a big step in the right direction. The use of historical response rate in predicting yield propelled Google to the top of the search pyramid, but more importantly, created revenue that had always been available, but never realized because of overly simplistic decision-making. Better monetization played a huge role in the explosion in the search advertising market.

So, what market today looks like search did in 2001? I offer you display advertising.

First, let’s take a look at the last five or so years of the display ad market. After the bust, companies who survived got serious about selling online advertising–specifically their premium positions. To compete with traditional media for budgets, online was going to have to sell like traditional media. Today’s non-search online advertising powerhouses (those with revenues measured in hundreds of millions or billions) include Yahoo, AOL, MSN, Fox Interactive Media, IAC and others. Yahoo’s home-page reportedly sells for more than $1 million per day. CPM’s on coveted positions such as finance and auto content often exceed $50. These premium ad positions are sold out months in advance. Selling them requires large and well-trained sales teams. Those who’ve made the largest investments have reaped outsized rewards, netting billions in ad revenue and increasing page yields.

However, a few years back something unexpected happened. The business of online publishing began to change. With the rise of user generated content and the increase of time spent online, page views have skyrocketed in the last two years. Today we hear publishers talking openly of the “glut” of ad space, and a need to focus on monetization. Even with premium CPM’s in excess of $50, publishers talk of average CPM in low single-digit figures.

Why can’t online publishers use their potent sales teams to sell all this additional “non-premium” ad space? Much of it is being created in areas less rich in content, such as social networking pages, web-based email, message boards and the like. This content is less compelling to large branded advertisers who pay premiums to be associated with targeted, valuable and scarce content. Ford or GM will pay much more to advertise to a user browsing new car models than a user checking email from her Aunt Sally in Nebraska.

The glut of inventory creates a new challenge for publishers of all sizes–how to sell it to marketers interested in driving responses or finding efficient reach. This explosive growth in ad impressions has not resulted in explosive growth in revenue. In other words, revenue is growing, but revenue per impression is shrinking. And if ad impressions continue to climb at anything like the rates they’re growing today, the US display ad market size prediction for 2010 ($6.2 billion) assumes that unit prices will continue to fall between now and 2010. Forecasters are assuming that inventory will continue to grow faster than revenue.

Display advertising has a monetization problem. So did search in 2001. When you look at it like that, it begins to look less like a problem and more like an opportunity. What if instead of revenue per unit shrinking over the next 4 years, it held steady? What if it grew? Could the estimates be off by as much as 20%? 40%? Who knows, but no matter how you cut it, the opportunity is enormous. If the monetization problem can be fixed, display advertising might just be the next driver of explosive growth in online advertising, and four or five years from now our industry just might be looking back and saying “Wow, how did we miss that?”

If this vision is going to become reality, three key things will need to happen:

1. Traditional Media ad dollars will continue to flow online.
2. Innovative companies will devise new and better ways to manage the performance of online advertising (performance/monetization).
3. Open ad platforms that enable better delivery of performance/monetization innovation will play a pivotal role in enabling both 1 and 2.

Few will dispute that #1 is happening. How quickly it happens is debatable.

#2 is of critical importance, and there are many examples of companies innovating in this area. Microsoft, Google, Yahoo, Fox Interactive, AOL and many others have tremendous stores of data and user behavior. This data has been used to better target advertising on these companies’ own sites. More recently, we’ve seen most of these companies move to extend the use of this data to the broader internet–Google with Adsense, AOL with Advertising.com, MSN buying Facebook’s ad space, Yahoo’s deals with eBay and the newspaper consortium, and of course their deal with us. As these performance and monetization platforms continue to evolve, look for each of these companies to continue to extend the scope of their efforts beyond their own inventory, and broadly to the massive supply of inventory across the hundreds of thousands of web publishers.

These giants will not be the only players in this area. Expect innovation from ad networks, behavioral advertising engines, companies leveraging offline purchase data, video and countless other performance/monetization “applications” for advertising.

All of this innovation will have two impacts on principle market participants:

1. For the advertiser, it will eliminate waste from advertising campaigns, increasing ROI and making the media they buy more valuable. As a result, they’ll spend more in areas where they can find scalable efficiency.
2. Because the media will be more targeted for advertisers (and hence more valuable), unit prices will rise, increasing yields for publishers and reversing the negative pricing trends.

In this way, we will achieve something remarkable, but not unprecedented. Growth in online display advertising will accelerate regardless of the pace of growth of inventory (which is still torrid), and the continued growth in inventory will be an additional accelerant.

Some will argue that the innovation described in #2 has been happening for years, and indeed it has. However, that innovation has been diluted by the difficulty of applying it to advertising inventory. Growth and broad adoption of these performance/monetization strategies have been slowed by the difficulty of marrying them to diverse pools of supply and demand.

This is why open ad platforms are so important. Open platforms will allow advertisers and publishers to access the various performance/monetization applications seamlessly. Our Right Media Exchange is one such example. By enabling advertisers to use various performance optimizing technologies (not just ours, but also our customers’) to bid for media based on the value of each impression, we’re making it easier for advertisers to get better ROI and reduce waste. By enabling publishers to foster competition amongst a broad pool of networks and monetization applications, we ensure they will boost unit prices (yield). Sometimes we are perceived as a threat to networks and application developers, but in reality we provide them increased access to the supply and demand pools that are so critical to their success.

What is our role in this evolution? Clearly, we are responsible for #3. We also have some role to play in #2, and our entire industry must come together to ensure that #1 continues to happen. If you want to know how to measure Right Media’s success, do not look at our revenues or profits. Look instead to the increased revenues and profits of participants in the Right Media Exchange, and the increase in display advertising spending we’re going to help drive over the coming years. If we concern ourselves primarily with these 2 key metrics, the rest will fall in line for us.

As always, I look forward to your thoughts, comments and discussion of these topics. Please come by, or pick up the phone if you want to discuss anything at all.

One last thing. We have had a remarkable year here at Right Media in 2006. I will not catalogue all the reasons, but I will thank each of you wholeheartedly for making Right Media what it is. I can only hope you feel as proud of what you’ve accomplished as I feel to have been a part of your accomplishment.

Wishing you the warmest and happiest of holidays, a joyous New Year, and looking forward to an extraordinary 2007.

My Best,
Mike

Note: At the suggestion of several employees, we decided to post this–a year end memo to Right Media employees–on our blog.

This entry was posted on Tuesday, January 2nd, 2007 at 5:58 pm and is filed under About Right Media, Right Media Exchange. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.