Lotame

Good friend of Lotame, and a member of our Board of Directors, Satya Patel, just wrote a great post on his blog entitled “3 reasons that data will save online advertising”, after reading this I smiled big and long! His post is so good, well thought out, and smart that I thought that I would copy it word for word. It is too important of thinking to not share with you. I am not sure about the “blog etiquette” here, so please post all comments on this blog entry back at Satya’s blog “Venture Generated Content”

3 Reasons why data will save online advertising

It’s been nearly 15 years since Rick Boyce and HotWired famously popularized the use of banner advertising campaigns as a model for generating revenue online. Since then, there have been many, significant innovations in online advertising, including new ad formats, new pricing models, new targeting technologies and new metrics for effectiveness. Yet the value of online display advertising is being questioned now more than ever before, particularly in the current economic environment. Numerous organizations are projecting that online display advertising spend will be flat or slightly down in 2009. Growth is expected to recover in 2010, but at much lower rates than earlier in the decade and than search advertising. But the explosion of data and its increasingly effective use hold great promise for online display advertising. There are many types of data for online advertising, including keywords, contextual, behavioral, semantic, demographic, psychographic and social. The relative value of each of these forms of data is still an unknown, but I believe that the value (and cost) of data will soon exceed the value of inventory, which is already deteriorating.

Here are three reasons that the use of data will save online ads and help restore their growth.

- Data makes media buying easier: Data from comScore, the IAB and others suggests that while the top 50 online publishers only account for 25%-35% of user attention, as measured by page views or time spent, they represent about 90% of online advertising spend. Why is that? As I’ve written before, the job of an online media buyer is seemingly impossible. Audience fragmentation, the proliferation of ad networks and the emergence of ad exchanges have created incredible amounts of complexity in the marketplace. Learning about all of these sources of inventory, let alone buying from them, is an unenviable task. On the other hand, buying from large, known publishers is simple. This is the default behavior for many online media buyers because it doesn’t entail extra effort or risk. Further, the buying of traditional media, rightly or wrongly, is done largely based on gross rating points, viewership, circulation, listenership, etc. Media buyers purchase audiences at scale. In the online world, media fragmentation has made it a necessity to buy from multiple places to achieve desired scale. Data allows traditional buying behavior (again, independent of whether it’s good or bad) to be replicated online. Data enables media buyers to purchase a specific, consistent audience at scale across many different publishers. Data makes the jobs of media buyers easier, allowing more dollars to be spent online.

- Data increases the value of remnant inventory: Somewhere between 30%-40% of online ad inventory at most major publishers goes unsold by their direct sales organizations. That number is closer to 80-90% for most social media sites, the fastest growing segment of inventory and the one with the most ad effectiveness challenges. Remnant inventory is the direct result of highly ineffective ads that are not relevant to the consumer. There was a time when NYTimes.com could sell its inventory because of the association with its brand. That time is long gone as metrics have told advertisers that they are not earning a return on their dollars. Getting value from advertising on social media, where consumers are largely not engaged in commercial activity, is even more difficult. And inventory, both premium and remnant is increasingly being commoditized by the ad exchanges. Effective use of data for targeting (with more engaging creatives) the right audience yields better ad performance and generates real value from remnant inventory. In the end, today’s gap between demand and supply diminishes as data-defined audiences, rather than impressions, are being purchased.

- Data is available to all: The traditional ad agency model is widely recognized as broken. The economics of the agency business dictate that they find more efficient and effective ways to engage consumers on behalf their advertising clients. Along these lines, agencies have come to realize that one of their greatest assets is their consumer and ad performance data. Data, in combination with more innovative creative, can target the right audience at the right time with the right conversation, interactivity and engagement. Publishers also see that it’s becoming more difficult to aggregate sizable audiences and to sell their ad real estate. Differentiation in the face of commoditization comes from their data. And ad networks know that they are in danger of being disintermediated unless they bring unique value to the both advertisers and publishers in the form of greater access to data or better targeting through data. Fortunately, all of these players have their own data assets and increasingly have access to data from traditional offline data vendors, such as Acxiom and TARGUSinfo, as well as from emerging online data exchanges, such as BlueKai (where I am an investor) and eXelate. The competitive dynamics in the online ad industry dictate that the various players leverage data to provide greater value to their constituents.

While data doesn’t solve all of the problems in the online advertising market, it’s clear that data is going to have a huge impact on the future of the industry. The companies that develop the platforms, tools and services to make it easier to aggregate, analyze and utilize data will be the next category of winners in the online ad market. More importantly, they will help grow the online advertising market for all of us. Even as the value of inventory decreases, the increasing use and value of data and the resulting greater sell-through of inventory will yield a larger online advertising market.