No one argues against the idea that there’s something wrong with the display advertising market. Not only do CPM rates for display ad inventory pale next to search CPMs, but the total advertisers’ spend on search engine marketing is higher than the total on display, in spite of the fact that internet users spend a tiny fraction of the time they spend online on search sites.

That was before the credit crunch.  In the ensuing months, display CPMs have plummetted further, whilst their search cousins have enjoyed continuing growth.  If anyone needed pursuading before that something was wrong with display, they don’t now.

Where people disagree today is why display advertising sucks and hence what the remedy is.

A common misconception: display advertising sucks because the market is fragmented and opaque

The argument runs as follows:  display advertising sucks because the  market is fragmented and opaque.  Advertisers cannot be bothered to deal with large numbers of small and medium websites, so concentrate their spend on a handful of top sites, or buy across ad networks.  They overpay for large sites which attract similar advertisers, and underpay for smaller sites / network buys, because they have no real idea what they’re buying on.  (And so are unwilling to spend a lot on it.)   This sucks for advertisers, because they either overpay, or lack visibility, and all but the largest publishers whose inventory sells at below its “true” value.

The solution?  More effective ways of matching buyers and sellers, either in the form of bigger ad networks (e.g. Platform A, AdSense), exchanges (e.g. OpenX, RightMedia) or algorithms to optimize which ad network an ad is sold to (e.g. Pubmatic, Rubicon).  Companies with this goal in mind have raised vast sums of money from VCs keen to take a percentage of the uplift if these solutions can drive a rise in CPM rates so that display looks more like search.

Sadly, there are more fundamental problems with the display ad market

To understand the real reason why display advertising sucks today, we need to go back advertising basics.

Broadly speaking, there are two types of advertising that happen on the internet.  Brand advertising, and performance advertising.  Brand advertising is the type of advertising you see on TV, in print and on the radio: the purpose is raise awareness and emotional affinity for a specific brand in consumers.  Performance advertising is advertising with the aim of driving a specific action in a short time frame, normally buy a product or service.  Before the advent of the web, performance advertising was a niche activity and represented a tiny proportion of overall ad spend: after all, advertiseers had limited opportunities to trigger a direct response e.g. using direct mail.

Before we consider how effective the web is as a brand or performance advertising medium, we need to think about what consumers are doing when they’re on the web.  Whilst the number of potential things is long (and growing), we can broadly divide activities into two categories:

1. Getting useful stuff done (e.g. sending emails, paying bills, booking holidays, buying groceries)
2. Killing time (e.g. catching up with friends, reading newspapers, watching videos)

That the web is a place where people are productive makes it a unique medium to advertise in.  (At least different to TV and most print publications.)  For advertisers, that creates a huge opportunity:  what better time to advertise a camera to someone then when they are in the process of buying a camera, or researching different cameras to buy?  Or a holiday to someone that’s exploring different holiday options on the internet?  That’s why performance advertising works so well on the web – it’s why search CPMs are constantly high, and it’s why well placed affiliate links, located on sites where people are engaged in activities that relate to the ad, make for effective advertising.

Why display advertising sucks for brands

So much for why performance advertising on the internet works.  But why isn’t the internet a good place to do brand advertising?

Part of the reason stems from the same fact that makes the internet such a natural place to do performance advertising.  Whilst people being productive are likely to respond positively to ads that help them meet their immediate goals, they are likely to respond very negatively to anything that distracts them from their goals, and that includes brand advertising.  So most of the locations on the internet that work for performance advertising just won’t work for brand.

But that still leaves plenty of online locations where people aren’t being productive.  Social networks, video sites, newspaper sites etc. should all be perfect places to do brand advertising.  And they might well be.

The trouble with the vast majority of advertising on these sites is it’s boring.  Standard banners and skyscrapers, even with a little bit of rich media thrown in, make for poor platforms for changing the way people emotionally respond to different brands. They’re small, they’re unconvincing, and they’re easy to ignore.  That’s why they’re worth so little to advertisers.

This type of advertising has a lot of similarities to advertising in offline media.  It’s based on an age old formula that looks tired offline and totally dead online, namely that consumers will put up with advertising they don’t want, if it means they get to access content which they do want, for free.  TV companies have enough difficulty trying to get advertising content in front of viewers armed with PVRs and hundreds of channels.  On the web there’s no way of forcing an ad on a disinterested consumer – assuming they haven’t already installed an ad blocker, they can simply ignore it (if there’s relevant content on another part of the page) or leave the page all together if the ad really bothers them.

When brand advertisers learn how to use the web effectively

So is the web fundamentally a useless place to do brand advertising?  Obviously not…  Brand advertisers, web publishers, and everyone else in the display game need to stop thinking in terms of the old media way of doing things, and start thinking in terms of the new.

The web makes it impossible to foist a weak bit of content, in the form of an ad, on a reluctant consumer.  So brand ads are only going to work on the web if consumers want to watch them.

But advertiseres can do better than produce ads that people want to watch.  The web presents opportunities for interested consumers not just to consume ads they’re interested in, but to actively engage with them.  My favorite example is the Cadbury’s ad, featuring two school children moving their eyebrows to electro music. The campaign was not just hugely entertaining (with people watching it on Youtube countless times), but through an associated site, consumers recorded and submitted their own versions.

There are other examples too.  Countless branded, viral apps are developed for Facebook, for example, to promote film releases.  Typically games that users play, these provide consumers not only with ways to engage with brands they’re interested in, in a fun and rewarding way, but to invite their friends to participate:  a much more effective way of convincing a reluctant consumer to engage than forcing an ad down their throat.

A more familiar example of successful advertising is the type typically used on UGO.  UGO offers display inventory, but ads need not be confined to the standard IAB dimensions, giving advertisers on the site much more scope for creating something entertaining that visitors to the site enjoy watching.  (Of course, it helps that UGO is a site that people visit to be entertained rather than to perform chores.)  The recent campaign run by Valkyrie is a nice example.

Implications for the display market

If people in the ad industry were to make the switch, described above, from producing unentertaining ads to force onto large numbers of people and instead produce high quality content that a small segment of users engage with, the whole dynamics of the market would change:

1. Volumes of inventory that advertisers would be willing to pay for would decline, as advertisers focus on quality rather than quantity of inventory, to those segments of the userbase that were interested in engaging with them.  However, they would be willing to pay more for those “slots”.  (If indeed a “slot” is still the right way of thinking about the advertising platform.)
2. The whole notion of an ad network or exchange seems a bit antiquated:  these are places that match advertisers and publishers, with little room for consumers to participate and choose which advertising content they’d like to engage with
3. The whole idea of an ad server, as distinct from e.g. a content management system, may need to be rethought as consumers come to view advertising as just another form of content that they pick and choose to engage with or not. (In fact this distinction is already blurring for a different reason: major publishers are starting to route ads through their content delivery systems to circumvent users’ ad blockers.)  We may move to a world in which advertising inventory isn’t clearly demarkated on a web page the way it is today, with the whole industry moving towards different ways of thinking about the ad “volumes”
4. Advertisers and publishers are going to have to work much harder to compete for viewers attention, as advertising “escapes” out of the dimensions circumscribed by the IAB

Let’s see if people are still talking about the “display ad market” in 10 years time…