Publisher's Paradox: The Inverse Inventory Principle
The Paradox: Display advertising rates are inversely proportional to the amount of content published on the internet. This is the "Inverse Inventory Principle."
The First Banner Ad
As we head into 2014, I thought we should take a look back at the internet's very first banner ad. In 1994, exactly twenty years ago, AT&T debuted the very first banner advertisement on HotWired, the early online version of Wired magazine. (You can see a screengrab of that very first ad in the slides below.) AT&T's ad garnered a 78% click-through rate. (That's not a typo: more than three out of every four people who saw the ad clicked on it.) How things have changed. Today, the average click-through rate for a display ad hovers around .17% -- that's not even a whole person.
Banner Ad Blindness
Over the last 15 years, consumers have trained themselves to ignore digital ads and look for content, a condition called "banner ad blindness." As digital advertising becomes even less effective, marketers will be forced to find new ways to capture their target audience's attention. Slowly but surely, banner ads will be replaced by new, more innovative ways to attach the brand to content that inspires demand.
There's no doubt that the rise of digital media has caused a sea-change in the advertising world. Entire business models have sprung up that make digital advertising accessible to any business, anywhere in the world. For pennies, one can create an advertising campaign on Google, measure its impact, and even adjust the messaging on the fly. But can this business model really last? I'm not so sure, given my understanding of economic fundamentals.
11th Grade Economics
I'm no economist, but any eleventh grade economics teacher can help you understand the simple laws of supply and demand. Essentially, those laws state that as the supply for any commodity increases and the demand remains unchanged (or even decreases), it leads to a lower price for the commodity (with a higher quantity left unpurchased). Obviously, the inverse is true as well. As the commodity becomes more scarce and demand remains unchanged (or even increases), the price of the commodity rises. Of course, if the supply of any commodity outpaces the growth for demand, the price also drops-and so does its value to you.
Imagine if the nearest mile-long strip of highway near your home suddenly had hundreds of billboards lining the road. By law, no strip of interstate freeway can have more than 36 billboards in one mile. That's about one billboard every 136 feet. Let's say that overnight that number jumped to 200 billboards, or one every 26 feet. Those original 36 billboards would be almost impossible to find. As you drove by, all 200 billboards would blend into the scenery, and you'd become "billboard-blind." That's exactly what's happening to digital advertising.
So let's apply these simple laws of supply and demand to digital advertising. Let's take one website, WordPress.com, and look at the advertising opportunities available.
Inverse Inventory In Action
WordPress is a complete content management system. Although WordPress was originally conceived of as a blogging platform, hundreds of thousands of companies have used it to build their websites.
In December of 2013, bloggers created an average of 50K new web pages per hour on WordPress.com. That's 1.3 million new web pages in 24 hours. Let's assume there were six new places to advertise on each of those freshly minted web pages. That means there were 7.8 million new places to advertise just on WordPress.com every single day. In one year, that equates to almost 2.8 billion new advertising opportunities on one web publishing platform. That's a huge increase in supply.
Google estimates there are tens of billions of new web pages published every day. That means there are hundreds of billions of new places to advertise, too.
As an advertiser, this sounds like a good thing. Lower-priced advertising opportunities mean that you can buy more for your money, right? Sure-with two major exceptions: First, advertising itself is becoming less effective because with an increased supply it's getting easier to ignore. Second, one's audience is becoming more fragmented over a wider selection of content, and it's getting harder to effectively find and target one's prospects.
As a publisher, this is a disaster. Increased global inventory for display advertising space means lower and lower click-thru rates and an ever-decreasing rate for the space you sell.
The Publisher's Challenge
In this week's staff meeting, I want you to challenge your team to think about a world in which display advertising doesn't exist. As you sit down and start anew in 2014, ask your entire team to think about new revenue models built on sound and stable economic principles.
Position your brainstorming session as an opportunity to rethink your entire business. Ask your team to ponder one question: What if display advertising disappeared in 2014. How would we rebuild our business?
I invite you to steal these slides and present this paradox to your team.
About Publisher's Paradox
Your publishing world has been turned upside down in the last decade. Call it digital disruption or the death of print -- it doesn't matter. You're still challenged with driving reliable revenue for a thriving market. The problem is you need your entire staff -- from editorial to audience development -- to think differently and try new things. You need new ways to drive new revenue.
Each week, best-selling author Andrew Davis will help you get the most out of your weekly staff meeting. He'll uncover another of the puzzling paradoxes in the publishing world and arm you with a Powerpoint slide you can use to inspire your team to rethink the ways you drive revenue, build audience, and can ultimately succeed in a challenging environment.
Related story: Publisher's Paradox: Information Overload