Online Ads Down 20%: Start of a Vicious Cycle Downwards?

AdAge has reported that CPM rates for websites are down 20% according to their sources, and sell rates have dropped from 60% of frontline inventory to 30%; the net effect there being that it’s a 20% drop on half as much inventory, which by my calculations would be something closer to a 60% drop on front line premium inventory.

Those figures are bad enough (and confirm what we’ve reported previously), but it’s the cycle they describe that’s more disturbing. Silicon Alley Insider has a good description of it here, but here’s the short version of the downward pressure cycle.

Large sites lose frontline inventory.

They turn to ad networks to fill the remnant/ passback.

Those ad networks, already feeling downward pressure, cut rates to sell the extra inventory

Advertisers, seeing discount rates on the same sites on ad networks vs direct sell, switch more inventory to ad networks

Frontline inventory sales decline further, both in fill rates and CPM

And around we go again.

Nicholas Carlson at AlleyInsider claims ad rates could drop as far as 90% based on the AdAge story, although I don’t see the figure mentioned there; either way the decline in the cycle could easily be higher that the 40% Nick Denton claimed last year, a prediction many people claimed was extreme and simply wouldn’t happen.

The proposed solution is for large sites to stop handing inventory to ad networks as a way to break the cycle, but it’s not quite that easy. Old media companies in particular are being hit in every direction, that they’d say no to selling the majority of their inventory, even at lower costs at a time the bottom line for many is deeply in the red is preposterous: they simply won’t say no, and the cycle will continue.

The missing link is the long held notion of premium inventory. Carlson claims that you can reach the same audience on the NY Times as a small blog; that may in effect be the case sometimes, but it doesn’t strictly apply across the board. Some sites (including blogs) attract more appealing audiences than others, based on content and reach. While some sectors of the economy simply can’t afford to chase this traffic any more, advertising and marketing isn’t about to disappear, and neither is chasing premium audiences, well not entirely. The only outstanding question is how deep is the bottom of the market.