Scale Economics

Charlie asked me to make a prediction for 2009. I was hesitant because I agree with Brad Feld that predictions are lame. But I did it because Charlie is a great person and I wanted to help him out with his project. It came out pretty well and here it is. My prediction is about 3 1/2 minutes into the video but stick around and see my son Josh make a cameo at the end (something Charlie threw in and I liked but Josh didn’t).

For those who don’t want to watch, my prediction is:

display advertising will get so cheap and the tools to target it will get so good that it will be shown that it can outperform search

What we are witnessing on the Internet is the development of a economy based on the notions of abundance and scale.

The Times Bits blog posted the news yesterday that Google has well over 1mm advertisers. If you click through and read the post, you’ll see that the number is estimated to be between 1.3mm and 1.5mm currently.

Let’s think about that. The "Mad Men" world was based on less than a hundred advertisers placing hundreds of thousands of dollar ad buys priced at $100 cpms and these ads were sold over martinis or on the golf course.

Now we are in a world where millions of advertisers buy billions of impressions at penny cpms or even better dollar cpas. This is a scale business with scale economics.

My prediction was supposed to be no longer than seven seconds. Don’t ask me how Howard Lindzon got away with a 30 second spot of his own. I followed the rules. So it was brief.

But what I meant was that in this economic downturn we will see even less of the display inventory being sold the old way at high cpms and more going into the remnant networks and ultimately onto the exchanges. And online ad buyers are setting up shop on those exchanges and buying billions of impressions at amazingly cheap prices. And they are deploying increasingly sophisticated tools and leveraging cookie-based data that allows them to target in real time the right ad to the right person at the right time. In that model, display advertising will perform as well as search.

This is not good news for publishers who have an economic model based on a $20cpm. It is very good news for social media properties that have low costs and a high number of available impressions to sell. It’s even better news for people looking to sell stuff on the internet.

There will be a lot of dislocation because of this move from scarcity and exclusivity to abundance and scale. Google is clearly the first big winner in this game. But there will be more coming.

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