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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Comments (Archived):

  1. ceonyc

    I’d rather do @cwalken.

  2. fredwilson

    Right on scottBut that¹s all directionalThe world won¹t change completelyIt will just move in the directions you talk aboutGreat comment and great link to Ben Kweller, my current favorite poet

    1. brooksjordan

      I love your prediction about display being as effective as search.I also think conversational media will take off in 2009, which is about display but not necessarily about ad networks. And that’s what I’m hearing in Scott’s poetry.

  3. fredwilson

    Yes, yes, yesWho is going to solve thatPeer production??

    1. BmoreWire

      no, no, no. networks are all science. Which is the problem, and which is why network cpm’s are plummeting. Investors want a model that makes them money and aren’t necessarily concerned with whether it works. The art is missing, the engagement is missing. Math can only take you so far, trust me I’ve tried. Successful campaigns are those run by smart marketers who know their audience. Google has a model that works for search advertising and is much like the end-cap point of purchase unit in the super market. But why did they walk down the cereal aisle in the first place. That’s what display has to solve and going for heavy tonnage and lower cpm’s won’t solve that problem. You might get lucky if your optimization is good enough and you have enough budget to burn through to find your audience, but more time needs to be spent on creatives, tracking, tactical adserving, and better mathematical models need to be discovered for engagement, this will provide true ROI, and as a side effect will drive up CPM’s. (disclosure: i work at an ad network as well as owned an operated media company and social network so i have a full view and hopefully am less biased than just a network)

      1. fredwilson

        Brian ­ interesting that you¹ve been at the center of both posts in the pastcouple days. You clearly are working at the epicenter of all of this stuff.Thanks so much for all your comments. They are great.

        1. BmoreWire

          You’re probably giving my opinion too much credit but thank you, and I will continue to offer commentary.

          1. fredwilson

            Not likely

      2. Gui Ambros

        Good comments, Fred and Brian. Though, I believe we’re far from having Display surpassing Search.Costs are going down because inventory is going to the sky. Portals and publishers are adding social content (e.g. Yahoo, MSN, Terra, etc), which is good to increase traffic. But the traditional advertising model for display – interruption marketing – don’t work for social content at all. Users don’t like to be interrupted when they’re poking people, sending vampire bites, reading emails or watching videos of a dog peeing on your pants. It’s simply human nature. As a consequence CTR have been going down, and will continue so in 2009.Smart marketers are using rich-media and good creative to compensate, but as Brian mentioned, this is art, not science. It’s a trial-and-error process, and there’s simply no way to be always right. Sometimes you get it right and have great CTR results, sometimes not. Adaptative Ad Serving techniques (Dart, Atlas, etc) help a lot to optimize testing procedures and thus increase CTR, but at a high cost (specially with pennies CPM and you having to serve billions of banners for a single campaign).My prediction: things will continue flat display & search in 2009. Display Media CPM *and* CTR will continue going down, thus keeping CPC flat. Search CPC will increase a bit (we’re seeing this already: bids are getting higher over time, with more competitors entering the game, specially outside US), but will still have a better ROAS than Display.BUT… things is not all rosy to google. Marketers are realizing Google is like the salesman that see the customer going to the checkout and stamps his code, so he can get credit for the commission. Of course Search results are always great: the hard work of getting the customer to buy was done by the TV, Print, Display, Social Media, bloggers, twitter, retail store, etc. Lucky GOOG that most companies don’t have the tools or desire to measure properly this spillover and calculate the REAL customer acquisition cost… Ignorance is a gift to some :o)(disclaimer: I work on a marketing agency, so demand generation campaigns are part of may day-to-day)

        1. BmoreWire

          Well, I think display is at a completely different stage in the purchase consideration funnel and the problem is that people are considering them equal. To say that display ads in social networks don’t work, is not necessarily correct. As you drive down Interstate 95 and speed by outdoor ads for BMW and then you purchase a BMW, just because you don’t use the 800 number on the outdoor ad for that dealership, doesn’t necessarily mean that after years of exposure, BMW’s display advertising had no affect on your purchase. A big problem is that people evaluate online display in the short term. I would love to see research or a study of a major online display spender’s long term effect from heavy banner advertising.

          1. fredwilson

            Here’s a post I did on some comscore research that does look at the longer term affects of display…

          2. Gui Ambros

            good post.Have also a quick interesting story to share:a few years ago I conducted a study between an automotive client and one large portal/ISP in which we were investing a couple of million dollars per year. The study consisted in matching the ISP’s customer database with the company’s database of new vehicles sold in the past 6 months. We then analyzed the number of times each user saw a banner, and how many times it clicked.As you may have expected, the result was surprising for us and for the client. We proved there was a STRONG (and statistically significant) correlation between # times a banner was shown to a specific user and the % of users that bought a vehicle. *Regardless* of click.(of course users that clicked had a higher conversion rate, but this was expected)Having said that, the problem most companies – and vendors – are simply unable to track and measure impact cross-channel. And even looking just at online purchases, advertisers still struggle to identify impact of display impressions over conversion rate on search, or the spillover on the brand. If you add call center, retail stores, etc to the mix the confusion just increases. Agencies and Clients that use DynamicLogic studies are even more scarce.You know what’s funny? Search spoiled marketers. We don’t use the same scrutiny to measure print advertising, radio or broadcast, but online brings this stigma that “everything is trackable”, so in the meantime let’s bang display on the head…

          3. fredwilson

            Yes, search did spoil marketersBut therein lies an opportunity to build tools that deliver the analyticsand targeting that can show them how to use display effectively

      3. davidhelmreich

        Fred and Brian -All good points, and I think many of the individuals on here would be ecstatic (and simultaneously mortified) if display can ultimately outperform search. It would dramatically change the lead generation industry and finally threaten the large search giants.My experience with the networks is similar to Brian’s in that they are technology companies first, second, third, fourth, and maybe marketers and media optimizers somewhere much further down the the list. This has created a unique opportunity for companies like MediaMath, Invite Media, mediageeks, and others, than are fighting to show the value of publisher’s audiences, and make it easy to agencies and networks to find individuals across mutliple sites, rather than buying on a mediakit basis.Today, it still seems as though the art and audience segmentation is largely done offline by the agencies and advertisers, and then the target audience is sought through a mangled insertion order and translation process that essentially flattens the ideal lift curve down to a straight line. There isn’t an easy way for an agency or advertiser to easily find their target audience online, period. By pushing this square peg through a round hole, the networks are forced to “interpret” the desires of the agency, and in more cases than not, just do what they want, and report something after the 30M impressions are fulfilled.Behavioral targeting, although it may employ the greatest technology and clickstream translation layer, resulting in some behavioral segment, isn’t understood by media buyers. We sit on the sidelines and remark how neat it is, but the sales teams and advertisers can’t find a relevant audience that way.Depressed CPM’s is only excaberate the problem as more media will be purchased and more RON impressions will be used to backfill large orders.In full disclosure, I have been working for over a year to combat this problem and provide a solution to power ad networks to drive informed ad serving and reach the true audience requested, but time and time again, networks want to tout their own capabilities and fall back on science and optimization, which in many cases, in neither science, nor optimization.”The Ad Server just figures it all out in real-time” won’t work in 2009 and 2010.-Dave

        1. fredwilson

          Keep working on it, we need display to work better for advertisers with somuch of it hitting the market this year

  4. Darren Herman

    Great post. It’s also worth noting that technology is finally here to make mass exchanges and their ecosystems (data, bidding, trading, serving, plumbing, etc) into real businesses.There are a lot of impressions around today, but tomorrow when most media is digital, there will be a lot more. (I.e Navic, Canoe for digital tv)Want to type more but on train with Iphone

  5. ceonyc

    Howard’s was 7 seconds…. but it was 7 seconds Canadian. That’s how bad the exchange rate is.

    1. fredwilson

      ha, you are on a roll with the country satire, first facebook’s a third world country and now this. maybe you should do stand up in a kermit the frog voice

    2. howardlindzon

      i am the only one on the internets making these type of jokes, so I feel yo are now infringing. good day.

  6. heif

    but attention doesn’t scale consumption doesn’t scalethese daysthe people ain’t buying the winner isn’t the ad-drunk stuff-sellersit’s the peoplewho wake up in their max’d credit hazeto having less to needing lessignoring adswhen they don’t want themnot needing to buyto be happyfinding their worthoutside the satisfaction of stuffmore smilesfrom people, not the stuffmore dancing more calmmore businesses, capital efficientkeeping prices lowreally serving peoplenot stuffing their adsthru ad-backed securitieswhere the math doesn’t add upsigned,a portfolio ceosee “things i like to do”

    1. markslater

      this is great

  7. Eric Franchi

    well said fred, i agree with you (disclosure: i work at an ad network).a big piece that is missing right now are tools to enable those 1mm+ google search advertisers to use display effectively to “sell stuff” as you put it. the result of too many current DIY ad creation products are pretty poor. display creative is art+science.

    1. Dan Lewis

      Crud, that was going to be my 5th question below… glad I forgot it. Anyway, here’s my guess.I think you’re going to find standardized ad spaces increase massively. Gawker’s huge 800×250 ad makes a LOT of sense if you are a publisher — it’s basically a big band across the content space. A plain text ad or something akin to a low-budget billboard (as in, actually side-of-highway biilboard) would be effective enough, simply given the size and placement, if CPMs fall off dramatically.

  8. Eric_Franchi

    that’s the $1b question right? it would behoove a google to develop or buy a tool that helps with creation and then automatically optimizes like they already to for text and with google analytics

  9. kidmercury

    perhaps. i must admit you make a good case fred. a few concerns (very similar to what heif said):1. does falling CPM lead to a world in which everything is plastered with popups and blinking banner ads…if so this gives clean sites greater value, and those who can monetize clean sites will be well positioned2. banner blindness will soar. i login to social networks on a daily basis. dont remember the last ad i saw. very rarely a well targeted facebook ad will get me to at least see it, though i never click. while i am probably a bit extreme in this regard it doesnt change that people want to give their attention to other people, and anything else is a nuisance that that the mind will work to avoid. as an example what if you called your friend up and in teh background there was some ad playing? and what if this ad was personalized to your conversation and other user profile information? it would be annoying and you’d try to block it out, perhaps getting resentful if you could not or if it was overly personalized without your permission. i view social network ads as similarly annoying. while they may be cheap and falling, i think that is because they are close to worthless and the market is correcting itself.3. personally with my business, i’ve found creating quality content to be the most effective way of advertising and getting natural links which are highly coveted. even the little advertising we do tends to be focused on buying links for SEO purposes.4. i think we’re in for “scalability 2.0.” meaning profitable on a small basis, but then a system that connects all these small profitable nodes into something bigger that creates exponential value which is then shared with the small nodes. what you’re talking about (or at least what i got from it) still seems more like an infrastructure business and that return on bandwidth will be a key metric. i’m more bullish on return on attention, return on influence, which i think will happen if we can find models that finance the creation of quality content, and will be disruptive and unlock new value. i feel google has already won the return on bandwidth game.but you make a good case, perhaps i am underestimating how good the targeting and ad creation tools for CPM/CPC advertising will be. and perhaps the two models are not mutually exclusive.

    1. Mike

      I agree that banner blindness occurs for 98% of the audience while they are on Facebook or MySpace, but when they are away from those social networks, they open back up. Imagine the day when you search on Google for an MBA Program, wander away from that search, but later in the day while at, you happen to notice a banner advertising an MBA Program that is close to the area you live in. Now that is attention getting.

    2. Dan Lewis

      I don’t think you find overlay/blinking garbage. I think you’ll find a lot of much larger units. A few years ago, the standard skyscraper size was 120×600. Now it’s 160×600. The most popular unit is starting to become, if it isn’t already, a 300×250, which was unheard of five years ago. Now, that’s giving way to 300x500s and expandable 300x250s. Publishers do not want to annoy their readers, but will give up more space to advertisers — especially when the marginal cost of that additional space is basically 0.Banner blindness on social networks sucks because the ads are placed in locations that blend into the wallpaper. But at their volume, the incentive to fix that is low, as they are still going to get pennies cpm.

    3. kidmercury

      @ mike, probably true that banner ads work significantly better outside of social nets, though i think everything will be a social network, or some type of community/communications device, as the web evolves@ dan lewis, yes. when i was running banners 160×600 was my favorite, still could get the attention of the user while getting ad revenue. at times i’m tempted to go back to it for the quick buck.but larger ads are a stepping stone to greater intrusion. first 160×600, then 250×300, and then? maybe some hover stuff. popups, interstitials. or the content becomes more valuable if you make it private (though i think that is doomed…think bit torrent).

    4. jordanmitchell

      CPM rates are already extremely low. I don’t think remnant rates are going to fall much more. And an average CTR of .1% means that banner blindness can’t get much worse either. In other words, I think we’re at the bottom for eCPMs and CTR (for the majority of inventory out there), and as Fred points out, the tools will pave the way for a rebirth in display.As I wrote last year at… high CPC rates (SEM) and better targeting/technology will be the major forces behind a rebirth in display advertising. If you’re a marketer seeing your bid rate for keywords exceeding $2 per click, the effective CPM rate you’re paying is high. At .25% CTR, you’re paying $5 CPM. At 1% CTR, it’s $20 CPM. If you’re paying $2 CPC rates , all you need is a measely .05% CTR to put $1 CPM inventory on par (which is what 83% of the inventory is selling for, and also 5-10x the price of most social media inventory these days)!Display offers >25x more volume than search, and new targeting techniques for CPM ads will shift dollars back towards the display market — assuming ad networks rise to meet the market opportunity. I think they will, slowly but surely. They have to, in order to grow their business.

      1. fredwilson

        You said it better in many fewer words than I did JordanBut that happens in the comments on a regular basis!

  10. jquaglia

    Great perspective Fred. Then what is the future for such publishers? Will it become all but impossible to generate any profit by publishing? How profitable are popular publishers like Huffington Post?Always makes me wonder if Web 2.0 will improve the quality of information that gets filtered to the mainstream reader, or if this economic model will drive too many crappy publishers out there.

    1. Ted Murphy

      That’s my thought — at some price point, run-of-site is more effective than keyword search. But that may not be useful for the content publisher.At a company I ran 10 yrs ago, I figured I needed $10 cpms to make money on advertising. Now, the number may be $5. Maybe its $1 at Twitter. But my Google run-of-site cost is $0.0778. Can any company really be profitable at an 8 cent price point?In the end, I think content publishers need to sell something. My bet is on peer-to-peer payment for direct interaction with the content publisher.

  11. Dorian Benkoil

    For mass advertising your point here is well taken. But for advertising that provides real value to a targeted view, I don’t think we’re “there” yet. There’s still room for higher-priced ads for those who can gather a defined audience with passion for the media they’re consuming and interacting with.

    1. David Honig

      I have to disagree with DorianB. How do you define ” real value ” You are correlating a higher price ad with Real value which is not the case. The mass inventory available today and with the maturity of technology today allows for VERY targeted, engaging ads to be displayed to the right cookie… ( user ). Technoligy is effectively scoring cookies. There is a ton of data, and there is science around it, Managing that data has been difficult for many people. We are never at a loss for data in the business. It’s about utilizing it. There is zero need to guess anymore. I Couldnt agree more with Fred. But a penny cpm is rather low. You can still pay a premium ( exchange ) CPM and execute effectively. Lets give some credit to technology maturing and not all the credit to the decrease in cpms.

  12. Gotham Gal

    I agree with Josh

  13. MartinEdic

    I think the ad serving industry is in total denial regarding banner blindness- it is real and it is the primary reason for falling CPMs. The idea that you can ‘broadcast’ ads into social media is so wrong that I don’t know where to start. First, if you place an ad in social it will not only get ignored, it may create a strongly negative backlash. This has not been the case in traditional media. Second, people seeking buying information in social media want information- not brand messaging. Throwing something ‘creative’ at them is putting the horse behind the cart. They’re already past that stage of the buying cycle. I know I sound like a lunatic to people in the media/ad industry but listen please: You have to wake up. Advertising in social media will not work. Community engagement works. Adding value to the discourse works. Serving up contextual ads will not work.The gist is: Stop trying to glom an old model onto a new media.BTW, why am I so vehement about this? Because we have a database of over 1 billion social media conversations and if you run a search on ‘ads in social media’ the sentiment analysis is off the charts negative.

  14. Dan Lewis

    I agree with 99% of this and am only really reserving that 1% as a hedge 🙂 But I have a few questions that pop up, which I’m thinking about a lot and would love to hear others’ take on.:1) What happens to places like Gawker et al, which clearly can’t stay in business of display CPM falls to 100% reminant (and reminant falls in value)? How do they innovate to stay alive?Gawker has already pushed toward things such as smaller ledes into full stories, fewer ledes/page, and cross-posting content on its network, all to increase pageviews (and therefore ad impressions). They’ve added enormous ad units which obviously appeal to advertisers but are also non-standard sizes and can’t be easily bought by networks for that reason. What’s next?2) Display ads are harder to target than search ads by orders of magnitude. Anyone who has run Adsense for Content has experienced this. And most ad networks target by vertical, which is to say, barely at all. At what CPM level will big brand advertisers just say “screw it” to targetting and simply buy a large volume of impressions, i.e. the shotgun approach?3) As CPMs fall, targetting the individual based on their online history — social network data, search history, e-commerce history, etc. — is not only going to be preferred by advertisers, but possibly demanded by publishers. Who falls onto what side of the privacy battle lines, and why?4) I recall reading that Citi did not want to advertise on user generated content sites because they did not want their brand next to unknown and potentially substandard or worse content. Ironically, that same week, one of my user-gen site’s ad networks served a reminant ad for Citi. Will brands adhere to this concern, and if so, how much of a premium can “professionallly” written sites continue to demand?

  15. Chris Mechanic

    I enjoyed this post. Predictions may be lame, but you have to admit that they can be interesting and make you think of ideas that you’d never considered.Actually, you know what, I don’t think that predictions are lame. I think that putting a time limit on a prediction (i.e. this WILL happen in 2009) makes it less relevant, but predictions in general I think are cool. Especially when it’s smart, successful people doing the predicting.Fred, I thought your prediction was particularly interesting. It couldn’t have been more relevant to my work as I’m a digital marketing strategist.I had never considered the idea of having an exchange-type atmosphere where display media is sold and purchased. Currently, it’s pretty expensive and some of our clients pay in excess of $40-50 CPM.Good work.

  16. Matt

    my prediction for 2009 is: blogging and user-controlled multimedia sharing platforms will become the new most powerful mass media, traditional media will either switch to Internet services or start losing ground.

  17. BillSeitz

    To clarify terminology, you’re using “display ad” to mean “any web-ad not targeted on the basis of user-search term”, right? So it might be banner/rich, or it could still be text. And it could be targeted by page-content, or anonymous-user-cookie, or not targeted at all, right?

    1. Dan Lewis

      That’s what I took it to mean.

    2. fredwilson


  18. Jeff DiStanlo

    still waiting for an ad model where i can choose to broadcast an advertisement to the people in my social network (twitter / facebook – doesn’t really matter). if i spam, they stop following, but if i pass along useful links/offers that i think they will like, i might actually get more traffic. (and let me share in the dough a little bit and it could get interesting)

    1. Dan Lewis purports to do that for twitter.But really, you don’t need an ad model other than “ask people for money” 🙂 or otherwise be financially involved. Tim O’Reilly springs to mind — he tweets about his books (see… and conferences all the time. They’re ads. They’re content. The “trick”? Be your brand.

  19. James Sherrett

    Fred,I agree with you about the falling cost of ad inventory. But one big caveat is the ads themselves.For display advertising to scale so advertisers can “target in real time the right ad to the right person at the right time.” there needs to be a way to create / customize all those display ads.This was way easier to do with search. Dynamic keyword insertion and customization down the long tail of inventory worked because they were simple text ads and they responded to text triggers. It was pretty straightforward to customize huge campaign.When the ads are graphical (jpgs, gifs and Flash), it’s much tougher. The advertising creative becomes the bottleneck because ad creative still gets built as if one ad was running many times, without regard for context (as in broadcast media).3 solutions to the bottleneck problem exist:1 – Offshore the labor to make the ads. Big ad agencies like WPP have been doing this for the last 5 years. China and India provide a lot of the horsepower to create the variations of ads needed.2 – Programatically create variables in the ads based on event, context and time triggers so they seem customized for where they appear. Some fledgling efforts are emerging.3 – Harnesses the distributed, on-demand global labor pool through a peer-production marketplace. The ad consumers become ad producers. Again, some fledgling efforts are emerging.I believe a combination solution will emerge of all 3, led by a peer-production marketplace and enabled by good collaboration tools and feedback loops.The old 80 / 20 advertising rule of spending 80 percent of your budget on media and 20 percent on creative will be reversed.On the web, the creative in the niches matters. The hard costs and scarcity of media have largely disappeared. Getting the ad into the right context is fairly advanced but the ads themselves have remained fairly stunted because getting them produced is locked process.*smile* And that’s what I started AdHack to change.

    1. fredwilson

      this is an important issue. i think collaborative and peer produced models will emerge (in fact are emerging)

    2. brooksjordan

      Interesting point, sherrett.I’d think one more solution, though, is building foundational ads with good bones, if you will, cutting down on the need for customization, and then, building some of the customization into the ad itself, allowing the user to interact with it.But, regarding peer-produced display ads, when I looked at your site – – it made me think, hmm, Threadless for display. Great idea.

      1. James Sherrett

        Hey Brooks, thanks for the kind words. I like ‘Threadless for display’ and am actually wearing a Threadless t-shirt right now.I agree with you about building “foundational ads with good bones” that can be customized. We’re working through the build on just such a thing, which would live somewhere between approach 2 and 3 (above). Making all the peer-produced ads customizable by users (ad buyers) to different contexts.Is that consistent with what you were meaning with “allowing the user to interact with it”?

        1. brooksjordan

          I need to get me some more Threadless. :)That’s sounds awesome, but by users I also mean simply the people viewing them. Why not allow them to extend the peer-production at their level for the learning experience and fun of it?I’m sure you’re already thinking along these lines. The reason I bring it up is because behavioral targeting is getting some of us all worked into a lather about the need to actually create multiple versions of the same ad in order to put it in front “of the right person at the right time in the right place.”And that’s nuts. Expensive, slow nuts, even in Outsourcing Utopia, and the ads are still going to suck.So, I’m seeing Campaign Monitor-esque ad templates, that the community can mark-up and redesign any way they want to (with some getting paid) but in addition to that AdHack, again, with a couple of really good designers/developers, shapes those templates into something that’s much more interactive than we see now.By shape, I mean something like Apex + Visualforce, so that components for interaction are built into the ad, allowing non-technical people do a lot of very sophisticated things while developers can take them as far as possible.What I’m looking for as a viewer of the ad is the same thing I’m looking for everywhere else I go. To learn, to change, to connect. Then, the ad becomes content and the changes that I voluntarily make spread across the network as appropriate for others to enjoy.

          1. James Sherrett

            Zounds! Now we’re thinking along the exact same lines.I’d love to extend the remix functionality. Make the ad consumers into ad producers. Make the co-creation circle complete, iterative, higher-engagement.I’m just not sure any ad buyers are as open minded. Yet. Soon? We’ll have to see. The strategy we’re talking about is (to my knowledge) too far ahead of the market. I think it’s where we’re headed but it’s not what people are buying today.

          2. brooksjordan

            The puck, the puck! 🙂

  20. gzino

    “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.”I look fwd to seeing that technology then. At high level, search (by its nature) gets the context and user goal a very high percentage of the time – or at least in the ballpark – 80% maybe? Do you see the tech that you reference getting near to that type of percentage for display ads? Granted, the second variable is getting the user to pay attention / click, but seems like display would have to crush search in that are in order to make up the initial deficit.Generally think there is still too much clinging to the old world numbers. The metrics that accompany online ads are a double edged sword – they are needed, but also show that advertising in general is not nearly as effective as it was assumed to be when it couldn’t be measured in old world broadcast media. Even if online advertising is more effective, which I believe it is, we now know advertising is not as effective as the market had to assume sans real data, so I’m not sure if display ads, even very effective ones, have a very high ceiling.Also think the social networks etc that link us so effectively today are poisonous in many senses for the overall ad industry – what was the chance that we heard about (something) for the first time via an ad 10 years ago, compared to the probability today with our always on connectivity and speed of light multicasting of data? How many brands could saturate us 10 years ago via pure capital driven name recognition campaigns compared to trying to do it successfully today with the current signal to noise ratios? Etc.Of course extinction of the old model will open up room for innovation as you state, and maybe much of it comes from the display ads, but it just feels like it will be a much wider leap than that.

  21. John Wesley

    “In that model, display advertising will perform as well as search.”Yes, for advertisers. But for publishers it’s a disaster. Unless you are a big name brand, the CPMs available to you are pathetic. Generally less than $1. At those levels its nearly impossible to make money off high value, high cost content. Your only hope is to get traffic from Google and funnel that search intent into AdSense or relevant affiliate offers.I think online publishing is forming 2 distinct classes. The only sites that can survive off pure ad revenue are the high traffic, high brand recognition sites with inhouse sales teams (mainstream newspapers, magazines, massive blogs). To survive, smaller publishers will need to abandon the ad model and make money by funneling visitors towards their own products and services, or those of another business through an affiliate relationship. Basically, they need to use their content and audience to promote themselves, rather than selling display ads at basement CPMs. Content as ads, etc.

    1. sukornyk

      I agree. This is great news for advertisers but it will drive revenue down for publishers and will lead them to explore alternative revenue sources.I think there will be a huge rise in affiliate marketing revenue, but only if the tools become easier for publishers to use. Right now affiliate marketing is a black art that needs to be repackaged.

      1. John Wesley

        “Affiliate marketing is a black art that needs to be repackaged.”Exactly. Affiliate marketing has been misused by blackhat SEO’s, spammers, and unethical webmasters. But there is really nothing wrong with recommending a product, if the recommendation is genuine. It’s a fine line, but for publishers able to build trust and not abuse it, affiliate marketing is amazing. Even better if you have your own products and services to sell.

      2. kidmercury

        this is one if the issues i wrestle with most. i agree with the rationale about why aff marketing will rise and utilize it myself, though tracking is a major, major issue. and the tools need to become easier to use as you noted.either way i think we will start to see aff marketers/resellers offer value-added services, most likely in support or education, to help add reseller value. this naturally ties into the social media revolution as well.

    2. kidmercury

      yes! “content as ads.” there it is. the simple idea that disrupts everything.IMO the problem for much of the current internet world is that the “content as ads” paradigm shifts value to the content creators, not so much the web service creators. though of course there will be opportunities for code visionaries, but IMO they are a bit different than your standard SaaS appraoch.

    3. Ted Murphy

      I agree with you. The hopelessness of advertising as an online business model apart from keyword search and classifieds is apparent to any objective analysis.Here are some numbers from the third qtr for, the only successful publicly traded pure play online publisher that I know of.In summary, traffic was up 27% year-over-year and advertising dollars were down -6.5% — resulting in a -26.4% drop in CPMs. At the same time, revenuje from paid subscriptions was up +11.5%.Q3 2008Q3 2007% ChgNet revenue (9/08 v 9/07):Paid services10,244,2129,188,32911.5%Marketing services6,478,3676,930,030-6.5%Total net revenue16,722,57916,118,3593.7%Unique visitors:24,000,00018,897,63827.0%Mktg per 1000 visitors:$269.932$366.714-26.4%…

  22. fredwilson


  23. fredwilson

    once again, the commenters outperform the original post.this is a great comment thread everyoneand even my wife joined in!!

  24. markslater

    my prediction for 2009 is that someone will figure out how to place cookies on the phone without using the network. 😉

  25. Christian Cadeo

    Although I am hopeful that your prediction comes true, I would think that this will be a tall order as you can apply as many targeting layers you want, but the most important which is intent will never be achieved by display. When I query something it is inherently an intent on my part. Display on the other hand can triangulate as many data points (implicit/explicit actions, purchasing history, etc.) as possible but unless I explicitly convey my intentions, at best display can only hypothesis to what I want.

  26. Steven Kane

    the big question for me is – fred, where were you sitting when you filmed your prediction?

    1. rmkf1027

      There’s been a lot of hope extended toward UGC – User Generated Content — as a future source of effective ads. I’m not sure these expectations are justified.A couple of years back I assembled a panel at the Academy of Television Arts & Sciences’ NexTV conference (alas, the event only was convened twice) about UGC in the TV landscape. Tony DiSanto from MTV, Peter Micelli from CAA, Brent Zacky from E!, Wayne Goldstein from Sony, Jason Meil from Current, Rob Bennett from Microsoft, etc. all appeared.Conclusion: UGC is a good indicator of raw ability and a useful talent finder. But the awful calculus of entertainment development still holds: one in a hundred scripts are optioned, one in ten gets made. For ideas pitched, the ratio gets too tall to be meaningful. So just going with completed projects, that’s about one in a thousand hitting a screen, either big or small. Quite a gantlet.Advertising and TV haven’t been so terribly distant for most of TV’s existence. But now that we are into Long Tail country and a viewing universe of virtually unlimited choices available concurrently, how important is creative excellence that has traditionally commanded a premium price for those who can sell their talent?I think that after we get past the novelty stage of web-based attractions, the same historic proportions of creative talent to no-talent hopefuls will stay unchanged. And the pricing structure for access to skilled creative talent will stay about the same.If anything, sifting through the almost-good to find great is now harder because there’s so much more of everything to evaluate. Everybody is their own studio, broadcaster, distributor, producer, writer, editor and director. Mass media and mass culture have lost centralized control via means of distribution. No more enclosure. Also no more editorial oversight.Recently the New Yorker ran a page speculating about how long our present delicate balance of juried content at free-access prices will endure. Maybe not too long. The NY Times has just hocked everything they have just to stay afloat.T. Murphy’s stats are appreciated. To me at least, they reveal the consumers are willing to pay a premium for content they want via subscriptions etc. Now the trick is to figure out how to make use of creative talent in a context where the remote “channel switching” button is closer than ever.

    2. fredwilson

      The vacant main floor of a store called ³apartment² in BerlinThe store is in the basement and for some reason they have this 3000sf mainfloor retail space that is completely emptyYou can see it on their web page I decided to turn it into a studio for 7 seconds with the help of Josh(who makes his cameo at the end of Charlie¹s film)

  27. Roger Toennis

    The crux here though that no-one seems to recognize is; no matter how cheap or effective CPM gets it is still spam and always will be.I don’t care how much demographic info an advertiser has on me, or how many clicks on the web they have spied me clicking; they are still pitching products and services to me that I HAVE NOT ASKED TO BE PITCHED TO ME.This is the core problem with the 19th century mass marketing/advertising model that persists to this day. They are GUESSING what I want. (I say 19th century because Sears invented it with the mass printing of the Sears catalog in the 19th century.)What’s the “Well, DUH!” solution to his problem that no-one seems to think about?:-)

    1. Willan Johnson

      Great comment rtoennis. Search advertising works because there is value for both the advertiser and the consumer. Hard to imagine display ads outperforming search without such value.Fred, agree that CPMs will generally fall, and targeting will improve. But another challenge with your view is relating broad reach (i.e, millions of impressions) with penny CPMs with sophisticated targeting. If the targeting is so good, why are advertisers using exchanges to buy millions of impressions? (In other words why use a shotgun when a rifle / scope will get the job done more effectively).My sense is that traditional display advertising will only become more effective through better targeting, stronger engagement with the consumer, and some form of direct benefit or feedback. Penny CPMs will be a part of the broader solution, but not the core.

    2. fredwilson

      Right, but it pays the bills for a lot of stuff we want and need

    3. Jonathan Wegener

      Yes rtoennis! Couldn’t agree more. Glad someone finally said what I was thinking.CPM/display is shouting — it’s pushing a message onto unsuspecting victims who aren’t open to hearing that message. Search advertising works because the ad is displayed at the moment where the visitor is SEARCHING for something specific. It’s the perfect place to display an ad and the user is generally receptive to it: thus the order of magnitude higher click through rate on a SERP page vs a generic web page.

  28. rafer

    Sorry, Fred. Have to completely dissent on this one.1. Buyer aggregation is going to kill publisher aggregation.…2. The best new source of display targeting is search KW retargeting, which performs at ~20% of search (which is better than contextual).3. Publishers without focused or easily segmentable audiences are generally, and maybe permanently, screwed. 4. Exchanges won’t survive the recession in their current form. The buyers are in a position to insist on flat-fee technology service suppliers and there’s enough mediocre inventory to erase any scarcity of demand as #1 on this list becomes increasingly automated.

    1. fredwilson

      Thanks for stopping by and weighing in scott. You are way closer to thisthan me. We¹ll see but I wouldn¹t bet against the exchanges.

  29. Richard

    We at are seeing more and more advertisers as well as smallmedium sized new advertising that are coming to take advantage of the mass of inventory available at great rates and ona wide range of site. We are also seeing many more publishers expressing their willingness to allow us to manage their entire invetory.

  30. jonathanmendez

    The pre-click and post click technology and strategies of search are certainly moving into display thanks to APIs and semantic tech. Performance is moving along with it. “The time is right for a palace revolution.”You might be interested in a post I did two months ago on this Also in March I will be moderating and speaking on the first conference discussion on this sea change (joined by the venerable Mr. Rafer) at Search Engine Strategies, New York.

    1. fredwilson

      Great post. Using keywords to target display “intelligently” is a great development.I’ll try to see your panel. Scott is indeed venerable.

  31. vijaycs42

    I agree that display cpms will drop, and had done a blog post in August on this subject:…I also agree that some forms of targeting will become more commodity. But more than that I feel display ad targeting is highly overrated. Most display advertisers have a goal that’s closer to brand advertising than to getting immediate conversion, and for that goal they would not need more than some basic forms of targeting (e.g., high level subject area, location etc.). Beyond this basic level, you could look at any metric to figure out that more advanced targeting doesn’t help in either click-throughs, conversions, or awareness. If advertisers have more specific goals in mind, they’d be better served by search advertising.

  32. Michael Stephanblome

    I think that the economic crisis could be a catalyst for a surge in online performance display advertising. The lack of online brand advertising budgets will force online publishers to dedicate much more thought on how to effectively monetize their remnant inventories. They might quickly realize that the lack of transparency from blind ad networks is detrimental to their eCPM and that they need to look at ad exchanges and understand how optimization works.On the ad buyer side many media agencies are realizing that they need to become smarter by using technology (which is seldom in their current DNA). They are used to outsource their display performance budgets to blind ad networks and that has made them vulnerable in terms of margin and USP. Clients are scrutinizing every penny and are asking what their agency is doing about it. That’s why we are seeing some new types of media exchange agencies emerging who are trying to build audience platforms who will enable them to find relevant user cookies for their customers on the exchange in order to reduce wastage and increase ROI.I think 2009 is too early. The so-called ad exchanges are still in their infancy and online display advertising itself still has many hurdles to overcome. Automation is happening slowly – self serve is only working for very low-value inventories and advertisers. But it will come – the whole industry has to become more efficient and technologies for targeting, optimization and efficient creative production are slowly coming together.

    1. fredwilson

      Great commentSounds like you know a lot about this sector

      1. Michael Stephanblome

        Thanks Fred. I like your blog – lots of interesting observations. I started an online display exchange about two years ago in Europe and had to learn the hard way in which areas you can bring scale and efficiency through technology to advertisers and publishers and in which area the current intermediaries are so powerful that one startup alone cannot overcome them just now. So I am still hopeful that more transparency will eventually lead to more efficient pricing and hence value creation but you have to take it one step at the time.

        1. fredwilson

          It would be interesting to hear more about what is easy to scale and what isnot