While not as rousing a topic
as that covered in this issue’s Trends Reports, the topic for today’s
Thoughts has no less significance. For regular regulars, it touches upon
themes that appear often in our articles. In the broadest context, what this
article deals with is the long-term success of our pay for performance industry.
Just as it appears that a new ad network is popping up almost daily, the number
of options and ease to entry means that finding and keeping publishers has
become more difficult. Publishers have more choices and seemingly little
incentive for brand loyalty. As a result the ad network space has seen more than
a few aspects of commoditization. Instead of having only a few companies
offering them relatively low payouts, they have several offering higher and
higher payouts– each trying to outdo the other in an attempt to woo the
publisher. Welcome to the Network Wars and as a result, the Age of the
Publisher.
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The low barrier
to entry for becoming an ad network or broker means that more often than not
price becomes the only differentiating factor. Many of the traits that
distinguish one company over the other have become commonplace. When three
strong companies offer the same ad at a similar price, payouts being one week
faster than another or one having a cleaner interface doesn’t yield enough
differentiation to have a publisher stick with a company offering a slightly
lower price but slightly better features. The same holds true for other
characteristics as well – ad selection, customer service, overall product
offerings, and history. Each matters, but almost none, even combined, can lead
to brand loyalty in the Age of the Publisher.
A few years ago,
a company having 50% margins on ads wasn’t unheard of. Now, if a publisher were to
learn that a company had margins that high, it might cause them to never run an
ad with them again. Not too long ago too, hearing that an established
multi-million dollar per month in revenue ad network took less than twenty
percent in margin was considered shocking. Today, that is almost commonplace.
That’s just how spoiled, if you will, the publisher has become in the Age of the
Publisher, brought on by the Network Wars.
The slimming of
margins to attract business certainly benefits the publisher in the short term,
but will it do so in the future? Many companies and industries have this concept
of a loss leader. Companies commonly sell certain products at a loss in order to
draw more customers. Wal-Mart is often accused of undercutting their competition
and selling certain products at a loss in order to get people in their door.
Someone such as Wal-Mart figures that once in the door, they can convert customers
into either regular customers or they will purchase other more profitable items
along the way so that Wal-Mart can afford to take a loss on one particular item.
The idea of
taking a loss on one in order to acquire and retain a customer must work well,
as it has been used for years, and in all likelihood will continue to be used.
The downside for our industry though is that, unlike a mega-store such as
Wal-Mart, ad networks do not get to keep users or up-sell them on their other
product offerings. The ad networks cannot reasonably assume that users will
stick with that network long enough to earn the profit needed to cover the loss
leader. Publishers are fickle, are not confined to a physical store and are
often short-term thinkers. They will jump from one network to the next for the
highest payout often because they can regardless of what impact it has overall.
In the end, it will ultimately mean that some companies will go out of business,
as they can no longer afford to take losses on ads.
In
the end, companies might focus so much on price that it might end up being the
battle of the most cash. Unlike the offline world though, where customers to a
store might turn into regular users or earn back the profit on other items they
purchase that day, publishers really won’t, as their store is virtual. Publishers
will benefit from the wars for a while, but all will lose out in the end as
cutting margins across the board has never made for a long-term business model.
Does that mean we are in trouble or that offering a loss leader is a bad thing
to do? Not necessarily. It does suggest that even internet companies are not
immune from standard business practices. Our hours might be more flexible and
our corporate cultures less corporate, but we cannot escape the rules of trying
to make money and keep customers. We simply need to focus on the well-rounded
picture of operational efficiency and keep striving towards long term value to
keep the Age of the Publisher alive and protecting ourselves from the asteroid
that could wipe out the ad networks and thus the publisher.
