Arguably
among the most frequently quoted lines in literature is the
opening from Charles Dickens’ “A Tale of Two Cities.” When
we look back on this year, I think we’ll say, as his novel
states, “It was the best of times, it was the worst of
times...” In my opinion, those in our space have grown so
tremendously that we are making it hard on ourselves to
continue at the same rapid pace. Inventory and ads drive
revenue, but neither are becoming easier to acquire,
especially the former. For publishers, the start of this
year is the continuation of an incredible year in 2004.
Publishers have seen their worth climb, not simply in terms
of rates but clout.
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From a rate perspective, it’s
a great time to be a publisher. Like the price of oil, the
amount they can get for leads is at an all time high. At the
beginning of 2003 mortgage leads went for $12. In 2004 those
leads went for $20. Today, anything less than $30 seems
under market value. Education leads experienced the same
increase. Over the past twelve months the lead price
publishers could get went up by almost 100%. The same is
true for the payout of a credit card application. This in
turn, no doubt, helped the average price per email/zip for the
incentive promotion offers climb from $.30 at the start of
last year to more than $1.00 today.
In one sense, the climb in
lead price is exciting. In another sense it is cause for
concern. For those in the lead generation business, the way
in which they get their leads has not changed that much.
This means that for the same activity, publishers receive
substantially more money than they did previously. If we
take the example of education offers, what this implies is
that the cost per lead has risen without a guarantee that
the student quality has. Let’s assume that as an education
provider, the leads you receive convert at the same
percentage as those you purchased one year ago. The only
difference being that the ones you purchased this year cost
you up to two times more. Assuming no changes have been made
at the school, the increase in lead value comes from the
profit you, the school, received from the enrolled student.
If the increase in lead price
comes out of a company’s bottom line, without significant
improvements on their end or other gain in efficiency, we might
be headed for a correction in the market. We will reach a
point where prices cannot rise any higher. In many respects
this is exactly what we saw in 2000 through most of 2002.
The amount advertisers could pay dropped. As a result
inventory prices, which were at incredible highs, steadily
fell. As much as internet advertising is about the
publisher; in the end, it’s about the money being payed for the
space. This type of correction is exactly what we don’t want
to happen now. With the economy as a whole on the rebound,
current lead prices should be more in alignment than they
were during the bubble. Nothing is certain though.
Were there to be a correction
in lead prices, the first people to feel the pinch would
most likely be the networks. In order to maintain their
publisher relationships, they would experience margin
compression the same that was initially absorbed by the
advertiser. Margin compression is a current and ongoing
trend; there is no escaping it. As markets mature, they
commoditize; pricing becomes fixed, and high margins get
traded for more scalable revenue. There is nothing new
there; the question is just what aspects of this will happen
in our space this year.
Maturity isn’t a bad thing,
but it often isn’t as fun. We’ll become more like Dell and
less like Google. Innovation won’t be stifled, but it will
come from operations and be more evolutionary than
revolutionary. That is why it is the best of times, and it
is the worst of times. Fortunately, I think we’ll find this
year to be still leaning towards the best of times. The
publishers and the networks will still find room to grow,
but more and more the emphasis will be on adding value. We
can’t expect high margins for simply existing, nor can we
sit back and ride the coattails of others innovations. I as
much as anyone would like to take it easy and simply benefit
from the market’s growth. But that was 1999. We’re seeing
the same type of opportunity but with smarter buyers who
have more choices. We need to prove our worth. In other
words, we’re just going to have to earn our money this year.
Jay Weintraub
