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On-line advertising – imperfect pricing

Does the lack of transparency in how pricing is set for an ad-network lead to imperfect pricing where the advertiser pays too much and the property owner gets too little?

I have to believe the answer is "of course it does!"

There's a great article that speaks to the growing awareness of this issue in today's New York Times with the title "An Ad Upstart Forces Google to Open Up a Little".  It describes the progress made by Quigo Technologies, a New York based ad service company funded by Steamboat Ventures and Highland Capital.  Quigo provides transparency to advertisers on how their advertising is placed – something that neither Yahoo nor Google provide.

Google and Yahoo both act as market makers for the pricing of advertising via key words on their networks.  Their market is many-to- one where advertisers bid against each other for key words but Yahoo and Google control the placement of the ads. 

This is great for Google and Yahoo but not so good for the property owners whose web sites display the ads.  Why?  Because not all web sites are equal in terms of audience appeal.  Sites with high audience appeal get the same deal as sites with less appeal – imperfect pricing for both advertiser and property owner.

Of course this raises the debate about cost-per-click (CPC) pricing versus cost-per-impression (CPM) – with CPC pricing; many would argue that the site with the better (more interested) audience will generate higher click-through rates than the site with lesser audience appeal.  Even if this is true, I'd argue that the advertiser and property owner are both being impacted by the performance of the other sites displaying the ad.

Better pricing for both sides of the ad equation would come from a market that was many-to-many.  Advertisers would bid against each other for placement (the bid) and property owners would offer space for advertising at a price that reflected their audience appeal (the ask).  The market maker would act as the clearing house to match and settle transactions.  The rating of audience appeal could be verified by an independent third party or by the market maker via tracking and analytics.

I think it's only a matter of time before this starts to appear especially as more brand-based advertising moves to the web.  Brand owners care as much about the quality of the audience as they do in generating click-through to their site. 


Stu Phillips

Great comment! I think for the truly large property owners (like a CNN, ESPN etc.) I think you are 100% right. But there is another tier of sites that attract specialized audience and have high intrinsic value to advertisers because of their reach. I think these folks get better pricing power and a bigger split of the ad revenue.

I see the "middleman" being squeezed - indeed, therein lies part of the opportunity. At the moment there is a wide range of splits between the middleman (the "market maker" in my post) and the property owner. I've seen ranges form 60/40 to a little better than 80/20 between property owner/middleman.

In the physical world the middleman takes between 12-15% depending on the clout of the advertiser and the reach of the property owner.

As you say, the middleman online will get squeezed but even at 12-15%, there's still a big market opportunity!


Joe Agliozzo

Stu, how would the middleman make any significant money with that business model? The "best sites" would grab most of the ad revenues, and would not be willing to pay much if anything to the middleman, while the lower quality sites, while they would presumably be willing to pay more to get ads on their site, wouldn't generate much traffic (or consequent middleman revenue) at all. Plus (as hinted at in the Quigo story) if you are successful "enough" at proving this model works, Google easily flips a switch and destroys your marketplace with their own "new" Adsense marketplace.

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