There is big pendulum swinging over who controls spend in Online Media.  The economy has taken a swinging nose-dive and everyone is looking for signs of fall-out.  One thing that is for certain, Advertisers are aggressively taking back control over their spend.  There will be budget cuts of 15% of more across the board in Q4.  The place where those cuts are starting is anyplace where an ROI can’t directly be derived.  If a publisher can’t prove a return they will lose the spend.  Response-based advertising is probably the most insulated area of the industry.  This means a push from CPM towards CPC and CPA, even for display.  Advertisers will be driving the pricing models and publishers will have to buckle in order to sell inventory.  With less money to spend, more pressure to perform, hundreds of publishers and networks competing for the reduced dollars at hand…advantage advertisers.

Here is the story…

My good friend, Jonathan Ewert says that every four years there is a great big pendulum that swings in our industry.  On the end of that ball is the influence factor over who controls the dollars in Online Media.

In the late 90s it was clearly the advertisers who had the control.  As they began to test the new medium and brought dollars to the internet in increasing amounts, advertisers tested all kinds of mechanisms that the publisher could come up with.  But it was the advertiser that dictated what measured performance, what the price they would pay and what services they expected in terms of campaign management and reporting.

Then the pendulum swung in the other direct – towards the publisher – as online media shifted from “new media” to internet advertising.  “Standards and policies” were written.  Publishers started driving pricing; and ad server utilization, campaign management provisions and acceptable reporting became organized and structured according to what Publishers were willing to provide.  Advertisers had to start working with what was available, throwing more resources and time at managing the diversity that clients were demanding which made the process of managing internet advertising increasingly more expensive.

Competition for inventory rose steadily once again following the recoil of the bust and price inflation followed.  The explosion of ad networks broadened advertisers’ options and the result was a drastic overload on resource requirements to manage just a single campaign.

While all of this was going on, Search outpaced display as advertisers began to recognize the value of response-based advertising and Google’s climb to the top of Everest was off to the races.

Fast-forward to the beginning of 2008 and you had topped-off CPMs, somewhere between 200 and 400 ad networks (depending on who is counting) and Google controlling 60+ % of the addressable Query stream on the Internet – 90% collectively controlled by Google, Yahoo and MSN. 

Throughout the first-half of 2008, prices hit all time highs in search as traffic growth online slowed and competition for popular keywords rose.  CPMs for targeted quality display inventory trumped the last four years and publishers began to push to reclaim inventory from the networks that had been previously aggregating and watering down their value.

Then the big ball started to swing.  With the advertiser no longer able to increase spend in search without compromising ROI and publishers reclaiming display inventory in order to elevate CPMs, something had to change.  Additional factors at play, aggravating the situation, was the continued consolidation of search (think Google’s increasing share of the Market – the Yahoo deal, Google running on ASK, etc.), the intense-resource demand on advertisers associated with managing disparate data sources, and publishers trying to push CPMs while a massive number of networks commoditize eyeballs. All of this equates to the advertisers almost hitting a breaking point.

Then the economy took a swinging nose-dive and everyone started to run around asking themselves what is the fall-out result for online advertising.  Is this the next bust?  Here come the layoffs.  How many VC-backed companies are going to go under which have promised huge returns with no revenues to prove it?  One thing that is for certain, Advertisers are aggressively taking back control over their spend.

You can figure there will be 15% cuts in budgets across the board in Q4.  At least that is what some of the larger advertisers are talking about and that is what some of the networks are already hearing.  The place where those cuts are starting is anyplace where an ROI can’t directly be derived.  Lookout publishers – if you can’t prove a return you’re going to lose spend. 

Response-based advertising is probably the most insulated area of the industry over the next 2 to 4 quarters given our economic environment.  Advertisers have to advertise to keep generating business, but branding online is going to suffer.  This means a push from CPM towards CPC and CPA, even for display.  Advertisers will be driving the pricing models and publishers will have to buckle in order to sell inventory. 

Furthermore, diversification of spend across less expensive, higher-returning publishers and networks will also draw attention.  This means that advertisers who have hit the asymptote of their returns on Google or the major display ad networks – when spending a dollar no longer returns $1.50 but now returns $1.25 – will start to look elsewhere to maintain their margins.  With smaller budgets to spend, ROI pressure will become intense.  We may even begin to see performance-based commissions between advertisers and agencies as competition for control over the spend increases between agencies.  Certainly this will be a likely case in the SEM arena.

So the pendulum, which started to swing in the beginning of Q2, went full tilt when the market dove.  Advertisers now hold the cards and publishers and networks that recognize the truth will step up and work with them to maximize the value of their relationships given the pressures present in the economy. 

With less money to spend, more pressure to perform, hundreds of publishers and networks competing for the reduced dollars at hand…advantage advertisers.