Why are online CPMs so low?
Why is the reader of an article on NYTimes.com worth a third of the exact same person reading the exact same article on paper?
This can’t be true.
Let’s say you had a newspaper–like in the old days–and you sold a quarter page ad for a $25 CPM. And let’s say that advertisers thought that was a fair price and–despite not being able to measure it very well–thought it provided the right ROI. You had 20,000 readers in your little city, so you made $500 off that ad space every day. Now let’s say a competitor comes into your city with another newspaper, one that remedies your woeful sports coverage. Your competitor takes half your readership and sells ads just like you.
What has happened to inventory here? There are twice as many newspapers, so has it doubled?
No. Even though there are now twice as many ad spaces, they each get half the number of impressions. So the inventory, the total number of impressions, stays the same. Of course it does! Unless the readers are reading more news in total, the ad inventory has to stay the same: the inventory is the consumers’ attention.
(Of course, if CPMs stay the same, your newspaper now makes half as much because it has lost half its readership, but that’s a completely different problem.)
The same is true online. There is not appreciably more inventory in the world than there was ten years ago. In fact, in a world where we collectively spend less time with media, inventory is contracting. Online inventory is increasing because the amount of time spent online is increasing. But the supply of inventory per user is constant, and demand per user should be constant, so supply and demand should stay matched. Plummeting CPMs are not a supply and demand problem.
So, then, why are online CPMs so low? If it’s not supply and demand, what is it? The answer has to be either: (1) the market for online ad inventory is fubar, or (2) online ads just don’t work very well. I suspect it’s a bit of both, but this whole supply and demand argument has just got to go.