Details, details

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“An important lesson… is that details may matter.”
– Kyle Bagwell, The Economic Analysis of Advertising

Supply in the ad market market is impressions created, people seeing an ad. Everything else can be viewed in terms of this. Demand is impressions bought.

Supply = Impressions created = Hours viewing media x Impressions per hour
Demand = Impressions bought = Ad spend x 1000 / CPM

Supply = demand, so:

CPM = Ad Spend / Thousands of hours x Impressions per hour

Here’s a graph of total US ad spend divided by total US hours spent with media, both online and offline.

Average CPMs would be this amount divided by average ad impressions per hour.

1) Online spend per hour is much less than offline spend per hour. This is partly a result of people moving online faster than ad spend, as John K. made me aware last week. But also note that offline ad spend per hour was rising until 2007, which means that–absent offline efficacy having improved over the last ten years (ha!)–marketers are getting worse ROI offline than they had been. In fact, the projections say that when the ad market recovers, this trend will continue. Perhaps internet ad spend will grow faster than the forecasters think? The alternative is that marketers are hidebound and insensitive to wasting money. You choose.

2) The difference between online and offline ad spend/hour is significant and not shrinking. If this were entirely marketer ignorance, the gap would have shrunk over the last five years, as knowledgeable online people became more mainstream in the agencies. My lead generator friends are arbitraging the difference between the high price of offline advertising that is built into the cost structure of most products and the low price of online advertising, so the gap can’t be entirely efficacy. What else is there? I think the answer has to be uncertainty about what, exactly, the advertiser is buying. There was a time when a media buyer could flip through the newspaper or magazine or watch the TV show and know how his ad fit. When he’s out buying a million disparate impressions through an exchange or network, he can’t. He could be buying one display ad in a sea of ads, or one in a pristine page. But it could be something else entirely.

3) CPMs. The online CPM is the above number divided by impressions per hour. Note that the online spend/hour is pretty steady from 2002 to 2008, between $58 and $66 per thousand hours. The decline in online CPMs can’t be attributed to this, unless there was a large increase in ads/hour. This may be so (I can think of arguments both ways, but have no idea what the facts are) but who cares, really? If I spend an hour on the NYT site and they show me 30 ads at a $2 CPM or 6 ads at a $10 CPM, they make the same amount of money: I assume they show the number of ads that maximizes their revenue. So, two hypotheses:

  • Fragmentation of online time: people spend less time on each site, spreading the money around and making it seem like less money is being made; and/or
  • Ads are being put where there were no ads before so money is being made by people who didn’t make money before, and that money is coming out of the pockets of the established online media.

Both of these would lower CPMs because there are more ads. This is the only ‘supply’ argument that seems reasonable to me.

4) As Niki Scevak noted in the comments yesterday, search is 5% of the time and 50% of the revenue. Since the numbers in the graph are averages across all online, one explanation for declining display CPMs could be increasing search eCPMs. In any case, if Niki’s stat is true, then it might also be that we are simply noticing, as the display ad infrastructure is extended, how low display ad CPMs have always been.

Data sources: US population, US Census Bureau; Internet Users, ITU and Nielsen (last three via; time spend on internet, USC Annenberg Center for the Digital Future, Digital Futures Report press releases and IAB summary (too expensive to get actual report); time spent on media, Veronis Suhler Communications Industry Forecast (my friends at VSS use to give me a copy of this every year… I need to invent a reason to go visit them soon); ad spend through 2008, CMR/TNS; ad growth 2009-2014, eMarketer.


  1. Jerry –

    I think the last line about how low display CPMs have always been hit the nail on the head.

    Things become real interesting for display when you start to think of demand in terms of clicks (and cost per) – as most successful internet marketers and advertisers have done since day one of the web.

    In an “active” user controlled medium impressions are (and have been) only worth the cost per action – even for brands (you brand on your site, not your banner, duh).

    If we haven’t learned yet from Google that display is valuing the media in the wrong way then I think we’ll never learn.

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