Ad-Supported Media & Consumer Surplus
Read a fantastic article today arguing that Facebook represents the end of the ad-supported Web. It’s an argument which I’m not sure I agree with, but seems pretty darn plausible to me. Basically, in its revenue model Facebook works a lot less like Google than it does like, say, the Huffington Post. While Google AdSense targets people who are at various stages of the purchase decision (even if it’s only idle research on, say, new TVs), Facebook just shows people ads arrayed around its user-created content. The ad content is generally unrelated to the core page content – it’s there to create brand awareness and stimulate demand rather than being used to steer a purchase decision. This is the core difference between search and display advertising – Google does the former, Facebook the latter, and this is why Google charges vastly higher ad rates for high-salience search terms (e.g., “mortgage refinance Bay Area”).
Now, the key thing here is that marketers can decide whether to put their online ad dollars into search and display. The dirty little secret of display advertising is that it has a terrifically low rate of user attentiveness. Online ad effectiveness is measured in click-through-rates (what percentage of users click on an ad) and priced in cost per impression (the price to show an ad to one thousand users, abbreviated as CPM). The issue here is that click-through-rates for display advertising is terrible and it’s cheap, low-quality media – hence why Facebook’s ARPU is low. Facebook’s ad inventory is equal to total pageviews – as users go up, inventory expands and CPM drops. The author is betting that Facebook’s rates have nowhere to but down, and it’ll destroy the rest of the ad-supported Web along with it.
So far, so good – the real issue for me here is that why should it be that ad rates for online are so much lower than they are on paper? The principle that $10 offline translates to $1 online is well-known, but I think it’s not commonly acknowledged what a powerful principle that is. After all, the key to online advertising’s low price is that advertisers can see the results. They can see the click-through rates, and they can measure the ROI which they then must justify or exalt to their bosses. You can’t do that on paper.
This ultimately suggests to me that the whole idea of free ad-supported media was based upon wildly over-optimistic ROI models. Simply put, advertisers since the dawn of print have been completely gouged on their ad rates. They spent way too much on a product that has been ultimately revealed to be of little value. The reason advertisers are constantly pushing out the boundaries of cognitive science isn’t because they’re crazily effective at manipulating purchasing behavior, it’s because they’re extremely bad at it.
Unfortunately, the market inefficiencies in the old model created huge consumer surpluses – free value available to consumers. Advertisers were being gouged in order to subsidize the product delivered to consumers. The article mentions that the New York Times (print edition) has an ARPU of around $1,000, of which customers are only paying around $300 for a yearly subscription. Take the $700 left over, subtract the $70 advertisers should be paying (remember the 10:1 principle!), and that $630 is pure consumer surplus. While basically market pricing inefficiencies tend to hurt consumers, this is the rare one that unambiguously benefits us.
As a consumer, we should all mourn the death of ad-supported media while recognizing that it was inevitable. Journalism and media will not die, but we’re going to have to get used to paying a fair price, and we’ll find out just how small (big?) the market really is for quality media.