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Display Ad Recovery Hinges on ROI, Scarcity

WASHINGTON -- The economic downturn hasn't exactly crippled the online advertising sector, but it has taken its toll.

Here at a media conference hosted by the BIA consulting group, a pair of current and former AOL executives described an industry that is quickly having to reinvent itself in the face of ballooning online inventory and advertisers' insistence on accountability as they decide how to allocate scarce marketing dollars.

"From perspective of Web site publishers, the industry right now is in tremendous transition," said Lynda Clarizio, former president of AOL's Platform A advertising division. "We are seeing growth but that growth has slowed dramatically as we've been in this recession."

Depending on which study you look at, growth in the near term will either be modest or flat, and at least one study has projected a net decline in online ad spend, and it's been showing up on the balance sheets of large Web companies whose businesses are built on advertising revenue. Those gloomy projections are a steep drop from the double-digit increases that analysts across the board were projecting as recently as a year ago.

But the macroeconomic crisis is only one blight on the online advertising sector.

With the explosion of blogs, user-generated content and niche sites throughout the long tail, inventory for display ads is plentiful, and Web site publishers are feeling the squeeze.

"Right now I would argue that there is a huge imbalance between supply and demand in Internet advertising," Clarizio said. "The demand that was once growing is essentially flat and the supply has vastly increased from what we saw a few years ago, and that's impacted pricing."

But just as consumers' Web browsing habits are fragmenting, display advertising can no longer be thought of as a monolith, according to Eric Bosco, AOL's senior vice president of operations and product management at Platform A.

Traditionally, display ads have been sold by a rate called a CPM, or cost-per-thousand impressions. But Bosco said that as advertisers insist on more accountability from their online display campaigns, more are looking to tie pricing to a specific action a user takes, such as clicking on the ad, signing up for a promotion or even making a purchase.

Unlike search, which has historically been sold on a cost-per-click model, display advertising continues to be dominated by the larger brands. In part, that's been due to the bewildering array of ad networks, exchanges, site optimizers and other middlemen that have made display advertising an extremely complicated proposition.

"Ironically, spending on the Internet right now is really hard to do for advertisers," Bosco said. "A huge area of opportunity there is to create a true self-service and self-management model in the display space." Products like automated exchanges and focused networks to connect local advertisers and publishers could help deliver more contextually relevant ads that the ubiquitous banners from Netflix and Classmates.com, which Bosco said are typically "monetized in the sub-dollar range."

"I think the industry -- the online industry -- is finally at the point where it is getting this," he said.

The role of ad networks has been the subject of considerable debate in the industry of late. Some have argued that they are undermining the publisher's revenue stream by turning ads into a commodity. Their motivation -- to sell as many ads across as many sites as possible -- can be at odds with the goals of individual publishers, who are concerned with getting high-quality, contextually relevant ads on their sites.

But not all ad networks are created equally. Clarizio said that while some are less than scrupulous, the best ones will align their revenue model with the success of the sites in their network. Her advice to publishers is to limit the number of networks and middlemen they partner with, though she was quick to point out that the best networks perform the valuable service of connecting buyers and sellers in an exceedingly crowded marketplace.

"That's a good thing, but essentially what all those middlemen are trying to do is take money out of the dollar that you're potentially making on your site," she said.

But a careful selection of ad networks doesn't get at the supply and demand crush. As the value drains out of the static, commodity banners that litter sites across the Web, publishers might help their cause by actually putting fewer ads on their sites, but making them more contextually linked to the content on the page.

"Be really smart about where you choose to place ad units on your site -- almost to limit the number of ad units," she said. "You're trying to some extent to create scarcity."