We Now Know Which Half of Advertising is Wasted

Over one hundred years ago, John Wanamaker proclaimed, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”  With the rise of Programmatic Advertising, many believe we have finally solved the problem. Programmatic Advertising enables marketers to make advertising investments to select individuals in a media audience as opposed to having to buy the entire audience. Advertisers use a wealth of Big Data to learn about each audience member to then determine whether that audience member should be served with an advertisement and at what price. This all happens in near real-time and advertisers can therefore make near real-time adjustments to their approach to optimize the return-on-investment of its advertising expenditures.

In theory, Programmatic Advertising should solve the issue of waste. However, in our attempt to eliminate waste from the advertising value chain, we may have made things worse. We have unleashed a dark side to Programmatic Advertising that comes at a significant cost. Now, we know exactly which half of the money spent on advertising is wasted: it’s the half that marketers must now spend on third parties who have inserted themselves into the Programmatic Advertising ecosystem just to keep our investments clean.  P&G Chief Marketing Officer Marc Pritchard blasted the industry at this past January’s IAB Leadership Meeting for its murky supply chain and ambiguous fees (I am paraphrasing and encourage you to read or view his speech). And, he’s right to do so.

How bad is it?  How much money are advertisers spending on this murky supply chain?  The IAB (Interactive Advertising Bureau) answered this for us when they released their White Paper, “The Programmatic Supply Chain: Deconstructing the Anatomy of a Programmatic CPM” in March of 2016.  The IAB identified ten different value layers in the Programmatic ecosystem. I believe they are being overly generous by calling each a “value” layer. When you need an ad blocking service to avoid buying questionable content and a separate verification service to make sure that the ad was viewable by a human, how is this valuable?  When you add up all the costs associated with the ten different layers, they account for 55% of the cpm (cost-per-thousand) that an advertiser pays for a programmatic ad.  This means that for every dollar an advertiser spends in Programmatic Advertising over half (55%) of that dollar never reaches the publisher. It falls into the hands of all the third parties that arrequired to feed the beast that is the overly complex Programmatic Advertising ecosystem.  We now know which half of an advertising investment is wasted. It’s wasted on infrastructure to prop up all those opportunities to buy individual audiences across the entire Programmatic Advertising supply chain.

Some proponents of Programmatic Advertising argue that this complicated ecosystem is required to enable a marketer to access audiences that are sitting in the Long Tail of the media supply chain.  I strongly disagree. This argument holds only if the audience in the Long Tail is truly unduplicated and cannot be found elsewhere. I believe we are building an infrastructure around excess media supply that does not deserve to be monetized in the first place. When Chase Bank can cut the websites on their advertising schedule from 400,000 to 5,000 without any change in the reach of their schedule that tells you something.  Media audiences are all over the place: it’s rare that you have only one shot to engage with your desired customer. Is all the complexity and infrastructure required worth the cost?  Perhaps I am being too draconian by not being a proponent of a business model that steers funding to the Little Guy.  I don’t think so.  When funding the Little Guy means that marketers have to pay third parties in order to avoid some of the really scary stuff that requires ad blocking services and verification services in the first place, I’d say the value return simply isn’t there.

Who is really getting hurt by all this?  High quality media companies that invest heavily in their content product to create engaging environments for both audiences and advertisers are the ones getting hurt. For every dollar invested, these companies are only seeing .45c on that dollar.  In essence, media companies can cut their advertising rates in half while bypassing the Programmatic Advertising ecosystem and work directly with advertisers and still, technically, break even.  I am not suggesting they slash their ad rates. I only raise this to demonstrate how tenuous the business model truly is.  Why should media companies that heavily invest in quality environments have to compete with media companies who are barely acceptable just because the same audience member frequents both sites?  That’s what Open Exchanges in the Programmatic Advertising ecosystem do.  It’s no wonder that media companies tend to only put their remnant inventory into the Programmatic Advertising ecosystem.  

If we aren’t careful, Programmatic Advertising will collapse under the weight of its inefficiency. However, there is still hope. This advertising economy is still in its early stages; marketers and media companies still have time to re-write the rules. There is no reason why we should continue to support a current approach with overhead costs at 55%.  This inefficiency would never be tolerated in any other industry and it didn’t exist in the advertising economy before.  Programmatic Advertising should improve the efficiency of our advertising investments, not thwart it.  Now that we know which half of our advertising investments are wasted, we can do something about it.

There is no Silver Bullet that can easily fix what has become a highly complex and inefficient Programmatic Advertising ecosystem.  However, I do believe we can apply learning from the financial markets to improve the efficiency of Programmatic Advertising and to keep more dollars in working media investments as opposed to overhead costs.  Here are a few ideas for the industry to consider:

  • Limit the number of exchanges: similar to the financial markets where a stock can only be bought/sold in the U.S. on one of two exchanges.  The exchanges, themselves should be accountable to a governing body consisting of both advertisers and media companies.
  • Implement quality ratings: not all stocks are created equal (Blue Chips, the S&P 500 etc.) and the same holds for media environments.  By implementing a third-party rating system, marketers will have a better understanding of exactly what they are buying and media companies will receive due credit for the quality of the advertising environment they curate.
  • Impose regulations: fraud should not be an accepted cost of doing business; rather, it should be punishable by law. At minimum, the industry should impose a Zero Tolerance stance: any fraudulent activity should prohibit the offender from participating in the Exchange for life.           

I am hopeful that by eliminating the waste in Programmatic Advertising that is currently caused by third party intervention, we can come closer to finally solving John Wanamaker’s concern. Programmatic Advertising offers great potential if we can run it more efficiently.  

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