What Online Advertising Should Learn From TV's Upfront Market
This type of forward buying of media is so common because it accommodates the way large consumer products companies actually run their businesses, with complex operating structures and supply chains. These same companies spend the majority of total brand advertising dollars -- exactly those elusive brand dollars that have been so relatively slow to come online. So, regardless of our ever-increasing "share of audience time," we in the online ad industry simply won't get that money if we continue our exclusive obsession with capabilities that are exciting, but constantly changing -- and may not actually serve the largest marketers. To get these brand dollars, we must accommodate consumer product companies' need to plan ahead with scalable, predictable forward media-buying capabilities: It's time for an Online Media Futures exchange.
Let me explain.
A streamlined modern supply chain is an amazing thing and, in a "flat" world, a critical thing. Raw material inputs, manufacturing, packaging, distribution, merchandising, replenishment all must work together with clockwork precision. And the financial operation of a well-tuned supply chain is just as well choreographed as the physical operation. Costs, inventory levels, pricing and margins -- all must be carefully planned and managed by finance and procurement teams that are tasked with delivering a predictable stream of earnings from the operating business.
Futures markets have become an essential tool to help procurement and financial management assure the smooth functioning of these complex modern supply chains. For those of you that may be less familiar, futures markets trade standardized contracts for different commodities like financial instruments (indeed some are financial instruments only). Futures contracts exist for a wide variety of different commodities, which are primarily used as raw materials. For example, farmers large and small can sell futures contracts to lock in prices for their crops in advance. The other side of those trades may be a large food company looking to ensure supply and limit price volatility for key ingredients. Similarly, a major airline may buy jet-fuel futures contracts for similar reasons. With these and a variety of other applications, the futures markets have become increasingly important, to the point that futures market activity is often a material factor in quarterly earnings and receives commensurate attention.
One of the key raw materials for most consumer products is media (advertising), which can account for up to 20% of the wholesale price of a product. To use breakfast cereal as an example, that would put media neck and neck with sugar, packaging and vitamins for runner-up to grain on the list of largest ingredients (truly "people eating advertising" as one brand manager put it in an article last summer). So as you might expect then, futures are also very important in the media market. They are just not called "futures."
Futures will gain importance online
The highest profile use of futures in media is in the annual TV upfront, where some $15 billion of media -- more than 10% of annual measured spend across all media -- changes hands between large brand advertisers and TV networks. While these agreements are struck over two weeks, the spending itself occurs over the entire upcoming year -- the essence of a futures transaction. Countless more billions are put to work in forward buys for print and even scatter TV. (The sticklers out there will notice that all of these transactions are more accurately "forwards" and not futures, but this is a technical distinction only and doesn't change the thrust of the argument, i.e. that locking in supply and pricing in advance is as important for media as it is for other key raw materials in the supply chain.)
So, as online media becomes a more material portion of the overall mix (and/or the distinction between online and offline blurs), we should naturally expect to see the futures market become as important online as it is and has been offline. Doubly so as the same procurement teams that rely on futures-based commodity hedging programs get ever more involved in media purchasing.
Why, then, is the infrastructure of the online advertising market today -- including ad exchanges, ad networks and DSPs -- almost exclusively focused on an auction-driven spot market? To be sure, this spot market is vibrant, active and generates tremendous value for many participants, but it does nothing to address the needs of large brand advertisers to plan and manage their supply chains. Brand advertising is (rightly) seen as the next huge growth opportunity for online -- everyone wants the online brand media market to become large and sustainable. But the current online obsession with the spot market is ignoring these advertisers' requirements, and creating runaway complexity as it does so.
Behavioral targeting and other subjective targeting schemes are the currency for this spot-market ecosystem and can be useful tools for some spot-market applications, particularly where online activity can be quickly and precisely tied to online ad exposure. However, they will not support the scale, standardization and delivery predictability a functioning futures market requires.
Fortunately, the objective targeting criteria large brand advertisers have been using for a century offline (e.g., context, demo, geo, quality) are perfectly suited to the task. I say "fortunately" for several reasons. First and foremost, marketing mix models and panel-based studies confirm that effective management of objective targeting criteria and frequency are the fundamental drivers of high ROI sales offline -- where more than 95% of retail commerce still takes place. Objective targeting criteria can also be efficiently and predictably deployed across different media types and providers -- a key enabler in smoothly integrating online media into the broader media mix that is so important in keeping the supply chain humming. Finally, objective targeting criteria also facilitate clearing, which is essential to maintaining the integrity of transactions that are agreed today, but not delivered for months.
Developing an online media futures exchange beside and/or atop the current spot infrastructure is the critical next step for online media. New players have these capabilities and the online media market can no longer afford to ignore the distinction between spot and futures, even as everyone wonders, "Where is all that brand money?"
|ABOUT THE AUTHOR|
Andy Atherton is cofounder and chief operating officer of Brand.net.