In a meeting with a traditional radio broadcaster in Brazil I realized that many traditional media professionals still do not understand how digital advertising works, but also I became very aware of the sad paradox of digital inventory.
What do I mean? Well, I met the new manager of the streaming audio service of a large radio broadcaster but she had worked in the traditional broadcasting side for many years. She thought that just like in her terrestrial radio station, one audio spot is broadcasted to all users. In traditional radio if you have 10 spots per hour, that is your advertising inventory and it is independent of the number of listeners you have. Also, those 10 spots are broadcast to all listeners.
As many of you know, digital advertising works very differently. Whether you are Spotify, the New York Times, or YouTube, with each additional user, you have one more audio spot, banner impression, or video pre-roll to sell respectively. The more traffic you have, the more available inventory you have.
And that is the sad paradox of digital inventory.
Let me explain further using TV and web inventory as an example:
In TV, unless there are new channels, greater audience does not add more advertising inventory. If that channel has more audience, the number of spots it has available to sell remains the same. What happens is that the channel can charge more per spot since each spot reaches more people than before. Advertisers are happy to pay more because they are reaching a greater audience.
For a website selling display banners, its available impressions increases with each new user. Therefore, this website does not make more money by selling each banner at a higher price, but the website can make more money by selling more impressions. However, this increase in inventory is not happening just on this site. It is happening across the board, with digital inventory increasing exponentially as users spend more time online. At the same time, creating digital content is very cheap. Facebook is the best example – how much is Facebook paying each user for the photos and videos they post? So in the last decade there has been an explosion of content and publishers. Demand does not increase that rapidly, and therefore, CPMs (cost per thousand impressions) go down as there is a lot more supply than demand. In reality then the website in our example may not make more money with more traffic because over time their CPMs are going down.
This is the crux that major publishers are facing and given the paradox of digital inventory this is not going to get better. With programmatic, this trend will deepen and get worse. So traditional media players who are seeing their audience migrate to their digital platforms will have a hard time. And that is the sad paradox of digital inventory. The solution for major publishers is to de-commoditize their impressions by integrating ads into their content (Native Advertising) and by providing Data on their users (using DMPs). That would be the topic of a next blog.