It's been more than a week since I first read about JPMorgan's forecast "Nothing but Net". The key takeaways for me were that (a) average CPMs bottomed in 2007 at $3.31, and (b) 83% of graphically advertising in 2007 sold for less than $1 CPM.
What's it going to take to increase CPM rates? Will average CPM rates continue to decrease, or was 2007 truly the bottom?
JPMorgan forecasts increasing CPM rates. Andrew Chen feels that CPMs will decrease over the next year, possibly quite a bit. Pat McCarthy believes 2008 will result in average CPMs for display ads about the same as 2007. The viewpoints rightly center around the following points:
- Use of technology and targeting improving, enabling a more efficient market and better performance, which increases the rates. (behavioral advertising, exchanges, etc.)
- Growth in online advertising market stimulates increased demand and therefore increased rates.
- Available ad inventory is increasing, which softens/decreases rates. Much of the increase in ad inventory is in social media, which has been notoriously hard to monetize.
I think in 2008 we'll see two overall market factors that will initially result in some correction to the graphical advertising market within 2008, but then by early 2009 give way to ongoing increases in CPM rates:
- Economic uncertainty -- this will result in brand marketers, who over the last couple of years incurred negative ROI on CPM advertising campaigns, to pull back their spending and focus on ROI.
- Escalating CPC rates -- the search engine advertising market has been on a tear for the past several years. CPC rates will only get more competitive (unreasonably so?), which will encourage advertisers to reconsider display advertising.
Escalating CPC rates and better targeting/technology (IMHO) will be the major forces behind a rebirth in display advertising, rate increases, etc. Think about this. If you're a marketer seeing your bid rate for keywords exceeding $2 per click, the effective CPM rate you're paying is high. At .25% CTR, you're paying $5 CPM. At 1% CTR, it's $20 CPM. If you're paying $2 CPC rates , all you need is a measly .05% CTR to put $1 CPM inventory on par (which is what 83% of the inventory is selling for, and also 5-10x the price of most social media inventory these days)! As CPC rates escalate, new targeting techniques for CPM ads will shift dollars back towards the display market -- assuming ad networks rise to meet the market opportunity. I think they will, slowly but surely. They have to, in order to grow their business.
The display advertising market is frought with inefficiencies. I continue to see leggings ads on Facebook, Tallahassee (Florida) ads on Yahoo, and credit repair ads on MSN -- none of these are even remotely interesting to me. It doesn't work!! Yet these are leaders in today's online advertising market. At the same time, advertisers are increasingly demanding ROI, as they should be. CPM rates have to go up at some point, as the market finds and corrects the inefficiencies, and balances ad spend between search and display. There's just too much of a gap right now, which represents too much of an opportunity for the online ad market to pass up.