Facebook renegotiating the ad deal it has with Microsoft was reported by and large as a ‘little startup grows up’ story but underlying the innocent waters was this bombshell: “Facebook, as it turns out, is getting rid of traditional banner ads altogether.”
comScore estimates that Facebook accounts for roughly 1 in 10 display ads in the US. MySpace, who is approaching a similar fork in the road with negotiations with Google, accounts for another 1 in 10.
The display ad market is rife with a glut of supply. Brand advertisers have been happy to pay $20 CPMs and upwards in offline mediums like TV but there is currently very little demand by these advertisers for brand advertising online, despite what you hear at industry confabs. This means that display ads are forced to be measured on the immediate online transactions they generate. And that’s a game of $0.50-$2 CPMs. On social networks it’s more like $0.10-$0.50 because of the poor conversion characteristics of the inventory. I’ll leave aside the strikingly obvious elephant in the room that display ads do more than generate immediate online transactions but that’s where we are today.
Facebook’s move, which is to be applauded (seemingly they are doubling down on their self-serve ads where they have more control over the various levers of monetization), will dramatically reshape the display ad space. The industry will further be transformed if MySpace follows suit.
The trouble with the Internet is that so many other types of services have become ad supported, particularly communications type online services, which offer particularly poor performing environments (but with the VC attraction of moths-to-a-flame high volume). Facebook’s decision will offer a meaningful reduction in display ad supply. Advice from folks such as Dave McClure will hopefully lead to more ill-suited ad-supported services to further reduce supply.
We can read about PHD-backslapping, behavioral algorithm-masturbating all day long but the reality is that this move will do more to singlehandedly lift average CPMs than any technology breakthrough in the last 3 years.
