David Kirkpatrick

February 16, 2009

Internet advertising is drowning …

… in a sea of endless content. This is a case of supply (web pages to advertise on) wildly outstripping demand (eyeballs to view those pages and ads).

From the WSJ:

What does the Internet display-ad market have in common with Zimbabwe?

Both are printing nearly-limitless amounts of their main currency, vastly diminishing its value and undermining their future. The currency, for Web sites, is their ad inventory. And while Zimbabwe, under different management, can change course, the same isn’t true of the display-ad market. Web sites keep generating new content and extra pages on which ads can run.

That is why the sudden sharp weakness in online display advertising, which hit fourth-quarter revenue at companies ranging from Yahoo to Time Warner‘s AOL and New York Times Co., isn’t just about a cyclical downturn caused by the recession.

For sure, part of it is due to depressed demand among advertisers, including those who buy “brand image” ads that suit the display format. AOL, for instance, whose display revenues fell 25% in the quarter, cited “softness” in categories such as “personal finance, technology, autos and retail,” which clearly relate to the economy.

But weak demand is simply highlighting the more fundamental oversupply problem — and pressuring prices. The cost per thousand views of display ads on big Web sites sold through ad networks — rather than sales forces of individual sites, which usually handle premium inventory — fell 54% in the fourth quarter compared with the year earlier, estimates PubMatic, which offers online services to publishers.

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