The Simple Online Inventory Equation

If we take it as a given that we are in the midst of a monumental shift of advertising dollars flowing from traditional venues towards online (cite your favorite report here; I’ll use last week’s IAB/PwC’s as an example), then there are a number of implications we can draw from the following simple equation:

Weighted-Average CPM Rate x Number of Content Pages = Total Dollars Spent Online

In other words, the total advertising dollars spent on the internet is a function of two levers: the ability to monetize each page and the number of pages available. Some of the resulting deductions are natural. For example, if the dollars online spent continues to increase, then either CPM rates will rise, the amount of content available will increase, or both. As Mark Kvamme noted in his speech at Ad:Tech this week, the disparity between typical $65 CPM rates on television vs. $30 CPM premium internet or $10 CPM run-of-site is real, and arguably unsustainable.

Likewise, the amount of content that has and will continue to be created to support these advertising dollars continues to rise. The distinction to note, however, is that we’re not witnessing the creation of more of the same types of content (albeit improved), but rather augmenting the existing set with new types of information and content. I’d argue that the vast majority of pages being created today – whether user-generated or editorially-produced – are supplementing that which is already available, not improving upon it. So for every new product review or news page competing for the same fixed (albeit growing) audience, there are dozens of other pages containing conversations and information which wasn’t previously generated or available. And that is not to mention the recent move towards the proliferation of video online, which is creating vast amounts of content and ad inventory.

Taking the above equation literally, however, does not imply that television advertisers are absolutely getting “bad deal” or that current online ad rates are “on the cheap” ready to significantly rise. The beauty of the interactive medium is the ability to more effectively target the right consumer for the advertiser’s message. Whether advertisers realize it or not, the right metric to view media buys isn’t CPM, but rather effective cost per reaching the right target customer. And while television and print advertisers have striven towards improving this measure though demo- and geo- targeted buys, the interactive medium allows for much more granular targeting. Witness e-mail marketing, contextual CPC campaigns, and search. Now with behaviorally-targeted networks like Tacoda, advertisers can reach consumers with even more precision (e.g. demonstrated car buyers who are surfing ROS news, weather, or sports pages). So while publishers are earning higher CPMs for their pages (thus raising the weighted-average CPM on the ‘net), the technology allows advertisers to more effectively reach who they want, which is the true goal in the first place.

Finally, it appears that the shift away from non-digital to digital media consumption and corresponding advertising spending is also starting to give rise towards other types of “new new media,” but that’s a subject of another post.

What we’re left then, is the opportunity that the Simple Online Inventory Equation supports from a top-level theoretical perspective. If the increase of total dollars spent is our basic assumption, then any established company or startup which fundamentally capitalizes on the terms on the left-hand side of the equation will benefit: the creation of new content & new content types, and the ability to more effectively target the right customer at the right time towards inducing a transaction.

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.