-          Where and who are our tax dollars going to?

-          What are those tax dollars being used for?

-          Are their different tax rates for different advertisers?

-          Can we exploit any loopholes?

-          Are our tax dollars benefiting us or is it just a waste?

Whichever part of the spectrum of opinion you fall in regarding taxation in general, what can be agreed upon is that in a free society, taxes are supposed to be used for the greater public good that ultimately benefits us all individually and society as a whole. Of course if you are a signed up member of the Libertarian or Tea Party versus being a member of a left leaning party in a Scandinavian country, your view on the level of taxation and the scope of what it should cover will probably differ completely.

So this ultimately brings us to Display media and the growing chorus of voices bemoaning that for every dollar of Display media of purchased by an advertiser, up to an additional 35% (i.e. the tax) is levied in additional costs. And whether this tax is actually benefiting anybody or is it just additional greedy players looking for their own cut of this growing Display advertising pie.

Figure 1: Display Landscape (courtesy Terence Kawaja – Luma Partners)

Where and who are our tax dollars going to?

The famous Terence Kawaja Display eco-system chart best illustrates who all these players are that exist between the Advertiser, (i.e. Coca Cola) and the Publisher, (i.e. Bloomberg). So the premium on top of the raw Display media cost Advertisers are paying is going to these players of which Efficient Frontier is a member.

What are those tax dollars being used for?

Kawaja has done an admiral job of classifying all these companies into various segments that can better explain what value-add these companies are offering. Without explaining every single segment, some of the major ones include;

-          DSP (Demand Side Platform) & Retargeting: Technology platform designed to provide a central source to buy and optimize Display inventory on behalf of advertisers and agencies

-          DMP (Data Management Platform) & Data Suppliers: Able to provide in-market Interest, Demographic, Psychographic data to advertisers (via their advocates) to increase and improve their audience targeting

-          Yield Optimization & SSP (Supply Side Platform): Can be viewed as the counterpart to a DSP, but for Publishers (and their Private Exchanges) that is designed to aggregate, optimize and maximize the return on the Display ad slots on their online properties

-          Ad Exchanges & Ad Networks: Aggregate sources of Display Inventory from various Publishers

-          Ad Servers & Verification: Technology infrastructure that actual serves the Display creative itself when a given webpage loads and also may do some sort of validation and brand safety check as to the nature of the advertiser and publisher

-          Agencies & Trading Desks: Managers and Media Buyers of their Advertiser client’s marketing spend

All of these types players provide a service as described usually for either a management fee or some form of arbitrage of the buy and sell cost of the Display media.

Are their different tax rates for different advertisers?

The short answer to this question is yes as depending on the sophistication of technology platforms that are used to buy media as well as negotiated rates with entities like Agencies, Ad Networks, etc., the overall premium an advertiser may pay will differ. Of course it not mandatory for an advertiser to use any of the these players, however usually for sophistication, expertise and scale reasons, a large advertiser will almost always employ at least some 3^rd party help.

Can we exploit any loopholes?

This is an interesting question as depending on who you talk to when you discuss the nature of “loopholes” as it relates to a tax code, some view it is at a perfectly legitimate activity where as others view it as anything from a violation of the spirit of the law to outright exploitation. There are certainly inefficiencies in the Display eco-system but with things like Real Time Bidding in recent time, where each impression is now bid on by advertisers based on their respective ROI criteria and valuation of that individual publisher and audience browser.

I believe a better way to address this question is that depending on the methodology (and technology solution) an advertiser uses to value the Display media they buy could alter how a given advertiser may value the same media and Impression

Figure 2: Display Real Time Bidding Potential

If you look at Figure 2 and focus on the two ad slots on the right side (i.e. Continental Ad and Whale Wars Ad), we can illustrate the concept of exploiting a “loophole”. Assuming you had two technology platforms as follow, who for arguments sake had similar algorithmic capabilities as it relates to valuing media.

(a)    Display Technology Platform

(b)   Display & SEM (Search Engine Marketing) Technology Platform

Platform (a) would be able to value the ad slots based on the ad size, previous impressions served to that browser, previous ad clicks, nature of the publisher, placement on the page, etc.

Platform (b) would be able to do the above but also account for prior search history (and timing of the search queries) of the browser.

Therefore, Platform (b) would actually be making a better valuation of the Display media for the advertiser as it has more information feeding the willingness to pay a given rate. If you compared the overall ROI benefit of your marketing spend, this would definitely be a “loophole” worth taking advantage of.

Are our tax dollars benefiting us or is it just a waste?

Imagine we went back to a world where it was just advertisers and publishers (i.e. Coca Cola & Bloomberg.com) negotiating directly via media buying and sales teams. This would obviously have to be done in advance of a Display media purchase and historically was done for long periods of times (1, 3, 6, 12 months).

Therefore the willingness Coca Cola would have to pay would be based solely on some historical metrics they have internally as it relates to the value of that form of advertising and how all Bloomberg.com demographic viewers would match their desired audience (i.e. very similar to the way TV ads have traditionally been negotiated and purchased). Now assume Pepsi goes to Bloomberg and undertakes a similar process and they value the ads on Bloomberg at a similar level as Coca Cola. Clearly some major in-efficiencies are going to exist;

1. Coca Cola and Pepsi’s Media Buying team are different and their abilities to negotiate will affect the price paid
2. Coca Cola and Pepsi’s internal analytics sophistication would also differ affecting how much they think the media is worth
3. The Bloomberg.com sales team even if it is the same negotiating team of people with both parties, would in all likelihood have a different personal dynamic with each company’s team affecting the final price
4. As each in each case the data is based on historical and not real-time or recent market and revenue data, the price negotiated upfront would most probably not be an accurate reflection of a true market rate
5. As media is being bought in mass and not individually at the impression level, the cost of advertising to a viewer who would be the ideal demographic and someone who is not is exactly the same

It is very evident from just these points that the price paid is not going to be a true optimal price for the Advertiser. The advertiser is also negotiating in a silo and has no clear idea what the minimum price level they could pay would be relative to other advertiser’s willingness to pay for the same Display media.

Of course depending on the premium you are paying your agency, technology platform, creative partners, ad server, and/or data providers, etc., as well as how good those partners may be, also plays a part in whether the “tax” is worth it.

SUMMARY

Given the billions of dollars have been invested to create many of the sophisticated platforms and technologies that exist as well as the individual experts within many of these companies, it would seem at face value to be very difficult for advertisers and publishers to both replicate and keep up to date with the advanced buying and selling of media dynamic. That said, ultimately the premium paid on media has to be thoroughly outweighed by the ROI and business benefit to the advertiser and publisher.

However as we said there exists some clear distinctions between many of the various players that can be employed to optimize Display media and these are the “loopholes” you can exploit, so the “tax” dollars you spend are very much to your benefit and not a waste!

Cj

©2012 Chris G Jacob. All Rights Reserved.

If you look at Terence Kawaja’s Display Landscape Chart in Figure 1, apart from a nauseas feeling due to the overwhelming number of players operating, another picture emerges when looking at some of the players in the various segments as it pertains to Google.

Figure 1: Display Landscape (courtesy Terence Kawaja – Luma Partners)

 
Invite Media, Teracent and DoubleClick along with many smaller acquisitions along the way have provided them with a potential end to end offering between Advertisers and Publishers as they have successfully accomplished in a different manner in the Search Engine Marketplace (SEM). So in Display they now have an Ad Network, Ad Server, DSP, Creative Optimization and Ad Exchange all under the Google umbrella. This ultimately allows them to have a dominant footprint in all aspects of the biddable and remnant Display inventory market.

However one part of the Display market where Google up until this point has largely had not that much of a heavy presence in the market is the guaranteed display market. This is the oldest part of Display and indeed pretty much of any online advertising where advertisers and publishers come together (often via agencies, ad networks or other advocates) and agree on a fixed Cost per Thousand Impression (CPM) price for their Display media buy. It has often been dominated by brand focused advertisers but certainly is also very much utilized by direct response advertisers as well.

The operation of these deals is not too dissimilar to what has occurred in the Print, Television and Radio worlds for decades. Given there is no auction, algorithm or other form of technology, other than Google now getting a cut via Advertisers and Publishers using DoubleClicks’s Dart ad server, Google has not really had any value add to this transaction.

Enter The Google Display Network Reserve
The Google Display Network Reserve as described here by Susan Wojcicki in Ad Exchanger is Google’s initial response for playing a part in this transaction and extracting additional revenue for themselves from an advertiser set that they themselves define as brand focused. Google, via SEM, has always been known as the haven of direct response advertisers and brand focused advertisers historically have often had little to no direct involvement with Google with their advertising.

The Google Display Network Reserve is Google’s aggregation of “high quality” and “scalable” publishers by vertical which advertisers and agencies can buy on a guaranteed CPM basis via their Google representative. Of course quality and scalability are very ambiguous terms and Google have divulged little at this point as to the transparency for advertisers as to the exact publishers they will run on. Generally Google prides itself on transparency, however in recent times they have had to bow to some publisher’s wishes by making their domain data anonymous in the Ad Exchange (AdX).

What Does This All Mean For Me?
Well if you are an advertiser or agency who buys media from exchanges, other publishers, ad networks, etc. as well as spend money on things like SEM, then you should maybe ponder this. If Google can see how much you are willing to bid for keywords in search, how much you are bidding for display media in the exchange auctions and now knows upfront how much you are willing to pay guaranteed for certain categories of Display media. This translates to a lot of information that they have about you as an advertiser and your propensity to pay for online media. This becomes even more stark if you use Google Analytics, DoubleClick as your ad server and have Google conversion tracking on your site.

Google are famous and successful by being able to provide turnkey type solutions for advertisers and making things simple for anyone to start a campaign. They are now via the Display Network Reserve trying to bring that knowhow to another area of the advertising market with a solution that is also designed to placate publishers who have often decried Google for being to advertiser friendly at the expense of them.

We will leave you with this final thought. Imagine back to the time when you negotiated with the New York Times to run some ads for a negotiated rate. OK now imagine you want to run your ads on some other newspapers but to do it you will negotiate the rate with a representative of the New York Times on behalf of the other publications. If nothing else that would make for one interesting set of negotiations!

Cj

©2012 Chris G Jacob. All Rights Reserved.

A major reason there has been a shift to incorporate a Display Strategy into marketers online advertising plans is due to large amount of innovation that has taken place in recent years. New technologies and new ways of targeting users have emerged that have allowed particularly direct response advertisers to venture into a digital channel they had largely ignored in the past as they often viewed it solely being brand orientated

This has all manifested in explosive growth for the Display ad market as you can see in Figure 1 which is projected to be close to $10B in 2012 for the Non Premium Display segment. Non Premium Display refers to all ad inventory not bought on a guaranteed cost basis in advance of the media running. Overall now the entire Display market commands 38% of all online ad dollars as per a study by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC). Only Search with 46% has a greater share of online ad spend, however in 2010 Display ad spend is growing at twice the rate.

Figure 1: DISPLAY MARKET GROWTH

This has not all materialized out of thin air as this new Display eco-system, best illustrated by Terence Kawaja’s ubiquitous Display industry chart, has attracted enormous amounts of Venture Capital funding. Mr Kawaja himself 12 months ago estimated about $2.5B had gone into funding these companies and that number has certainly increased over the past year with many of those companies have gone through further rounds of capital raising. This figure also doesn’t probably account for Research and Development conducted by existing players like Yahoo, Google, etc. to innovate their own Display offerings.  To put that $2.5B figure from early 2010 in perspective, that equates to about half of all Non Premium Display ad revenues of the prior year, 2009. Clearly a lot is at stake!

It is no coincidence that because of this rapid innovation and resulting advertiser spend, that the mainstream media and subsequently Washington has begun to take notice of the industry and its advertising practices. The Wall Street Journal has run an ongoing series titled “What They Know”, The New York Times has recently instituted a “Paywall” to their online content and Senators John McCain and John Kerry have introduced legislation around Digital Privacy all as a direct result of what has been happening in recent years.

I Am Confused, What Does All This Mean For My Privacy?

Well while no industry can claim to be perfect and there have always been unscrupulous players operating throughout the ages, the digital advertising industry has certainly come together in many positive ways as far as protecting user privacy is concerned.

When almost all technology and media companies who manage Display campaigns for advertisers target users or an audience segment, they are using non personally identifiable information (also known as PII). PII can refer to things like Social Security Number, Home Address, Phone Number, etc and generally encompasses anything that would clearly identify you as the web browser.

What is tracked is in an anonymous way via cookies, and includes things like the type of sites visited, ad clicks, search queries, etc. that allow an advertiser and their technology partner to show ads that are far more relevant to you. If you have been recently visiting travel sites like Expedia or Trip Advisor and searching for things like “Vegas Holiday Deals”, then ads that offer the cheapest hotels in and flights to Las Vegas might be of great interest to you rather than a ubiquitous ad for a TV sale. Advertisers will pay a premium for this type of audience targeting and this intern allows so many of your favorite News, Gaming, Social Networking and Video sites to remain free (or very low cost) to you.

To also put more control back into the hands of users;

-          Web browsers like Firefox, Internet Explorer and Chrome have different types of new setting controls to manage your privacy settings

-          Many ads have a little (i) icon at the top where you can get further information as to why you are being served that particular ad and with information about how to opt out

-          Technology companies have Opt Out for users who no longer want to be served ads based on the companies tracking

-          Companies like Evidon (formerly Better Advertising) who are a major part of the Industry Self Regulation have released free tools like Ghostery that allow a user to see exactly what companies are placing tracking cookies when they visit a given site

So a lot of capital and time has been committed by the industry at large to ensure the general online browsing public can feel at ease and take control themselves of their browsing experience. Ultimately most reputable advertisers and their advocates do not want to annoy or seem obtrusive to the public as that only diminishes their brand and customer perception. However by providing relevant content to a browser that they are more likely to be interested in allows, web sites and content publishers to continue to provide innovative web experience to all of us as the browsing public. As they can both recoup their costs and make a profit from the premium that advertisers are willing to pay.

Ultimately there is a lot of misinformation about digital marketing and audience tracking but it is important to reiterate that user privacy is taken very seriously by the Industry at large and I hope this information helps educate you further and clears up any misconceptions that you may have had.

Cj

©2012 Chris G Jacob. All Rights Reserved.

Other interesting points of note is the prediction for Google’s Android OS to hit close to 50% marketshare in 2015 and Research In Motion (RIM), maker of Blackberry to fall to 11%

I guess what shocked me about this initially would imagining the maker of the ever popular iPhone, iPod Touch & iPad ceding market dominance to a competitor which barely has a foothold in the market today. I mean walk out into the street tomorrow in Midtown Manhattan, Hollywood Blvd or Downtown Austin, TX and ask them;

1. Do you know what the iPhone is?
2. Do you own or would consider buying an iPhone?
3. Can you name any Microsoft phone?

My prediction is that; “Yes, Yes, No” would form maybe 70% or more of the responses you would get. And 12 months from today, I would even be as so bold to wager that it would change much. So the question then becomes, if a year from now in April 2012 you could walk down any street in the country and get little to no recognition for Microsoft’s foray in Smartphones via Windows Phone, how could a mere 3 years later the iPhone be in a losing position.

Well this where Nokia enters the picture. While a relative minor player in the US, Nokia sells more handsets globally than any other manufacturer and thus its current Symbian OS is also the Smartphone OS leader. To put it in context at 37% it is getting close to double Android’s 22% market share and well over twice iOS 16% market share.

Nokia and Microsoft have entered into an Alliance whereby all Nokia handsets will carry Windows Phone from 2012. Now you may notice a disparity that while Gartner is predicting Windows Phone will have a 20% marketshare in 2015, that is a long way from the 37% marketshare it enjoys now.

So now looking at everything in context, the Microsoft marketshare prediction doesn’t seem so far fetched. However what about Apple?

Well, Gartner (& others) are banking on the fact that Apple will repeat their mistakes or maybe not mistakes but rather business preferences from the past. Apple has traditionally always targeted the higher end of the market and with strong controls with their distributor channels enjoyed high margins on their hardware sales. However since the advent of the iPod and later iPhone and iPad, Apple has found itself in the previously unusual position of being the sole market leader or at the very least a large majority player. Generally the organization who holds that position in a competitive consumer electronic market tends to be at a lower price point relying on volume rather than margin for greater profit.

In the Smartphone industry, market penetration globally has not reached anywhere near a majority level and even in mature Western markets there are significant portions of the population just using simple cellular phones. Hence it has been the higher end of the market that has been doing the majority of the purchasing. However the largest growth areas of Smartphones will come from the Developing world and thus lower cost smartphones running an “free” open source operating system (i.e. Android OS) will reign supreme.

So the real prediction Gartner seems to be making here is that Apple will be content to cede the wider market to other players and remain content with the premium end of the market. The interesting part of this is the path of the iPad and the tablet market in general. There is also an implicit prediction in all of this that the swarm of Android tablets, Windows tablets and even WebOS tablets will begin to take charge of that market as they are now with Smartphones.

Let the battle begin…..

©2012 Chris G Jacob. All Rights Reserved.