Is banner ad model still viable?

Banners are now such a ubiquitous feature of almost any site that many publishers have come to rely on this as a major source of income to drive business growth, ever since they first turned their attention to generating income from sources other than venture capital.

The model itself is simple enough. Advertisers pay a small fee (usually a few cents) whenever a banner ad is displayed to an Internet browser. It has spawned an entire industry, complete with its own jargon, and terms such as Geo-IP targetting, frequency capping, wide sky's, leaderboards, squares and banners are part of the online lexicon.

Advertisers, agencies, designers, publishers, ad servers and CDNs (content delivery networks, responsible for the actual delivery of ads to the browser) work together to ensure that the graphics are delivered as quickly as possible. While in the background, media planners, campaign managers, sales people and their agencies slog away at bringing advertisers, mostly unfamiliar with the vagaries of the Internet, online.

Sufficiently strong?

But is this model a sufficiently strong one on which online publishers can build sustainable, profitable web businesses? Despite a number of warnings over the years threatening the imminent demise of banner advertising, banners are still part of the everyday browsing experience and look set to remain so; however, trends indicate that publishers will have to pay serious attention to building up other revenue streams in parallel to supplement banner ad sales and generate industry growth.

But what about the huge swing to online advertising? The Online Publishers Association (OPA)'s mantra that advertisers are waiting in the wings, ready to pour billions into online advertising in South Africa, is repeated often enough at its roadshows.

Worldwide Internet advertising reached a new record level of $4.9 billion in the first quarter of 2007, according to a bullish report by PricewaterhouseCoopers. However, a closer look reveals the numbers to be slightly misleading. Up to 60% of that money belongs to paid search, and the bulk of that revenue flows into the coffers of a handful of the global search superbrands. The balance of the online ad spend, of which banner ad sales form a part, is divided up amongst the rest of the market.

Number of reasons

There are a number of reasons why businesses cannot bank on banner ad sales to build their businesses in the future. Firstly, CPM rates are low and declining. Although publishers publish their rate cards, it is common knowledge that online publishers discount their rate cards heavily to lure advertisers online. What the advertiser pays can vary anything between 4% and 60% of the published rate card, depending on the amount and placement of the inventory purchased - and how desperate the publisher is for revenue.

The reason for this is partly historical. Publishers were so eager to generate revenue following the dot-bomb that they discounted inventory heavily. Once something has been given away free (or almost free), it becomes very hard to start charging premium rates (yes, some sites may get slightly more for a limited number of premium spots, but overall the rates remain abysmally low). Generally, publishers are not making headway in reversing this trend.

Second, banner advertising is a high-volume low, margin advertising business. Huge amounts of ad impressions are required to generate clickthroughs of anything between 0.1% and 2% (which in the online space is considered fairly normal).

Therein lies the rub

And therein lies the rub. As a publisher, vast volumes of page impressions (or inventory) are required in order to create a return for the advertiser. Generating that content requires building cost into the business in the form of development, design, content creation, marketing and bandwidth costs. So, on the one hand, the publisher incurs costs to grow the amount of saleable inventory and on the other, it is faced with lowering CPM rates... you can see where this is heading.

But what about user-generated content as a way to generate inventory at low cost? Although user-generated social networking sites create huge volumes of inventory, its usefulness as saleable inventory to the publisher remains unproven. Ask Facebook. The Facebook publishers have all but admitted that banner advertising model on their site does not work when they recently drew back from this channel and handed over all banner ad sales to Microsoft.

Third, in Europe and the US, bulk advertising resellers have exploited the requirement for massive inventory, aggregating publisher content into advertising delivery networks to deliver vast quantities of impressions to advertisors. A few upstarts have tried this with limited success in South Africa, but it is only a matter of time before bulk sellers move into this market and start discounting heavily.

‘Banner blind'

Lastly, the “spray-gun” nature of online advertising (notwithstanding geo-targetting, capping and a few other clever tricks) means that, for the most part, Internet users remain ‘banner blind', and its benefit as anything other than a marketing tool is the subject of some debate. Although users have grudgingly accepted online advertising as a normal part of web surfing, there remains a resistance to consuming online advertising, and most browers come standard with advertising content blockers.

Online publishers in South Africa have become somewhat complacent in the light of these developments. This is the Internet where nothing is taken for granted and business models are constantly evolving. It remains a relatively immature space without a single overarching business model that works similarly across the medium (like radio or print advertising).

My advice to online businesses is spread your bets - paid search, transactional (micro and macro) revenue, sponsorships, partnerships, joint ventures and mobile revenue (where possible) all form part of the revenue stream. And, oh yes, before I forget: there is always banner advertising to fall back on.