Don't Believe All The Hybrid Hype

To most people in our industry, the term “hybrid” evokes the happy thought of complementing ad revenue with subscription fees paid by subscribers. However, when hybrid refers to combining efforts to optimize sales for digital ad networks and marketing to a particular category of advertisers, we are going to generate less revenue, not more.

That’s the message industry CFOs received from Russ Fradin, president of Adify, a vertical ad network management and media services company, at MFM’s CFO Summit in June. While each approach can lead to generating more revenue, a hybrid ad sales strategy can lead toward commoditization, Fradin cautioned.

The industry’s shift toward ad network optimization has been a matter of following the money. We have been reacting to the shift in marketing spend from traditional media to digital platforms. A recent study from Booz & Co. cited by Fradin found digital media ad spending would increase by nearly 90% this year.

Fradin is quick to point out that he’s not discouraging the media industry’s use of ad networks.

They are driving growth for the media businesses that have embraced them. In fact, he noted a recent study by ComScore that found that 30% of online advertising dollars were spent on direct marketing as compared to 5% on brand advertising.

However, the downside in chasing ad network dollars has been the commoditization of ad inventory. Fradin gives the example of media businesses that chase the ad network fix by compensating for less demand for premium RFPs by creating more inventory. The result of this strategy is receiving less money for the same content, which in turn results in creating even more inventory that will sell for less. As one analyst summarized, “media companies were selling Web inventory like pork bellies.” 

Fradin feels the best way to avoid that downward spiral in the value of your brand to advertisers is by fitting the company and its products to a premium strategy. He describes this as choosing to sell premium inventory at $2,000 compared to the $200 that can be fetched in the commoditized model.

This approach will create near-term pain for companies that have been aggressively selling commoditized ad inventory through ad networks, Fradin warns. That means that they will need to educate their stakeholders and the media analysts that follow their companies on the wisdom behind exiting their current ad network contracts.

Replacing these arrangements will require a restructuring of the company’s sales strategy for its products and implementation of programs to extend its reach on its own rather than relying on others. Examples of premium ads include the “full page” messages that appear on a home page welcome screen or that appear alongside a news story. In addition to offering advertisers a larger, less clustered online ad environment, premium placements offer a larger share of their target audience.

As an example of the added value from premium ad sales, Fradin shared market analysis that reported quality “mid-tail” CPMs climbed from $6.01 in 1Q 2009 to $7.73 by the end of the year.

Meanwhile, as he was quick to point out, some media businesses will find that volume is their better course. In these instances, the strategy should be to increase their ad networks contracts and seek out partners to assist with ad network optimization. This entails finding good partners for each category, including a performance ad network, a behavioral ad network, a text/contextual ad network and a good data partner.

It is critical for media outlets to clarify data ownership in each of these ad network agreements, Fradin advises. He also paraphrases the axiom about the importance of location in a smart real estate purchase by saying media businesses must “optimize, optimize, optimize” in order to ensure a successful volume strategy. This “optimal optimization” can be accomplished by using a yield management platform and it will help them to track and grow their audience.

Fradin closed by reminding MFM’s CFO members that they will benefit by consciously choosing either a premium or a volume strategy. There are no secrets on the Web; companies that persist in trying for a hybrid strategy will end up with the worst of both.

This topic is certain to be an important part of the discussion at our upcoming seminar Media Outlook 2011. The half-day event, which will be held next Wednesday (Sept. 15) at the McGraw-Hill Building in Manhattan, is co-chaired by two industry executives who have a great appreciation on what’s involved in selecting the right strategy to grow your business, Mark Limbach, vice president-strategy and group controller of McGraw-Hill Broadcasting Co., and Bruce Lazarus, CEO of Cable Audit Associates Inc.

The event’s program includes:

• A luncheon sponsored by Szabo Associates.
• An economic outlook for 2011 from Beth Ann Bovino, senior economist, Standard and Poor's.
• A CFO’s financial perspective panel, moderated by Harry Jessell, editor of TVNewsCheck, which will focus on the challenges for 2011 with panelists Gerard Gruosso, EVP-CFO, A&E Television Networks; Doug Lowe, EVP-Broadcast Group, Meredith Corp.; Edward Nolan, VP-CFO, Greater Media; and Thomas H. Peck, CFO, Daily News-US News & World Report.
• The business outlook for 2011, with panelists Jack Myers, CEO, M.E.D.I.Advisory Group; Brian Wieser, CFA, Global Forecasting, Magna Global/Mediabrands/The Interpublic Group of Companies; and Peter Conti Jr., EVP, Borrell Associates, and moderator Jessell.
• The outlook for automotive advertising in 2011, by Gene Cameron, VP, auto marketing/media solutions, J.D. Power & Associates.