Outdoor Analogy to Online Advertising

Fred Wilson’s post this morning on display advertising got me thinking about its offline analog:  billboard advertising.  My retail business in Miami is located on a property that also hosts a billboard.  CBS Outdoor is the company that manages all aspects of the billboard (selling ads, maintenance, legal, etc) and they pay my landlord 30% of all ad revenue generated from that billboard.  In online terms, my landlord is the publisher, the retail center is the website, the billboard is the ad unit and CBS Outdoor is the ad network.  Ad networks for billboards operate the same model as online ad networks:  they aggregate inventory from many sources, sell that inventory to advertisers, and split the revenue with the respective landowners.

Yet there are tremendous differences between the economics of billboard advertising and online advertising.  The offline world has limited real estate and we cannot produce anymore land.  Furthermore, outdoor advertising in the U.S. is subject to strong government regulation at the federal, state and local levels, imposing restrictions and limitations on the construction of new billboard units.  Hence supply is tightly controlled.  Also there are only a handful of companies that do billboard advertising, notably Clear Channel Outdoor, CBS Outdoor and Lamar (these are the “ad networks”).  It is for these reasons, despite being a mature industry, that revenue and profit grew consistently up until the recession of 2008.  For example, Clear Channel Outdoor’s U.S. business has grown at 11% per year for several years, with EBITDA margins of 45%.

In contrast, the online world has perpetually growing real estate and ad inventory.  Millions of web pages are created every day, and most of them are capable of displaying advertising without abandon.  That is the terrestrial equivalent of us being able to create a new country every day and sprinkle it with as many billboards as we want.  If I own the land around one of these billboards and I plan on living off the advertising on that billboard, I better do something really awesome to convince people to come see me.  This is the economy of attention.  It is no surprise that with such an excessive amount of inventory there are hundreds of ad networks, all competing for the same ad dollars and driving down CPMs.  In reality very few companies can survive from online advertising alone.  Almost all online ad dollars go to Google and Yahoo.

So yes, display ads will get dirt cheap and will be sold as remnant inventory.  As Fred notes, people will deploy sophisticated targeting tools for these display ads to the point that they are as efficient and democratic as search.  However, what will transpire after that is an increase in display CPMs– a rebound of sorts.  Why?  That is exactly what happened when Google introduced AdWords.  At first it was dirt cheap to advertise through AdWords.  But as more and more advertisers came onboard to use the simple text ad-creating tool, and as demand for specific keywords increased,  so did pricing.  That too will happen when creating display ads becomes stupid simple.

I wonder what the internet would look like if ad inventory was controlled the same way billboards are.  We would certainly see more creative business models generated.  We would probably witness fewer entrepreneurs see their dreams falter.  Yet we would gain a lot less value from all the content and data the free internet gives us.  Long live the American dream.

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