2009 TheOnlineAdvertisingIndustryEco
- (Evans, 2009) ⇒ David S. Evans. (2009). “The Online Advertising Industry: Economics, Evolution, and Privacy.” In: Journal of Economic Perspectives, 23(3). doi:10.1257/jep.23.3.37
Subject Headings: Online Advertising.
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Abstract
Online advertising accounts for almost 9 percent of all advertising in the United States. This share is expected to increase as more media is consumed over the internet and as more advertisers shift spending to online technologies. The expansion of internet-based advertising is transforming the advertising business by providing more efficient methods of matching advertisers and consumers and is transforming the media business by providing a source of revenue for online media firms that compete with traditional media firms. The precipitous decline of the newspaper industry is one manifestation of the symbiotic relationship between online content and online advertising. Online-advertising is provide d by a series of interlocking multi-sided platforms (also known as two-sided markets) that facilitate the matching of advertisers and consumers. These intermediaries increasingly make use of detailed individual data, predictive methods, and matching algorithms to create more efficient matches between consumers and advertisers. Some of their me thods raise public policy issues that require balancing providing consumers more valuable advertising against the possible loss of valuable privacy.
1. Introduction
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...online advertising. The market capitalizations of the major publicly traded news- paper businesses in the United States declined by 42 percent between January 2004 and August 2008, compared to a 15.6 percent increase for the Dow Jones industrial average over that same time period (Blodget, 2008). More generally, online adver- tising is disrupting all aspects of the global advertising industry — which had esti- mated revenues of $625 billion in 2007 (Minton, 2007) — changing how creative work is done, how advertising campaigns are run, and how advertising is bought and sold. Online advertising is a “two-sided market” (Rochet and Tirole, 2003; Anderson and Gabszewicz, 2005), as is advertising generally. Intermediaries operate platforms that faciliate the connection of advertisers and consumers. Innovative intermedi- aries operate exchanges and face the critical liquidity issues discussed in the market microstructure literature (O’Hara, 1998; also see Evans and Schmalensee, 2009).
This essay discusses the evolution of the online advertising business. It exam- ines the supply of online advertising “inventory” (the space times the views of that space); the demand for that inventory; and intermediaries that operate between the sell and buy sides. It also explores some of the key developments for matching advertising messages to consumers and suggests that online advertising methods are arguably leading to significant reductions in transactions costs between mer- chants and consumers. But in doing so, online advertising methods collect and analyze detailed information about how people use their computers — raising difficult issues concerning the expectation of privacy and the regulation of the online advertising industry. In addition, this essay suggests some interesting questions and economic puzzles about the advertising industry — offline and online — that remain to be addressed.
Evolution of Online Advertising
Online advertising started in 1994 when HotWired, a web magazine, sold a banner ad to AT&T and displayed the ad on its webpage (Kaye and Medoff, 2001). The ad was sold based on the number of “impressions” — individuals who saw the ad — which was the model followed by most traditional media for brand advertising. Many web ads were subsequently sold based on “cost per mille,” which is advertising terminology for cost per 1,000 viewers of the advertisement and often referred to as “CPM.” Paying by number of viewers remained the norm until Procter & Gamble negotiated a deal with Yahoo! in 1996 that compensated the web portal for ads based on the “cost-per-click,” commonly known as “CPC.” Yahoo! was paid only when a user clicked on the ad; this was the web-version of paying for direct response commonly used by advertisers for things such as mail and telephone solicitations. As of 2008, most “display ads” on websites — the ads that look like those in newspapers and magazines — were still sold based on thousands of views …
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References
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| Author | volume | Date Value | title | type | journal | titleUrl | doi | note | year | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2009 TheOnlineAdvertisingIndustryEco | David S. Evans | The Online Advertising Industry: Economics, Evolution, and Privacy | 2009 |