Wednesday, November 5, 2008

The Problem is Advertising Does Not Work

If you want to make money online, you have to accept the fact that advertising will not pay your bills. The only areas of online page views that are profitable through advertising are search and classifieds. Everybody else makes an average of less than $1 CPM.

You can prove this to yourself pretty easily. Buy $100 worth of advertising on Google Adwords and see what CPM you pay for advertising on Google's "Content Network". Those are ads on generic page views across Google's vast network. Glancing at my account just now, I have paid Google six and one half cents per 1000 impressions over the last two months -- a $0.065 CPM for general run-of-site advertising.

For the keyword searches I have purchased, on the other hand, I have paid a $23.75 CPM over the last two months. Put another way, I paid Google 370 times as much for my placement on search page views than I did for my placement on non-search page views. This differential is justified by the clickthrough rate, which is much higher on keyword search than it is on the Content Network.

Its not just Google. Industry statistics paint a similar story. The table below combines US internet advertising revenues with CPM figures from an investor presentation from Yahoo! filed with the SEC. The IAB report broke down internet revenues by category, while the Yahoo! filing showed expected CPM rates for various page view categories. The revenue data from the IAB is for January to June of 2008, while Yahoo's CPM rates are as of March, 2008.

CategoryRevenues ($B)CPM
Other Advertising$4,835$0.99
Total Internet Advertising$11,510$2.27

I do have an assumption buried within that table. My assumption is that search page views make up 2.5% of all internet page views. If the actual number of search page views generated by Google, Yahoo, and Microsoft were less than 2.5% of total page views, then the CPM for Other Advertising would be lower. I actually think that the percentage of page views from the search providers is more like 1.0% of total page views, which would translate into even lower CPMs -- $0.39 for the Other Advertising category and $0.91 for Total Internet Advertising.

In summary, publishers online do not make money through advertising. There are a few exceptions, notably in Finance and Technology, but the vast majority of us will not make our money online through advertising. Its true for us as individuals, and its true for the industry as a whole.

The video below is just me communicating the information of this post on a Youtube video:

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