Does High Online Ad Penetration Mean Low Rates? [Updated]

Last week I mentioned that a valid comparison among Google, Microsoft, and Yahoo probably needed to get beyond search numbers and look at overall traffic. There's another dimension of comparison, as suggested by the August numbers from comScore: Who's got the ad network visitors? Those rankings suggest a lot about why the online ad rates are so in the dumpster.

In a world of cost-per-thousand and pay-per-click, unique visitors to an ad network translates into not just revenue, but a chance to influence consumers. And the top ten is an interesting mix:

[UPDATE: the table originally had a type for the AOL Advertising value, but it is now corrected.]

A few things jump out from this. Some, like the dominance of ad networks over corporate collections of sites, aren't surprising. Others are. One of those is that with all the fashionable disparagement reserved for AOL, the ad network that the business runs can certainly draw visitors -- 91 percent of all US Internet audience, to be exact. Think about it for a moment: that type of reach is in the realm of old-time broadcast television before cable networks. It's an astoundingly large number.

Ad reach also provides a different way of measuring the relative strength of Microsoft, Google, and Yahoo. Of course, comparing them depends on how you group the properties as well as the mathematically necessary degree of overlap given the numbers. Although in terms of counting visitors I argued for keeping YouTube separate from Google because the brands are so distinct, in this case I'd be inclined to put them together because it gives the company greater flexibility in structuring advertising deals. That might put Google on top, only you can't have more than 100 percent share of an audience, and unless Yahoo and Microsoft totally overlap, there's a good chance that they are pushing the ultimate share as well.

In fact, it's amazing when you consider how many companies might actually reach every single Internet user in the U.S. And that suggests why online ad rates are so low. The standard explanation, one I've used myself, is "inventory." But different ad venues are not necessarily equal. Does a top consumer magazine have to drop its rates because a regional trade pub is far less expensive? Probably not. But what if the competitor reaches the same audience as effectively as you? Economics suggests that prices will drop.

And I think that's the real key to understanding the online ad market. It's not that there are a lot of places to put ads. It's that multiple ad vendors reach virtually the entire country. They're all competing head to head, and that drives down the money they can get from their customers -- because there is a ready alternative that probably has no more or less prestige and, possibly, effectiveness.

One more observation: Notice the preponderance of the word "video" in the company names. It's not just video downloading and streaming that is in wide use by consumers. The ads have clearly followed, which makes me wonder whether enough companies are thinking past the text ad box and if there could be new business opportunities for tech companies that made it easy for advertisers to put together a video ad â€" maybe a template-driven system.

Illustration via stock.xchng user svilen001, site standard license.