Why Online Ads Are Not Going to Save the Media

Although I always take third party metrics of online activity with a shaker of salt, some advertising numbers that comScore (SCOR) released yesterday were pretty scary. On the surface, online ads seem to be rebounding, but when you look at the details, the problems are astounding.

The good news -- depending on your vantage point -- is that U.S. Internet users viewed 1.1 trillion display ads in the first quarter of 2010. That's up by 15 percent from the same period in 2009. Now time for the more depressing facts.

Say there are over 234 million Internet users in the U.S. That's 4274 display ads per person for the quarter, or roughly 50 a day. I suspect the average is probably deceiving given that there would be a wide distribution of use: how many people heavily use the Internet versus only occasionally. More likely average users see many more ads per day of actual use, resulting in impression fatigue and lowered effectiveness.

Now look at the distribution of the ads by the top publishers, according to comScore:

The group of ten represents 47.4 percent of the $2.7 billion estimated total revenue, leaving all other companies to split $1.4 billion. When you think about the revenue dynamics in ads, you start to realize how finely that amount gets sliced.

Compare the ad dollars and impressions and you see that ads bring in about a quarter of a cent per impression, or $2.48 per thousand views. According to my industry sources, a prominent media site might get $9 to $10 per thousand views, and they're all having trouble making enough at that rate. For a company that depends heavily on online advertising -- a media or entertainment company, say -- this has to be incredibly depressing.

Think of what this translates to in real terms. Say a site brings in a million people a month and that each sees ten display adds. That's ten million display ad impressions -- or $24,800 in revenue for the entire month, before all expenses, including hosting, offices, personnel, utilities, furniture, computers. Attracting a million people a month is no easy feat, and generally requires a lot of effort that doesn't come for free. I'd absolutely agree that some -- a very few -- companies will grow large on online ads. But most executives need to banish from their minds that depending on online ads is a viable business model.

Image: Flickr user KarenLizzie, CC 2.0.