Lookery.com

Technology repeatedly re-intermediates markets. Information systems, often as applied to logistics, make it economical to manage ever larger sales and distribution channel operations for ever smaller margins. Information technology mainly impacted lower priced, less differentiated and/or more easily automated businesses first: delivery services, book sales, travel planning, etc. For instance, in books and housewares, Amazon hurt the big chain bookstores who had previously hurt many local specialty shops. Private-network, client-server systems were one step along the way, and Internet-based systems have been two more. I say “two” because dial-up Internet access and always-on Internet access had very different economic impacts. Always-on mobile and universal-mobile broadband may well be the next two.

In this second generation of Internet re-intermediation, higher priced, more personal, and/or more differentiated businesses are being impacted. Examples include music, movies, advertising, insurance, and consumer lending, where the sales and distribution is a large percentage of the of the price an retail consumer pays. Music is the most extreme example, where the original creators of the product make pennies on the dollar relative to their channel — the labels capture most of the retail price.

Within any single industry, re-intermediation causes revenue cannibalization of the prior generation of vendors. Re-intermediation of enough market segments at once becomes its own deflationary force. It’s not the primary deflationary force in this financial crisis, but I think it’s contributing and will effect the recovery. The companies that will come roaring out of this downturn will have shockingly low cost structures and capital investments. On the web, many of them will make extensive use of cloud computing and employ web services to distribute their offerings. At Lookery, I’m still shocked at the terabytes of data we’re able to aggregate, sort, and re-deliver cheaply with a technical staff of five and no servers outside of Amazon and Panther Express. We spend pennies on the dollar relative to what our system would have cost even three years ago.

Specific to advertising, the industry is experiencing a broad downturn, but most of the pain is being felt in brand advertising. These are the ads charged as cost per thousand impressions, abbreviated as “CPM.” In CPM pricing, if no human ever focuses on an ad or clicks on it, the advertiser still pays. Price-wise this is the best possible scenario for publishers and ad agencies, and it’s a dying scenario that brings advertising deflation in behind it.

Performance advertising, which is still slowly growing, is cannibalizing the CPM business quickly. Performance advertising describes ad campaigns in which the potential customer must at least click (cost per click or “CPC”) on the ad before the advertiser is charged. Increasingly, the customer must do more than click to cost the advertiser money. Cost per lead (“CPL”) and cost per acquistion (“CPA”) campaigns, which require a form to be filled out or an actual sale, respectively, are increasingly common. On a deflationary basis, this shift means that brand impressions are now free for performance advertisers. When your ad isn’t clicked, you get a brand impression and you don’t get charged for it.

Over the seven-year life of Google search advertising, which is a CPC business, performance advertising has grown from a tiny fraction of US online advertising to roughly half of this $20B+ market. As the ad market crashes and performance advertising continues to slowly grow, its market share will climb to two-thirds of online advertising revenues if not higher. Google dominates the segment, and the downturn could push it into a monopoly market share position by default. CPM advertising will recover a bit when the economy does, but its market share will never see 50% again. Nor will online publishers or ad agencies ever capture the same margin they once did as the retail distribution channel for advertising.