Arguably among the most frequently quoted lines in literature is the opening from Charles Dickens’ “A Tale of Two Cities.” When we look back on this year, I think we’ll say, as his novel states, “It was the best of times, it was the worst of times…” In my opinion, those in our space have grown so tremendously that we are making it hard on ourselves to continue at the same rapid pace. Inventory and ads drive revenue, but neither are becoming easier to acquire, especially the former. For publishers, the start of this year is the continuation of an incredible year in 2004. Publishers have seen their worth climb, not simply in terms of rates but clout.
From a rate perspective, it’s a great time to be a publisher. Like the price of oil, the amount they can get for leads is at an all time high. At the beginning of 2003 mortgage leads went for $12. In 2004 those leads went for $20. Today, anything less than $30 seems under market value. Education leads experienced the same increase. Over the past twelve months the lead price publishers could get went up by almost 100%. The same is true for the payout of a credit card application. This in turn, no doubt, helped the average price per email/zip for the incentive promotion offers climb from $.30 at the start of last year to more than $1.00 today.
In one sense, the climb in lead price is exciting. In another sense it is cause for concern. For those in the lead generation business, the way in which they get their leads has not changed that much. This means that for the same activity, publishers receive substantially more money than they did previously. If we take the example of education offers, what this implies is that the cost per lead has risen without a guarantee that the student quality has. Let’s assume that as an education provider, the leads you receive convert at the same percentage as those you purchased one year ago. The only difference being that the ones you purchased this year cost you up to two times more. Assuming no changes have been made at the school, the increase in lead value comes from the profit you, the school, received from the enrolled student.
If the increase in lead price comes out of a company’s bottom line, without significant improvements on their end or other gain in efficiency, we might be headed for a correction in the market. We will reach a point where prices cannot rise any higher. In many respects this is exactly what we saw in 2000 through most of 2002. The amount advertisers could pay dropped. As a result inventory prices, which were at incredible highs, steadily fell. As much as internet advertising is about the publisher; in the end, it’s about the money being payed for the space. This type of correction is exactly what we don’t want to happen now. With the economy as a whole on the rebound, current lead prices should be more in alignment than they were during the bubble. Nothing is certain though.
Were there to be a correction in lead prices, the first people to feel the pinch would most likely be the networks. In order to maintain their publisher relationships, they would experience margin compression the same that was initially absorbed by the advertiser. Margin compression is a current and ongoing trend; there is no escaping it. As markets mature, they commoditize; pricing becomes fixed, and high margins get traded for more scalable revenue. There is nothing new there; the question is just what aspects of this will happen in our space this year.
Maturity isn’t a bad thing, but it often isn’t as fun. We’ll become more like Dell and less like Google. Innovation won’t be stifled, but it will come from operations and be more evolutionary than revolutionary. That is why it is the best of times, and it is the worst of times. Fortunately, I think we’ll find this year to be still leaning towards the best of times. The publishers and the networks will still find room to grow, but more and more the emphasis will be on adding value. We can’t expect high margins for simply existing, nor can we sit back and ride the coattails of others innovations. I as much as anyone would like to take it easy and simply benefit from the market’s growth. But that was 1999. We’re seeing the same type of opportunity but with smarter buyers who have more choices. We need to prove our worth. In other words, we’re just going to have to earn our money this year.
Network
