A Long History of Advertising

June 1, 2007 on 1:28 pm | In Business, Insider View, Musings by Josh Jones |

I Am Born

Being that I am 30 years old, I thought it was about time I impart some of the invaluable wisdom I’ve obtained in over 3 decades darkening the surface of this planet. Invaluable wisdom about advertising.

Ever since there’s been advertising, there’s been an annoying disconnect between what an advertiser wants to buy and what an advertising venue can sell.

You see, advertisers don’t want to buy ads, they just want to buy customers.

Unfortunately, that’s not something that’s for sale, directly. Nope.. all there is for poor advertisers to spend their money on is dumb stuff like billboards, time slots, magazine pages, or maybe a line of text next to a search result.

But, thanks to the law of large numbers, it still all works out. When you advertise enough, you quickly get a sense of the relationship between billboards/time slots/magazine pages/searches and actual results.

For the rest of this post, I’m going to call that relationship (ad views divided by actual conversions) the “magic ratio”! I’m allowed to do things like that because I’m your elder. I call it the magic ratio because if you know the magic ratio along with how much you want to spend on an actual conversion, you magically know how much a given ad is worth to you!

Of course, the magic ratio is different for every single ad, in every single venue, for every single product, at every single time, forever. Therefore, the only way you can discover the current magic ratio is through a process of trial and error, over and over and over.

There are some problems with determining the magic ratio:

1. You must first test ads to find the magic ratio.. which means wasting money while you figure it out.
2. If you buy lots of ads at once, you can easily figure out your overall magic ratio, but it’s hard to track the magic ratio for each individual ad.
3. You have to take some dude’s word on how many views you’re actually getting. Which means the numerator for the magic ratio is not 100% trust-worthy!

Before about the mid-90s these three bullet items conspired to make it a big hairy pain in the butt to determine any given magic ratio. (At least, it sure sounds like a big hairy pain in the butt to me… I’ve never calculated a magic ratio in my life!)

My Voice Changed

And then in 1995, around the time my voice was cracking, online advertising changed everything.

Although it was still impossible to know the magic ratio before you started, and difficult to 100% verify your number of ad views, at least it was finally possible to track exactly which ads were resulting in which conversions. It was one major tiny step forward!

Yet this tiny step forward was not without a tiny step back. As inaccurate as counting views was before 1995, at least there was no incentive for publishers to cheat. Back then, a magazine would claim a distribution of 150,000. Somebody would buy an ad for a few months. They’d see how many customers it earned them. They’d calculate their magic ratio and decide whether it was worth it to buy again.

But then online, websites would charge a rate per thousand page views. Again, somebody would buy an ad. But now, the publisher could actually directly earn more money by just “showing more ads.” The fact that it was also a lot easier to show another banner ad than to print another magazine did nothing to hurt the temptation. Inevitably, unscrupulous publishers cheated to make more money in the near term. Of course, all this did was slowly shrink the magic ratio… and the lower the magic ratio, the less advertisers will pay.

So, in the end, the market corrected itself automatically.

But then, to compete as a content provider, you were essentially forced to stoop to scuzbucket tactics of inflating your ad counts with pop-ups, spyware, typo-squatted domains, and ad-”viewing” robots. Good luck selling your advertising network at $1 when the other guys are charging $.10! Sure, your views are “better” than theirs.. but how does a potential advertiser know that?

Nevertheless, it was one major tiny step forward!

I Grow Hair On My Chest

Then, just about the time I was growing hair on my chest, in 2000 or so, Google came along with Adsense, their pay-per-click system. (Okay, okay, they stole the idea from goto.com Overture Yahoo!)

Pay-per-click was soooo much better than pay-per-view not just because pay-per-view is all WCW and porn, but because it all but eliminated that numerator uncertainty we talked about before. You may not have been able to really track ad views that well, but you can definitely track visitors to your site, and what link they clicked to get there. Also, once somebody’s atually on your site they generally have a magic ratio that’s independent of how they got there… (Not 100%… but generally!)

This meant it was now a lot easier for advertisers to do their job. They just had to figure out the magic ratio of their own site’s visitors to final conversions, and ta-da, they knew what their max bid per click should be!

Of course, you also had to pick search terms to try and get your clicks to a level that you wanted to spend on advertising, but Google was happy to make that nice and easy.

The Other Side

To recap.. for all these years, advertisers were buying things (billboards, time slots, magazine pages, or maybe a line of text next to a search result..) they didn’t really want. By doing so, they were assuming all the risk in the never-ending hunt to find a medium with a cost and magic ratio they could live with.

Never in the history of advertising did a publisher offer any sort of pricing that had anything to do with results. And how could there be? If Martha Stewart’s Living charged per conversion instead of per ad, only the advertisers who made the most profit off each customer could be in there. It’d be filled with ads for mortgages, Viagra, penny stocks, and web hosting!

If advertisers only charged you per conversion, all magic ratios would be ONE… and there’d be no incentive for advertisers to try and find venues with better magic ratios for their particular product!

Strangely enough, that, right there, is why Google is currently worth $155 Billion and Yahoo only a quarter that. You see, Google realized that if they were going to make things easier on the advertiser by letting them pay per-click, they’d better work on their OWN magic ratio.. the ratio of search result views to advertising clicks! Otherwise, if it is mostly true that any site visit is as valuable as any other, there’d be no reason for advertisers to not plaster their ad over every single possible search result. After all, they’re only paying if somebody actually clicks!

Dumb Yahoo!, when they finally started doing pay-per-click at all, showed text ads based ENTIRELY on their bid per click. Google, on the other hand, showed ads based on their max bid per click times the number of clicks per view.. which maximized Google’s revenue per search result… the thing they had the most of.

This seemingly minor change meant ads less popular with searchers were automatically lowered in prominence; while Yahoo was stuck with web hosting ads all over the searches for “prison terms insider trading”, Google was electronically forcing more and more relevant ads for each search.

I Lose My Baby Teeth

It’s now 2007 and, just like me, it’s time for advertising to finally grow up, lose its baby teeth, and realize its ultimate potential!

Allow me to explain.

Advertising only sucks when it doesn’t interest you. The funny thing is, every time you see an ad you didn’t want to see, the advertiser would have prefered you not see it either. Ideally, for both advertisers and consumers, every ad ever shown would result in a conversion: there’d be a global magic ratio of ONE.

In that world, consumers only see ads they are 100% excited by, and advertisers don’t waste a single penny on people who don’t convert.

While Google took us one step closer to that utopia, DreamHost is already half-way there.

You see, “not wasting a single penny on people who don’t convert” can be achieved rather simply by just having an affiliate program!

Affiliate programs pay only for conversions! They’re an advertisers best friend.. they push all the risk, work, and magic ratio calculations onto publishers!

But.. all that awesomeness comes at a cost. You see, affiliate programs must pay extremely well.

For it to be worth it for an affiliate to go through all the work of figuring out where, how, when, and how much to advertise, they’ve got to have a pretty big pay off for every conversion. No holding out, advertisers! You’ve either got to spend time researching your own magic ratios or you’ve got to spend money to make your magic ratio one. You can spend both, but you can’t spend neither.

Unfortunately, affiliate programs are only half-way to utopia; they don’t do a thing to help consumers see more relevant ads. Not in the least. Because affiliates have no idea what sort of magic ratio they’re in for, they like to play it very safe and go for very cheap forms of advertising. You know, things like word-of-mouth, posters-stapled-to-traffic-lights, and unsolicited-email-and-forum-posts. I wouldn’t be going out on a very long limb to say 95% of the bad stuff on the Internet can be traced back to an afiliate program.

And therein lies the crux of the problem.

All these small-fry affiliates have no time, no money, and no ideas to maximize the effectiveness of their message. They’re the equivalent of a magazine that was 100% ads, and so had no readers… so the publisher just mailed it to every single mailbox in California every day, just hoping for some random hits. How stupid is that?

What advertisers really need is some sort of killer affiliate. Some magic hombre you could sign up for your affiliate program and they just KNEW the perfect place, time, and way to advertise your product.

It’d be awesome.

Advertisers would just set their price per customer and the killer affiliate would bring them the customers. Consumers would go to the killer affiliate and be shown the one true ad they most needed to see. And the killer affiliate would make a killing. And, you might see where I’m going with this…

Google IS the Killer Affiliate!

Recently, Google announced a beta test of their new pay-per-action advertising model. This is exactly an affiliate program.. but managed by Google. Google will just start including pay-per-action ads in their search results, and using the same method as before (but now it’s cost per action times actions per search) these “affiliate links” will quickly show up in the most relevant results possible.

I Get Laid

Before 2008, when Google hits $3000 a share and I get laid, both based on this post, let me explain some more stuff.

Why does Google even have to bother with this new pay-per-action system? Why don’t they go out and just sign up for existing affiliate programs such as ours?

For one, that’d obviously be a lot of management trouble for Google. Why deal with a zillion different affiliate programs when you’ve got the clout to make everybody just use yours?

For two, that’s already happening.. via affiliates who advertise on Google with pay-per-click. When you search for DreamHost on Google, you’ll see plenty of text ads.. but they weren’t put there by us! Nope, not a one.. and with pay-per-action Google will essentially be competing with existing advertisers to see who’s a more efficient converter of search results to paying actions. Who will prevail?!

My money’s on GOOG.

Google’s got a lot of advantages in the fight.

Traditionally, it’s been pretty hard for an advertiser to track their success in an affiliate program. They essentially have to believe the advertiser, just like old-school advertisers had to believe figures on ad views. For Google though, if any advertisers cheat by not giving credit for an action that occured, their magic ratio will automatically drop (less actions per search result) and they’ll be quickly pushed lower and lower in the search results!

In fact, I’m convinced that Google Checkout was 100% an attempt to get Google more intimately involved in the entire “action” process so that it’d be easier and more accurate for them to get their “pay-per-action” system integrated across their advertiser base.

(Oh, and another interesting aside.. for every $1.00 you spend on advertising with Google, you get $.10 of free processing with Google checkout. This is so good for them. Here’s what happens:

1. Advertiser A decides to integrate Google Checkout to save some processing fees. What the heck, they already advertise on Google.. might as well save some money. Not to mention they also get a nifty shopping cart logo next to their ads.
2. Advertiser A realizes that with the money they’re now saving, they can afford to bid a little higher on their ads.. putting them above Advertiser B and therefore pulling in more customers, making them even MORE money!
3. Advertiser B sees this happening, so quickly integrates Google Checkout and then takes THEIR savings to re-bid themselves back up higher than Advertiser A.

The end result? Everybody’s using Google Checkout, everybody’s ready to integrate pay-per-action, everybody’s ads are in the same relative placement as before , and all the “savings” they’ve been earning on processing fees are still going to Google, as higher ad bids! But now, all new advertisers MUST integrate Google Checkout to be competitve. So good.)

Oh, and another side benefit of pay-per-action.. no more click fraud!

Finally

Finally, I wildly predicted a few weeks ago that Google would buy Commission Junction (on a Tuesday in July). For those of you that don’t know, CJ is a site that runs affiliate programs for people, and they’ve got thousands of advertisers and millions of affiliates. They themselves are not a killer affiliate though… just a middle man who takes a transaction fee for managing everything. But after Google purchases them and integrates their whole system with pay-per-action.. watch out!

It’ll be 2009, and I’ll finally be potty trained.