After reading Fred Wilson’s post on “When is a market really a market?” I really started thinking about the future of advertising as more of a futures market. I completely agree with him in the sense that the current setup, although moving in the right direction, is still definitely lacking in the liquidity and transparency needed for a true “market.” It is really impossible to know how much someone like Microsoft is paying on each ad within their massive XBOX 360 campaign, nor is it impossible for anyone other than publishers to “invest,” (by invest, I mean placing ads pay per performance ads within their website) in this campaign. But after running my recent adwords arbitrage, I am starting to see how online advertising along with affiliate programs is moving us closer towards a true advertising market, or really a market where leads can be bought or sold. I believe that the future of advertising is really this, which is very similar to existing affiliates market:
Walmart wants buyers. So they list on a “leads exchange” that they are looking for buyers of say Product A, and they are willing to pay $10 per sale to anyone who gives them a lead for that sale, up until 1 million of product A’s being sold. They don’t care where the leads come from, or how so and so gets the leads to them, just that they’ll pay $10 for each sale. Anyone and everyone can see this, it’s completely transparent. So Company A knows that they have a lot of people coming into their shop/restaurant/website who would love Product A, but they don’t sell any products similar to it. So they make it known to their visitors/patrons/etc that Walmart is selling product A, and this is what it does, etc, head out and get it. Their cost to promote product A is only $3 per sale in opportunity cost(space, time, etc) or actual cost so they net $7 per lead and everyone is happy. It’s amazing because Walmart doesn’t have to worry about spending money on advertising, preparing the best marketing message, or figuring out how to target their target market. All of the risk is handed off to lead generators, who believe they know more about Product A’s customers, or have access to more of them than Walmart does and therefore can reach them in a more cost effective way. It also gives walmart a sense of the potential success of Product A by providing them a real time glimpse into the marketplace’s willingness to actively promote the product or not. And Walmart knows exactly their cost per goods sold ahead of them actually being sold! There would have to be active players in this market as well providing the liquidity and keeping the active transfer of commissions and lead generators open. I can’t really seem to wrap my head around where the money is made in the middle, and I know there are some holes in this. UPDATE: I’ve been thinking that the value in the middle could be created by middle advertisers. For example I run a website that talks all about Product A. So in addition to making the $10 per sale in my own promotions, I also am willing pay others for just qualified visitors. And I know that most people could get a say 5% conversion of traffic to buyers promoting product A, but I could get 15% conversion from customers. Therefore I’d be willing to pay people a certain amount just to drive traffic to my site/store/whatever because I know more people will buy from me, and they’re willing to send them my way because of the guaranteed return. But the key here is that “affiliate” programs can and will be moved off the net and into the real world. Companies will be able to effectively monetize friendly discussions (you should check out this), just as amazon has monetized book recommendations (blogs and affiliate links). I’ve been thinking a lot about this, and will continue to do so.
Bottom line, big things are happening and I’m excited to see where they go.