The Risk-Reward Equation for Publishers

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Today’s column is written by Eric Berry, co-founder and CEO at TripleLift.

Risk–reward analysis is studied heavily in modern portfolio theory. There are two important questions that pervade this discipline: How can an individual’s portfolio be structured to maximize their return while minimizing risk, and how can it be adjusted for an individual’s risk tolerance?

For web publishers, monetization is a version of modern portfolio theory. Advertising assets and resources can be allocated and maximized in light of the risks associated with various forms of monetization. But unlike savvy investors, publishers don’t always consider the optimal balance of income maximization strategies with their associated risk profiles. It’s a problem that is compounded by the simultaneous pressures of declining CPMs and the shift to mobile.

The New York Times recently garnered positive attention for its sponsored content promoting the Netflix series, “Orange Is the New Black.” It is evident that the Times was well compensated for its efforts while it simultaneously presented a much better user experience than interstitials. But this is analogous to a risky investment that happened to outperform; a dozen other equivalent investments might tank.

It can be tempting to try to replicate the success of the NYT-Netflix ad in a more standardized way. Ad networks and exchanges succeeded in large part because advertisers don’t want thousands of publisher relationships and it’s enormously challenging to produce highly custom content at scale.

Even the Times will be hard-pressed to scale the number of advertisers willing and able to produce and finance Netflix-style products to a degree that materially impacts its bottom line. This is especially true given the challenges of finding a willing counterparty, implementing a successful campaign and the increasing number of publishers that are open to provide native advertising. As a result, supply growth may outstrip demand growth over the next few years. This is an inherently volatile revenue stream and should be treated as such in any publisher’s planning.

A revenue stream based entirely on exchange-traded banner ads is on the other end of the risk-reward spectrum. The revenue will scale roughly proportionately to traffic, with no guarantees about volume required. It is a completely riskless, nearly “guaranteed” income source. Exceedingly predictable but with limited upside, few enterprises would benefit from such a cautious approach alone, but it certainly serves a function in an advertising mix.

The Role Of Customization

The risk-reward spectrum manifests itself in two ways for publishers. At the campaign level, the degree of customization corresponds to increased revenue and risk. Exchange banners have no customization, whereas a custom story in a publisher’s own voice must be entirely unique, often requiring dozens of stakeholders. At the publisher level, the appropriate allocation of effort and resources to different forms of digital advertising must be determined in order to return the most suitable income stream for their business.

The answer is different for every publisher. The New York Times, relative to other publishers, tends to have a lower overall risk associated with each custom project. Scale limits the impacts of volatility and its legacy of prestige increases the likelihood of success. This contrasts to an upstart blog with robust growth, where one high-profile customized cancellation could ruin the entire enterprise because it might result in no revenue whatsoever. For this hypothetical blog, a business model based on success resembles Russian roulette. This makes the 90%-plus relative drop in CPMs for exchange advertising much more palatable.

Naturally, the vast majority of publishers fall between these two extremes.

The Risk Score

To calculate the right mix of advertising efforts, publishers should employ modern portfolio theory by analyzing several elements, including inbound advertising interest, prestige of the publisher’s brand, revenue and the percent of business closed of various forms of advertising against the industry mean. This risk “score” will inform whether a publisher should be more or less aggressive in the pursuit of custom projects (their alpha, relative to that project’s beta). This calculus would then also dictate the appropriate size of your sales force and infrastructure dedicated to each form of advertising.

Highly customized and completely standardized are extremes, rather than the only forms of advertising. Direct sales for banner advertising, for example, involves some degree of customization and a higher upside, but the fixed costs to the sales team increase the risk relative to exchange-traded ads.

Native programmatic also presents an exciting middle ground. There are opportunities for numerous combinations of risk and customization, which makes the variety of native programmatic implementations a tremendous opportunity for publishers over the next several years. By dispassionately analyzing the risk-reward potential as it relates to their unique positioning, we will hopefully see an increasing number of publishers weather the storm of declining banner CPMs by focusing their efforts on the precise mix of opportunities for their business.

Follow TripleLift (@TripleLiftHQ) and AdExchanger (@adexchanger) on Twitter.


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