Subprime Problems with Online Advertising

Back in 2008 the world experienced the impact of the subprime mortgage crisis. Greed, combined with a dose of stupidity put the global economy into a tailspin. The question I have been asking myself is whether the online advertising industry is heading for its own subprime shakeout.

The global financial crisis was caused by blending toxic loans that would never be paid back with good loans that would. The thought of big commissions spurred Wall Street forward to meddle with the ratio of good performing to bad performing loans so they were weighted on the wrong side of the ledger.

Ratings agencies such as Moody’s and Standard and Poors would look at these loan blends and put a rating on them that represented the riskiness of the blended loan portfolio. The problem is the agencies were paid by the banks that were trying to sell them…..so guess what, all these toxic loan portfolios received the highest investment rating.

I know that I’ve over simplified the whole financial crisis but what happened next was incredibly predictable and now a part of history. People lost their jobs as a credit squeeze hit the financial markets and central bankers wondered how they were blindsided.

Let’s compare this to the online advertising industry.

Traffic can be bought at varying degrees of quality and blended together so that it’s just acceptable enough for advertisers to buy. In fact, the name of the game for many traffic sellers is to get an advertiser hooked on the “heroin” and then dilute the traffic quality with “talcum powder”. This way the sellers can maximise their returns.

So who is sitting on top of the quality? The online advertising traffic ratings companies are supposed to be the industry watch dogs that are sampling the traffic to ensure that quality is maintained.

Who pays the ratings companies? They tend to work both sides of the fence with the global advertising networks that sell traffic paying them for a good rating and an endorsement of the traffic they’re selling. The advertisers that are buying the traffic often use the same ratings companies to help them filter the traffic.

Do you see any similarities to the GFC as yet? I’m a firm believer that if you want to understand something then follow the money trail. No matter how good the traffic quality is the party that always wins are the ratings agencies…..which is a little strange since they don't actually bear the risk.

At what point in time does this house of cards collapse in a heap? It’s pretty simple to work out. When the traffic quality is blended to the point where the advertiser (who is buying the traffic) is unable to make a profit.

Now what happens? Either the online business goes bust or the marketing manager gets fired. That’s OK because they’ll get employed by one of the ratings agencies or global advertising networks that they’ve been paying huge amounts of their former employers’ money to.

This whole scenario is a problem for legitimate domain investors. Their A-grade traffic pay-outs were essentially being diluted by the massive machine that blends all the traffic together…..but that’s been changing.

Over the last few years we’ve seen a growing amount of good domain traffic completely bypassing the big advertising networks and going directly to advertisers. This has meant higher pay-outs for the traffic and as the traffic converts the advertisers are wanting more of it. This is all good news for domain investors that have held onto their domain traffic portfolios.

I’ve been saying this for years…..the reason why domain traffic is so valuable is because it converts for advertisers. All the smoke and mirrors of the global networks and ratings agencies means absolutely squat to an advertiser unless they get sales…..surprise, surprise!