May 11, 2006
Earlier this week at the ANA’s Financial Management Conference, AdAge reported on a proposal led by 10 marketers including Wal-Mart, Microsoft, and Lexus to create a $50 million advertising auction test. eBay demonstrated a prototype for the "media marketplace" which could work in forward or reverse auction format.
In theory, the use of a marketplace would introduce microeconomic efficiency to the buying and selling of advertising. With a reserve price set at a network’s cost and buyer’s ceiling set at an advertiser’s internal rate of return (IRR) for marketing investments, competitive market dynamics would set an equilibrium price somewhere in-between the two.
However, in practice auctions don’t always reflect laissez-faire economics and they won’t in this situation, when you have two markets running in parallel with fixed and floating prices. Look to eBay for an example. If you search for a 60GB iPod, successfully completed auctions for new items end around $360, which is 10% below the fixed price at apple.com of $399. Buyers have a good idea for what they should pay and rarely go above the fixed price. In the rare cases they do, possible explanations include "auction fever" or imperfect information.
But all products aren’t created equal, with time and scarcity playing a role. Think about Super Bowl Tickets in January. Or electricity auctions in California. That’s why it’s important for each bidder/advertiser to determine the right price and value combination for their individual needs.
Sounds like networks aren’t getting into the market yet – not surprising – but like power generators during a hot, dry summer, there’s a lot of upside potential to this idea. Making it a reality means marketers step forward first and show they’re committed by holding back dollars from the fixed model to force the issue.