The new math of media businesses

Once upon a time the math behind online media business’ revenue was clear:

Revenue = CPM x Number of Impressions

CPM = Revenue per thousand impressions, ie price
Number of Impressions = pageviews or equivalent (video views etc), ie inventory

For most sites there was a ceiling to CPM so the way to grow was to increase the number of impressions. Strategy boiled down to growth in eyeballs.

The trouble with this formula is that we now have a permanent oversupply of ad inventory online, and a whole adtech infrastructure working hard to make the pricing of that inventory a very efficient market. As a result, online CPMs have dropped dramatically over the last 20 years. Unless you can get to enormous scale on the number of impressions, it is hard to build a big ad business this way.

I think it is now more useful to think about online media business’s revenue this way:

Revenue = Average IO x # of IOs

Average IO = Average size of an insertion order
# of IOs = Number of insertion orders

Theoretically, these equations should be equal, but I think that this formula is a better guide to strategy today. In this case, there is a ceiling to the number of IOs, whether you are chasing direct response budgets or brand budgets. So the key to growth has to do with increasing the average IO size.

For media companies relying on direct response advertisers, this still boils down to growth in eyeballs.

But for media companies targeting brand advertisers, there are ways to increase average IO other than simply growing your audience. This boils down to becoming a “must buy” for brand advertisers. This can be achieved in many ways. One is to become an integral part of popular culture (as Snapchat*, Buzzfeed, Vice and others have done). Another is to create scarcity (the Superbowl is the best example). A third is to focus on a very valuable or hard to reach demographic (Mic*, Bustle and Bleacher Report are doing this). Of course, none of this matters without some minimum level of scale. But now scale is a part of strategy, not the whole strategy. And that is a better representation for how media companies are being built today.

I’d love to hear your thoughts on who is doing this well — leave a response below

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* Lightspeed Portfolio companies