Posted by: Matt Shanahan
My last post got me thinking about a mantra I frequently hear in the adtech community. The mantra is “advertisers have all the money.” It’s a bit distorted. It is like saying, Ford doesn’t have any money only their consumers do. This mantra affects everything from venture investments (e.g., emphasis on demand side vs. supply side platforms) to business models (e.g., revenue shares rather than fixed costs). In particular, the revenue share philosophy has created some toxic business model structures that sooner or later need to be fixed.
To illustrate the issue, imagine a manufacturer that needs different software systems to produce cars. Those systems might be computer-aided design, factory order management, and supply chain management. Let’s suppose the manufacturer is currently using CATIA, SAP, and I2 to perform these functions with each of systems vendors taking a percentage of revenue from each car sold (i.e., revenue sharing). At steady state, everything is working because prices and demand are stable and they are making a profit.
The manufacturer finds out about a new solution for quality control which could help improve their product. To implement the new solution will require another revenue share decreasing the margin that can be made because prices are fixed by a competitive market. Overtime and because of other needed solutions, the manufacturer enters enough revenue sharing agreements to drives their margin to 0. That is what revenue sharing does when applied to non-revenue producing activities.
The source of profit and margin for manufacturers lies in production. Manufacturers are successful when they can manage their margins on the production side (i.e., fixed costs). The model is always to have fixed costs in development, production, and operations and revenue sharing (a.k.a., commissions) associated with sales and marketing contribution.
Publishers are manufacturers. They manufacture impressions from audience members that can be purchased by advertisers. Revenue sharing on solutions such as order management, ad servers, verification, and others to help produce those impressions does not make sense in the long run and ultimately makes the business model toxic.
Revenue sharing does make sense if the publisher has outsourced their ad sales and are paying commission to the channel for revenue delivered. Even there the incremental contribution has to be clear to make revenue sharing viable.
Profit potential exists from the production of impressions. Optimized profit in the publishing model will come by making sure to split where to incur fixed costs for production and use revenue sharing in sales.
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