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The Value of Behavioral Targeting

Jan 11, 2017

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  • The Value of Behavioral Targeting

    by

    Howard Beales1

    This study seeks to provide an initial understanding of the effect of behaviorally targeted advertising on

    advertising rates and revenues. A survey of twelve ad networks was conducted to obtain quarterly data on

    pricing (CPM data), conversion rates, and revenues across various types of ad segments (run of network

    advertising and behavioral advertising). The survey results reveal three key findings: (1) Advertising rates are

    significantly higher for behaviorally targeted ads. The average CPM for behaviorally targeted advertising is just

    over twice the average CPM for run-of-network advertising. On average across participating networks, the price

    of behaviorally targeted advertising in 2009 was 2.68 times the price of run of network advertising. (2)

    Advertising using behavioral targeting is more successful than standard run of network advertising, creating

    greater utility for consumers from more relevant advertisements and clear appeal for advertisers from increased

    ad conversion. (3) Finally, a majority of network advertising revenue is spent acquiring inventory from

    publishers, making behavioral targeting an important source of revenue for online content and services

    providers as well as third party ad networks.

    This study was sponsored by the Network Advertising Initiative (NAI). The NAI is a coalition of more than 40 leading online marketing companies committed to building consumer awareness and reinforcing responsible business and data management practices and standards. For a description of the NAI and a list of its members, see http://www.networkadvertising.org/index.asp (last visited Mar. 3, 2010).

    1. Howard Beales has been an Associate Professor at the School of Business at George Washington University since 1988. He formerly was the Director of the Bureau of Consumer Protection at the Federal Trade Commission.

  • P a g e | 1

    I. INTRODUCTION

    In recent years, popular Internet content and services (such as online news, blogs, e-mail

    and social networking services) have been funded increasingly by advertising rather than through

    charges to consumers. Many providers of Internet content and services (publishers) depend on

    advertising revenue to develop and present their offerings to consumers. Web publishers range

    from large scale media websites and portals that sell advertising directly to potential advertisers to

    so-called long tail sites with smaller and more specialized audiences.

    If advertising is to remain the primary means of financing Internet content, then advertising

    rates will be a critical determinant of the kind and quality of Internet content available. Unless

    publishers can effectively capture some of the value they create for viewers, they will not be able to

    provide as much content, or content of the same quality as viewers have come to expect. The

    fundamentals of online advertising markets and behavioral targeting are described in more detail

    in Appendix A.

    One strategy widely used to increase the value of advertising is behavioral targeting. Using

    information about online behavior, including sites visited and interest in particular types of

    content, behavioral targeting seeks to serve advertisements that particular groups of consumers

    are more likely to find interesting. If advertising better matches consumer interests, consumers are

    more likely to respond to the message, and advertisers will be willing to pay more for ads delivered

    to such an audience.

    Behavioral targeting is used in different ways. Large publishers with diverse content

    offerings can use behavioral targeting across their various sites to offer their users more targeted

    ads. Additionally, third party firms can specialize in parts of this process or can encompass all of it,

    offering targeting across a broad range of publisher content. For example, data exchanges specialize

    in data collection and analytics that they sell to advertisers. More comprehensive third party

    advertising networks (ad networks) can handle both the collection, analytics, and servicing of the

  • P a g e | 2

    ads. This study focuses on transactions involving the final advertiser, because that is the market in

    which the value of advertising is determined.

    Because behavioral targeting makes use of predictive data derived from users online

    behavior, the practice has raised privacy concerns. To date, however, there has been no hard data

    about the effectiveness of third party behavioral targeting or its importance to content providers.

    This study seeks to fill that gap, providing data about advertising prices and revenues for a sample

    of advertising networks.

    The study surveyed members of the NAI seeking data for different types of targeting. We

    obtained data from 12 ad networks, including nine of the top 15 ad networks by total unique

    visitors according to comScore's December 2009 rankings.2

    Our survey questions were designed to

    obtain quarterly data on pricing (CPM data), conversion rates, and revenues across the various

    types of ad segments (run of network advertising, behavioral targeting, and retargeting). Table 1

    below summarizes the results of the survey. The data is presented in aggregate to protect

    participant confidentiality.

    2. Press Release, comScore Releases December 2009 Ranking of Top Ad Networks, available at http://www.comscore.com/layout/set/popup/layout/set/popup/Press_Events/Press_Releases/2010/1/comScore_Releases_December_2009_Ranking_of_Top_Ad_Networks (last visited Mar. 1, 2010).

  • P a g e | 3

    TABLE 1 SUMMARY OF KEY SURVEY RESULTS

    Q1

    2009 Q2

    2009 Q3

    2009 Q4

    2009

    FULL YEAR 2009

    AVERAGE CPM (WEIGHTED BY BT REVENUE) Run of Network $1.94 $1.98 $1.89 $2.06 $1.98 BT $4.09 $4.22 $4.07 $4.11 $4.12 Retargeting $3.00 $3.12 $3.13 $3.02 $3.07 BT Avg. Relative Price Over RON Ads (X Greater) 2.77 2.71 2.79 2.46 2.68 Retargeting Avg. Relative Price Over RON Ads (X Greater) 1.98 1.84 2.11 1.59 1.88

    AVERAGE CONVERSION RATE Run of Network 2.1% 3.6% 2.2% 3.1% 2.8% BT 5.5% 8.8% 6.4% 6.6% 6.8%

    REVENUES Total Ad Revenue ($ Millions) $708 $780 $795 $1,040 $3,323 Percentage Attributable to BT (Aggregated Across Firms) 16.2% 17.2% 18.3% 19.4% 17.9% Avg. % of Display Ad Revenue Used for Inventory Costs 54.7% 56.9% 53.0% 53.6% 54.6% Avg. % of Display Ad Revenue Used for Data Costs 8.5% 8.8% 9.1% 9.4% 8.9%

    The results lead to 3 major conclusions. First, advertising rates are significantly higher for

    behaviorally targeted (BT) ads. The average CPM for BT advertising is just over twice the average

    CPM for run of network (RON) advertising. On average across participating networks, the price of

    BT advertising in 2009 was 2.68 times the price of run of network advertising. Second, advertising

    using BT is more successful than standard run of network advertising, creating greater utility for

    consumers and clear appeal for advertisers. Conversion rates for BT advertising are more than

    twice the rate for RON advertising. Third, a majority of network advertising revenue is spent

    acquiring advertising inventory from Web content and services providers, making BT an important

    source of revenue for publishers as well as ad networks.

    The rest of the report is organized as follows. The next section outlines the methodology of

    our survey. Section III presents the results in greater detail. Finally Section IV discusses the key

    conclusions from this work.

  • P a g e | 4

    II. METHODOLOGY OF STUDY

    Over the course of two months, we spoke with representatives from a number of ad

    networks, all of whom were members of the Network Advertising Initiative (NAI). These

    networks graciously provided crucial background information on the role of BT. They also provided

    guidance in crafting a survey that was likely to be effective in obtaining data to assess the value of

    BT to networks and publishers. The survey had to be general enough to encompass the variety of

    business models seen in the industry, but specific enough to assess the primary research question:

    what is the effect of BT on advertising revenues and rates?

    Twelve NAI member ad networks provided data in response to the survey.3 Nine of the

    twelve participants appeared in the top 15 total unique visitors list according to comScore's

    December 2009 rankings.4 These nine firms averaged 159 million unique visitors in December of

    2009 and reached an average of 78 percent of the total U.S. online population.5 The remaining three

    ad networks are not as large, but provide some representation for the smaller networks in the

    marketplace. Study participants had total ad revenues of over $3 billion in 2009, accounting for

    approximately 40 percent of total Internet display advertising revenue.6

    The survey questions requested several key pieces of data that are essential to determining

    the value of behavioral targeting. The data were then compiled, and are presented in an aggregated

    form to protect participants confidentiality. The survey requested the following:

    Thus, the sample provides

    a reasonably accurate view of the overall marketplace for behavioral targeting.

    3. All current NAI members were eligible to participate in the survey. 4. Id. 5. Id.; Navigant Econom