Online advertising feels like it has fundamentally changed very little over the last ten years. Perhaps indeed the “air got dirty and the sex got clean”, but it feels like things in the online ad world are smoggier than ever. Search advertising has scaled up nicely in no small part due to the dominance of our friends in Mountain View. Apart from that, though, for graphical advertising it seems as if the ad revenue engine supposed to monetize many of the new and useful applications and sites on the Web, has been stuck in second gear. Quo vadis, online display advertising?

There are a lot of things one could point to here, but I believe three change themes in the online display advertising business worth focusing on are Integration, Automation and Innovation.

Integration: The approach of publishers and networks as islands unto themselves will not continue to work. There need to be new, efficient onramps to publisher and network inventory. One reason an ad network is attractive to many advertisers, is because it aggregates inventory from a whole host of publishers. Likewise, an aggregator like the Rubicon Project who aggregates publishers based on optimizing their ad network relationships and in turn allows ad network buyers to buy inventory across groups of sites is providing a service of some value.

It’s just too difficult to buy from even large publishers – while many use IAB/AAAA standard terms, it’s often still a crapshoot on terms and conditions with many publishers. Then you get to the reporting, which can vary widely and needs to be reconciled, creative needs to be distributed etc. etc.

Buyers and sellers need to be more integrated, period. Whether that means one or more central marketplaces that clear inventory (by the way, I believe that publishers can still maintain premium pricing AND realize operational efficiencies in a market, but more about that some other time…) or ad-server plugins to allow them to list portions of their inventory… or even a standardized open CRM interface for sharing insertion orders between buyers and sellers, there is not going to be a single solution here, but the “connection index” between the companies with the eyeballs and the advertisers with the money needs to improve radically.

Related point: Unfortunately many “advertising as financial markets” analogies turn out to be wrong – impressions are NOT commodities that can be traded and sold across sites because of the complexities of placement and audience – so perhaps a still-flawed but much better way to think of where publishers fit in is to see publishers as stocks. (or really, placements at publishers – but you get the idea) Ad networks may hold a certain combination in a portfolio, and have a smart way to trade/buy/sell those stocks to help the investor (advertiser) make money. The idea here is that there is a central marketplace where buying and selling takes place, where values are established and where everyone can benefit. Not everyone has the size to be interesting to the market so networks themselves can also create stocks that are a combination of various smaller publishers and trade as a single entity. By taking steps to improve the quality of response that advertisers get (e.g. reducing the number of placements on a page, switching to better sizes), the value of the publisher inventory increases and so does their stock price.

Automation: This is not quite the same as the integration point, but hopefully goes hand-in-hand. By automation, I mean that we should automate our internal processes, and also move to the kinds of automated buying strategies and budget optimization that is possible once the two ends meet in the middle and there is a better chained set of data to accompany the inventory. It’s ‘If then else’ on steroids – look at the market conditions and take action, and take the unnecessary people out of the equation wherever possible. This is not to say take the creative people out of the loop, or never have eyes looking over algorithms – there is no such thing as complete automation, unfortunately. Just automate what you can in your process and always be looking for more to automate or eliminate if it is not really necessary. As you may guess I’ll have a lot to say on this subject here in the coming months since this is part of our core goal in what we are building. This also means less spreadsheet work, more built-in data analysis applications etc.

Finally, Innovation – trying new stuff and building real technologies around this industry, whether that is innovating within creatives (with a current average clickthrough rate of somewhere between 0.1 and 0.2 percent, or a 99.8 percent ignore rate!), or even just improving the current weak-but-somewhat-effective bucket-based behavioral targeting systems. Many of the sales-driven ad networks out there offer very little but aggregation and some economies of scale on adserving and the use of data, but true innovation escapes them. I like what some of the players in the social space are doing in trying to bring friend-of-friends data to adserving and build technology around that… as long as that’s not just retargeting by another name, that kind of new stuff is worth testing and supporting. CPMadvisors as a company is VERY MUCH open to partnering and testing new technologies, and we are always always testing new approaches and new tech partners’ offerings… innovation relies upon us as much learning from one another as properly capturing learnings from our own efforts.

I see encouraging signs here that bigger minds are being drawn to the online advertising space, and perhaps Wall Street’s recent troubles may help pull more people over. I don’t think the trickle will become a flood until there are real markets that we are working within: the current exchange environment when dug into just below the service proves fragile and winsome. The industry needs more smart minds building stuff, to push forward the underlying systems and infrastructure which are still very much in development or not even yet conceived of. As a friend of mine who has been designing proprietary trading systems on Wall Street for some time said in email today:

I’m curious to see if the progression of the ad exchange follows the typical innovation/commoditization process I’ve seen in the financial markets. It does seem like the wild west – no regulation, no formal exchanges, no standardized instruments/contracts. the natural evolution of real-time ad auctions is a fully fledged electronic market. once it is removed from one-to-one over the counter type trades and becomes standardized, the arrival of electronic market makers can explode the volume and profit opportunity.