Over the weekend I was cleaning the basement and found my old Macroeconomics textbook. As I relived those fond memories of IS LM curves and Adam Smith, I began to think about how the basic laws of economics apply to digital advertising.    The simplest way is to think about it is in terms of supply and demand.  Here is a quick look at the supply side of the equation.

economics-of-search-graph

As we all know, the demand for digital advertising has been growing in the neighborhood of 20% a year – robust growth, by any measure.  However, on the display side (and for simplicity I am lumping together traditional display, video, mobile, etc .) supply has, for all practical purposes, reached infinite proportions.  On a monthly basis there are now over 50 Billion available display impressions, and in the near future we’ll top the 7 trillion per year mark.  Page machines such as Facebook and Twitter continue to add even more supply at a breakneck pace.  If you don’t think that’s infinite just go to one of the Demand Side Platforms and bid for impressions at 1 cent a click.  You’ll get plenty of volume.

On the flip side we can see that the number of search queries has remained essentially flat over the last 3 years.   Yet search, which still accounts for 50% of every digital dollar spent, has enjoyed the same growth rates.

So what does my trusty and dusty Econ book have to say about all of that?

On the display advertising side with infinite supply, no matter how much the demand curve shifts up, price can never rise.  And in fact, as we take friction out of the market, and use technology to make all supply equally available to all advertisers, we approach a perfect market that should theoretically drive price towards zero.  Obviously price will never fall to zero, since the supply side would pull inventory off the market as that happened, but it is abundantly clear, as the graph below illustrates, that price can never rise.

display-ad-economics

With search advertising we see a different story.  As we saw, the supply of search inventory has remained fixed over the last 3 years.  However demand has continued to increase as seen by search revenue growth keeping pace with the overall growth in the market.  As our Supply and Demand 101 Graph below shows, fixed supply and an increase in demand translates to an increase in price.  Of course the market is not quite this simplistic; there are vertical markets each with their own supply and demand relationship, and differences within mobile vs. desktop, but the overall market dynamic certainly holds true.

search-ad-economics

When we take a macroeconomic-look at the market the obvious opportunity is to increase the supply of search terms.  Since we can’t force people to search more, how do we do that?  Luckily the publisher community has solved the problem for us.  Every publisher creates content that is tailored to be as specific to search queries as possible.  The reason for this is obvious; over 50% of most sites’ traffic comes from Google search results.  So the trick is to find a way to turn every page of content that is on the web into its own unique set of search queries.  If that were done at scale you would create a greater volume of search queries than currently exists within the search portals.  And our Econ book tells us that would result in falling prices and increased demand for search advertising.

And that is exactly the mission that Swoop has set out upon.

Class dismissed!