Online advertising: Better targeted, but not always profitable, says MIT Sloan professor

As technology improves, competition increases for niche market ad revenues

Alessandro BonattiAlessandro Bonatti, Assistant Professor of Applied Economics

CAMBRIDGE, Mass., December 21, 2009 — An MIT Sloan School of Management professor offers a cautionary note to merchants and others who think they can get better results at a lower cost by advertising on the Internet instead of through more traditional media: Be careful what you click for.

According to MIT Sloan Assistant Professor Alessandro Bonatti, the same search and other technology that has certainly enabled advertisers to target particular audiences, such as men between 25 and 35 years old who work on Macintosh computers, is also creating greater on-line competition for the same audience, thus reducing the profitability of advertising on any targeted web site.

"We know that newspapers have a very limited ability to target audiences," says Bonatti, who worked with Yale University economics professor Dirk Bergemann on his research into the issue. "Specialized magazines can do better, while Google has a very good ability to target who's browsing each page. So while online advertising certainly has the potential to drive out traditional advertising, it does not necessarily follow that online advertisers will make more money. That depends on the concentration of the online advertising industry."

Facebook, for example, "is able to sell ads that are crafted specifically for me," says Bonatti. "So if Facebook was the only online provider, it would make a fortune. But as technology keeps improving, more and more web sites can sell very narrow products to very specialized audiences. And with lots of people targeting the same audience, the profits to be made through specialized advertising become more and more spread out."

So while online advertising has certainly hammered newspaper and other traditional media, "from a profitability point of view, competition for advertising between two super-targeted online media is worse than competition between the New York Times and the Wall Street Journal," according to Bonatti. "Instead of competing for one large pool, one big market, you will have price war in each targeted segment as the slice gets more and more narrow."

"The paradoxical result," says Bonatti, "is that the better the technology, the lower the profits for advertisers. You can make a lot of money through super powerful targeting if you are a monopolist, but not in a competitive market."

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