Welcome to another edition of the Baekdal Plus Newsletter. This time we are going to talk about some seriously heavy topics impacting publishers in different ways.
As you may have seen, about a week ago, Bernie Sanders, the U.S. Senator and candidate for President of the United States, wrote an article praising the media, and suggesting we should tax the tech companies.
You know, all the things that publishers want to hear.
However, his entire focus is based on a complete misconception about why brands advertise, and what advertising budgets are allocated to. But this is not just a problem we see with politicians, these talking points are coming from us - the media.
So, in my latest Plus article, I fact-check this focus, but also add some insight about why we need a very different solution to support the news.
How much money do publishers lose to ad tech?
In my article above, one of the things I talk about is the problem with ad tech, the network of companies that exist between the brands wanting to advertise and the publishers actually showing people the ads.
Here is an illustration of just how complex this path is, and this illustration is from 2010, so things are even more puzzling today.
We have the agencies, the media buying desks, the DSPs, DMPs, the yield optimizers, the horizontal and the vertical ad networks, and loads of other services that nobody really understands.
And the problem is that every single one of these is trying to take their own cut of the revenue. So when a brand spends $1 on advertising, by the time the revenue reaches the publishers, only a small part of it is left.
And over the years, you might have heard about publishers who have done internal studies to see just how much money they lose to all these middlemen. They do this by buying advertising on their own sites (via the programmatic ad exchanges), and then they compare how much money they spent to how much of that money came back.
So after doing some digging, and with great help from several friends on Twitter, here is a summary of these studies over the years.
We will start with the Guardian.
Back in 2016, the Guardian did a study where they tried to buy advertising via several different ad exchanges, and compared the revenue and flow of money for each.
The result was presented by the Guardian's chief revenue officer, Hamish Nicklin, who stunned the industry by saying that the ad tech companies "are extracting up to 70% of advertisers' money without being able to quantify the value they provide to the brand".
This is slightly misleading, because this wasn't actually what the Guardian found. What they found was that there is a very big difference between the ad exchanges, with some taking up to 70% of the revenue, while others only took up a much smaller share.
Google, for instance, was at the good end, with other exchanges being at the bad end.
And this is a pattern that you will see repeat itself in other studies.
Next up is Resumé, the Swedish media magazine.
Resumé did a similar study to the Guardian, and they detailed exactly where the money ended up. Their breakdown looked like this:
Please note: In Resumé's original study, the way they calculated the percentages was based on the previous number of the last step. This is somewhat misleading because it makes each step look like they are taking more money than they did. So all the numbers below have been corrected so that they compare to the total spend.
This then left Resumé with 433 SEK or 74%.
Resumé adds three important notes to this.
First of all that 3.2% of the revenue just disappeared to unknown companies. They got no information about who got that money, they could just see that it went away.
This in itself is a huge concern.
Secondly, the 10% that went to the SSP (the Sell Side Platforms), which in this case was Rubicon, was only possible because of a special agreement between Bonnier News Sales (of which Resumé is a part). They note that for other publishers the SSP share is more like 20%-25%.
Finally, in the example above, Resumé skipped the ad agencies and the trading desks. So if we also include those, Resumé estimates that it will look like this:
Resumé then received SEK 326, or 54% of the revenue.
So it's a very similar pattern.
Next up is the Cairncross Review.
This was a study that looked at many aspects of 'creating a sustainable future for journalism', where they also looked at the ad tech revenue problem.
For instance, the Daily Mail told them this:
The Daily Mail Group (DMG) told this Review that a direct advertising transaction would give them as much as £0.83 per £1 in both print and digital; however, an advertising transaction through the programmatic chain yields an estimated £0.30 per £1.
This is similar to what the Guardian found.
They also looked at the World Federation of Advertisers, who illustrated their findings with this graph.
The problem with this graph is that it's not attributed to any specific source. Instead, in their report, they attribute this to 'Industry experts' ... whatever that means.
You will notice that the percentages in the graph above are very 'rounded', so this is not a good source.
However, based on all the information that the Cairncross Review collected (via Plum Consulting), they came to this generalized conclusion:
This graph is a bit more interesting, because we see the range of percentages within each block. For instance, that the trading desks take anything between 5-25% of the revenue.
This is then followed by several other sources also presenting similar findings, but who aren't discussing the actual source or the media companies involved in the studies.
For instance, Mediatel reports:
The new findings, supplied by WARC, show that in worst-case scenarios just 28% of advertiser money is going where it's needed.
The World Federation of Advertisers (WFA) believe 55% of investment goes towards the 'tech tax' - the money spent on trading desks, demand side platforms, ad exchanges and data, targeting and verification services.
You will notice that this number is different from the number WFA defines in their own report, so there is a lot of 'spin' and conjecture going on here.
In fact, when WARC detailed this to eMarketer, the number was not nearly as bad. Now instead of 28%, the number is suddenly 40%.
So, as you can see, the numbers are all over the place, but this is not unusual for studies in the media industry. What matters is, the pattern is the same.
And no matter how you look at it, the revenue that we miss out on as publishers is substantial. I mean, Apple takes a 30% cut from apps in their app store, but here we are talking about 40%-70% for ad tech.
This is clearly not the way this should work. The middlemen, even if they provide a service, should not end up with that big a slice of revenue.
It's important to remember that the problem here isn't any specific company. If you just look at the revenue cut that Rubicon or Google takes, that amount is relatively minor.
The problem is the complexity of the whole system; that there are so many different layers of ad tech, each taking a slice of the total revenue ... which then adds up.
So, as I also explained in my Plus article, if we want to fix this, we need to focus on minimizing this complexity, rather than trying to go after any specific company.
The problem with ad tech is the ad tech structure itself.
On September 14, in the EU, a new law goes into effect that requires all credit card payments to be authenticated. It's called "Strong Customer Authentication (SCA)".
This is a pretty big deal, because it adds another layer to the checkout process, a layer where you could potentially lose people, and even more worryingly, lose existing subscribers who have already signed up.
Note: There is a slight catch. In Denmark, Germany, and France, the law has been postponed because the payment infrastructure isn't ready, whereas in the UK, the law does go into effect, but the government has said that they are not going to enforce it for another 18 months (this reminds me of GDPR where the ad tech world wasn't ready either).
So what is this? Well, I will let Stripe (the payment provider I use)explain it:
On September 14, 2019, new regulation will mandate Strong Customer Authentication (SCA) for many online payments in the European Economic Area (EEA), including the UK.
When SCA goes into effect, a form of two-factor authentication will be required for many online card payments in Europe. Without authentication, many payments will be declined by your customers' banks.
Traditional card payments usually involve two steps: authorization and capture. A payment is authorized when a customer's bank or card issuer decides to approve a payment, and the payment is captured when the card is charged.
When SCA goes into effect in September, there will be an additional and mandatory step before authorization and capture: authentication. This step helps protect customers by preventing fraud. To authenticate a payment, a customer responds to a prompt from their bank and provides additional information. This may be something they know, like a password, something they use, like their phone, or something that's part of who they are, like their fingerprint.
The most common way to authenticate a payment is a method called 3D Secure. You may recognize 3D Secure by its branded names, such as Visa Secure or Mastercard Identity Check.
So things are about to get complicated. And this is important because we know how big an impact this can have. For instance, Shorenstein Center and Lenfest Institute recently published a study called the "Digital Pay-Meter Handbook". It's a really exciting study about paywalls for 500 newspapers, and what works (and doesn't). You should read it!!
But one thing that it found is just how big the drop-off rate is across publishers.
Data from 10 major metropolitan newspapers showed that, on average, publishers saw an average 90 percent drop-off of users once they enter the subscription process along the purchase and conversion funnel. On average, only 29 percent of desktop users who saw the first step of the purchase funnel (presentation of offers and pricing choices) made it to the second step (providing their email address). Only 14.8 percent reached the step of the process at which they were asked to enter payment information, and 9.9 percent reached the confirmation page indicating that they had completed their purchase.
This drop-off was even higher on mobile devices; the desktop conversion rate was 5 times higher than the rate for mobile.
But now we are adding an extra step on top of this.
Mind you, from the publics' perspective, this is great. 3D Secure is brilliant in that it makes payments online massively more secure. If people have their credit card numbers stolen, or even if a store tries to charge for payments they are not supposed to, 3D Secure will completely block that from happening.
So, people love this.
But from a publisher's perspective, we need to seriously up our game and make our subscription/checkout experiences far better. We need to be dramatically better at demonstrating our value, so that more people stick around and decide to subscribe, but we also need to simplify our checkout experiences to eliminate or restructure as many steps as possible.
The real problem, however, is with the existing subscribers. Take Baekdal Plus. 63% of my existing subscribers are EU citizens and are thus required to be authenticated again. This is because when they initially subscribed, they just paid, but their cards weren't 3D Secure authenticated.
So potentially, all of these 63% of my subscribers will be asked if they want to authenticate the renewal when that comes up.
This is scary as hell!
Obviously, I hope that my readers are so happy with my articles that they will just do it, and then everything is fine. But remember, this is not the only reason for this form of churn.
As publishers, we know that when we contact people about payments (for instance, if their credit card has expired and they need to update it to continue), many people just don't respond to this.
Some people might simply not see the email (it might end up in their spam folder). Some people see the email, but they are too busy with other things, so they file it for later ... and then just forget about it.
And finally, some people might just not want to, and use this as a way to stop their subscription.
Now, it's possible that the banks won't ask for this, if they can see the payments were made regularly in the past. In fact, the new regulation allows for these types of exceptions.
For instance, as Stripe explains it, here is the flow for a subscription with a renewal. Notice that the renewal didn't have to be re-authenticated.
So it's possible that this will apply to some existing subscriptions, and it will also most likely apply to future subscribers.
But as Stripe says:
However, businesses can't rely on exemptions and must design their payment flows to authenticate customers when necessary. This is because the rules around exemptions depend on your customers' banks. The banks evaluate each payment and decide whether an exemption applies-and individual banks will apply exemptions differently.
Yeah... this is not fun!
In the long-term, things will be fine. But in the short-term, publishers are likely to see a spike in churn, both in their subscription rates (if they don't optimize), but potentially with their existing subscribers.
Founder, media analyst, author, and publisher. Follow on Twitter
"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé