The Problem With Ad Futures - Quantification, Supply and Demand Fluctuations

I had proposed previously that something like an ad futures marketplace could be an interesting model for a type of advertising "trading platform". Where, upon anticipating strong demand for advertising spots in certain niches, you could lock up future supply by buying "ad spot futures contracts" that guaranteed a fixed price for certain ad spots in the future. For example, if you were an investor wanting to capitalize on the next Twilight movie, you could go to all of the niche twilight sites and buy up all of their future ad spaces for a discounted price (since many, many publishers are cash starved and would take a much lower price today) then, when the event hit, you could turn around and sell the ad spots to a niche specific advertiser for a much higher price, making a profit.

However, there are two serious problems with this hypothesis.

Firstly and perhaps the most solvable problem is that of quantification. The commodity is poorly quantified at the moment. So, using a niche specific keyword as an example, there exists no reliable mechanism for determining the historical volume of said keyword (in terms of number of "views") and there exists no mechanism for determining the overall volume of said keyword in the whole market. Corn for example has numerous, predictable variables for determining crop outcome. So, volatile weather conditions, drought, pestilence, abundant rain, legislation, good weather etc are all factors that can be analyzed historically and correlated with crop outcomes. As such, futures traders can develop algorithms for predicting future prices and backtest them against historical data. Additionally, the whole market volume of corn is well quantified each year (in terms of billions of bushels). In any case, the commodity we're discussing (ad space) is poorly defined and poorly quantified. As such it makes predicting future prices extremely difficult.

Nonetheless, this problem is solvable by implementing the tools for tracking the commodity and quantifying the commodity. It's a large problem to tackle, but one that can be reasonably accomplished.

However, the second and probably the most difficult problem is that of super-saturation of supply. On the Internet, very little barriers to entry exist for players to enter the market. As such, a nearly infinite supply of advertising could exist at any given time, making prices (theoretically) approach zero. Corn has held it's value as a commodity for 40 years, so while the market has become highly commodified, large economies of scale exist as barriers to entry into the market for small producers making the supply side relatively predictable. In addition to this, limits exist to the total production, since there is only so much arable land and yields are only so high (in terms of bushels/acre).

On the Internet though, there are no such predictable limits to supply. A nearly infinite number of websites can exist for a particular niche or topic. Practically speaking, this isn't the case, but it's clear that as technological capabilities continue to increase and prices are reduced, the barriers to entry are lowered instead of getting higher. As such, quantifying the supply side is difficult, and instinctively it seems like it will continue to grow, leading to a continued reduction in prices.

Many analysts laud an ever increasing growth in the viewership online, but very few can accurately quantify the supply side for advertisers. Lowered prices are (in the short term) great for advertisers, but they're not very good for the market as a whole, since over the long term, the total amount of capital in the market will shrink. A few plausible solutions to the problems of super saturation, are consolidation or "closed markets". Consolidation would reduce the amount of players in the game and erect significant barriers of entry to competition. Closed markets would partly solve the problem by forcing players to only trade their commodities on one platform and the owners of the platform could dictate who participated in the market. Presumably, this closed market would command the lion's hare of supply and if advertisers wanted space, they would be forced to purchase it through this market. Neither of these solutions are entirely favorable because they entail significant risk and smack of non-competitiveness.

At this point, consolidating the supply side would require billions of dollars of acquisition capital. Closing up the market would also be very difficult because the current ad platform market and quant market is fragmented and idiosyncratic.

Social Capital helps solve a part of this problem by introducing a new concept of value to the space and proposes to quantify the value of social interactions to both traders and buyers of the commodity. As such, it can be subversive insofar as it can be introduced without triggering the alarm bells of the major players.

Without something like social capital though, are there other solutions to this economic issue? Because it is an issue. Remember that, as the supply side of the industry super saturates, the prices available to the lowest and mid tier publishers will decline significantly.