Pain is good

Bear with me and read to the bottom of this.

Without pain receptors few of us would last long. Pain acts as an indicator of troubles ahead and sets useful limits of tolerance. A life without pain would be short and dangerous. So it goes with markets. Pain, in this context is often substituted by ‘friction’. It has been suggested by many that taking friction out of markets eases the flow of data and funds in a way that is good for everyone but the ‘recent unpleasantness’ implies something different.

Two things happen when friction disappears; first we end up with machines talking to machines and the growth of contempt for human judgement; second we have a class of trader who in pursuit of the biggest buck develop instruments that have everything to do with making money and very little to do with propelling business itself. In all the explanations of credit default swaps we don’t here so much about any real purpose they may have had in the first place. Frankly if you choose to buy $1 billion bond in company X you should do so on the basis that you understand the risk not on the basis that you can insure it.

In our business a ‘friction free’ world is the stated ambition of many. They argue that if only all the pain could come out of the system the ability to  make money from bazillions of media impressions would go up immeasurably. In pursuit of this goal ad networks and exchanges proliferate and they and others develop more and more imaginative targeting systems to optimize the inventory ocean. The problem is that it does not seem to be working other than (and I have said this before) for transaction oriented direct response advertisers.

There is a particular irony in all this. Microsoft and Yahoo, the two biggest sellers of online inventory other than Google both lament two things:

  1. The relatively small proportion of the budgets of really big advertisers that go online
  2. Their relatively small share of the search market

So taking all this together maybe they should consider the following:

  1. Massively reduce the amount of inventory that goes to networks and exchanges at pitifully low prices
  2. Use some of that inventory to massively increase the visibility of the world’s biggest advertisers tied to some kind of performance metric like site visits or search queries
  3. Use some of that inventory to drive search volumes on their own platforms

By doing this they at least have a chance to compete in a race to the top rather to the bottom and to build conjoined search and display marketplaces that turn their size into real value.

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