ROI. Get used to it, Madison Avenue.

In the past 15 years, the hyper-growth of interactive media has presented the advertising world with some of its most pressing challenges; since it is so easy to measure performance online, advertisers would like to better measure the performance of non-interactive media (print, radio, outdoor, TV). Spurred on by John Wanamaker’s legendary quote, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half,” advertisers have been asking big media to justify $30 – $100 for much of the last five years. The pressures of the current economic conditions have only added to the urgency.

My view of the prices of media advertising in general is somewhat controversial. I believe the reason print and TV have been able to demand the rates they have is largely because there were so few ways to measure the efficacy of the buy; they are largely opaque non-performance-based media. We all know TV viewing rates are “measured” by a measly 5,000 Nielsen Peoplemeters and rates have been artificially boosted by the entire “Sweeps” concept and the Up-front sales process. When you look at the TiVo data, you get a more clear understanding of how poorly correlated the Nielsen viewing numbers really are with reality (when DVR usage is taken into the picture.)

Why talk about this now? Because online, every click is known. We know people try their best to ignore ads. The heatmaps of eyeball viewership online demonstrate that people try their best to avoid looking at banners. But we have also learned that search is the best indicator of intent and that when highly relevant (text) ads are shown, users click in great numbers. And when we combine intent with relevancy and interactivity, the real value of reaching a customer is known. Today, Google’s adwords market is the best indication of what a customer is worth. And it is nowhere near $100 CPM.

Why are online CPMs $5 – $20 for text and banner ads and TV is 5-10 times that? Because TV (and most traditional media) has been significantly over-priced for decades and online media is priced closer to the value to an advertiser of reaching a consumer. In addition, there is a growing supply and demand problem. What percentage of total available web inventory is unsold? 60%? 80%? That drives down prices. And even so-called premium inventory (Yahoo home page, nytimes.com) is sold at half that of TV CPMs.

So, where is this all going? Traditional media CPMs are coming down. And as those media become interactive and can be sold on a performance basis, their effective CPMs will fall dramatically as the true value of reaching a customer emerges.

This means the race is on for making all media as hyper-targeted, efficient, and as performance-based as it can become. One of my favorite digital media sectors is the advertising technology space. There are a plethora of companies focused on exactly this. By using every type of math around applied to every piece of data thrown off by our surfing behavior, we can make advertising more relevant and measure its efficacy. This satisfies the advertiser’s need to buy advertising on a performance basis and, in theory, makes advertising that much more relevant to the consumer. (I am skeptical that, aside from search marketing, we have yet seen any advertising actually appreciated by a consumer, but that is the subject for a different blog post…)

So, stay tuned for more thoughts on this space. I’d like to explore some specific sectors of ad tech like media buying, behavioral targeting and media exchanges.