1. Eyeblaster
Research Note
The Impact of CPC
on the Growth of
Display Advertising
Copyright © 2010 Eyeblaster, Inc. All rights reserved.

2. While 63% of publishers price display advertising using CPM, 30% of publishers now use CPC,
according to a survey by Econsultancy and the Rubicom Project cited by eMarketer in December
2009. JP Morgan notes that in the past 5 years, performance based display advertising, such as
CPC, gained market share over the CPM based models. The report projects that in a recession
environment, spread of performance based models is likely to accelerate, as advertisers place a
higher value on a clear ROI.
In CPM, or Cost per Mille, the advertiser is charged a fixed amount for every one thousand
impressions. CPC, or Cost per Click, is a pay per performance scheme, in which the advertiser is
charged only for clicks.
CPC became popular in the world of search marketing, where advertisers are charged only when
a keyword is clicked and not when it is presented. Nevertheless, there is a distinct difference
between display advertising and search marketing—the creative. In display advertising, the
creative plays a crucial part in convincing users to click on an ad.
While some may argue that publishers should be paid according to their ability to generate clicks,
publishers only carry a partial responsibility for the generation of a click. The CTR is also affected
by the vertical, ad size, format and particularly the ingenuity of the creative. Thus, when
publishers are paid by the click, their compensation is at the mercy of others in the advertising
chain who make decisions that affect the success of the campaign. Another concern is whether
clicks are the proper metric for discerning the success of a campaign. In many verticals, the
actual purchase is made in off-line stores, and therefore the value of the ad is in its retention rather
than the click.
On the face of it, CPC sounds like a far better scheme for advertisers— publishers only “eat what
they kill”, and therefore share the risk with the advertiser and marketer. This research argues that
CPC payment schemes are not only impaired because of inequitable allocation of incentive and
risk, but also that the spread of CPC may curtail the growth of the display advertising industry. In
addition, by linking publishers’ pay with success that they have only partial influence on, CPC may
drive some publishers out of business, causing an increase in media prices and as a result driving
some advertisers out of the market as well.
Research Note | CPC will Curtail the Growth of Display Advertising Page 2
Copyright © 2010 Eyeblaster, Inc. All rights reserved.

3. Impressions and Effective CPM for Standard Banners
12 $12
Average CTR
10 $10
Impressions (Billions)
8 $8
Effective CPM
6 $6
4 $4
Average CPM
2 $2
0 $0
0.01%
0.03%
0.05%
0.07%
0.09%
0.11%
0.13%
0.15%
0.17%
0.19%
0.21%
0.23%
0.25%
0.27%
0.29%
0.31%
0.33%
0.35%
0.37%
0.39%
0.41%
0.43%
0.45%
0.47%
0.49%
Click Through Rate
Effective CPM Impressions
Source: Eyeblaster Research. Data: Q4 2008 to Q3 2009, Standard Banners, worldwide.
The chart above depicts the standard banners market by different levels of CTR. The orange line
is the total number of impressions by CTR. The green line represents the effective CPM that
publishers would charge in order to break even if fees were denominated in a CPC scheme. We
assumed, for the sake of this illustration, that the average CPM in Standard Banners is $2. As the
average CTR for standard banners is 0.09%, publishers can charge the equivalent of a CPM in the
form of CPC, which is $2.24 per click (CPM divided by CTR). The green line is what publishers
will have to charge in order to generate the same revenue in a CPC model that they currently
generate through a CPM model; essentially they would have to charge more from campaigns with
higher than average CTR and lower CPM from campaigns with lower than average CTR.
So what would happen to the display advertising market if payment would switch primarily to CPC
schemes?
One possibility is that publishers would let advertisers and marketers choose whether they would
like to use a CPC or CPM. Clearly, advertisers that expect their campaign to underperform would
choose CPC, while those who expect their campaign to outperform would choose CPM (known in
economics as moral hazard). Thus, publishers will lose revenue from underperforming campaigns
and will not be able to recoup it from outperforming campaigns.
A second option is that publishers charge fees only using a CPC scheme. Then, about 73% of the
impressions in the market that achieve lower than average CTR, would pay less for the media in
Research Note | CPC will Curtail the Growth of Display Advertising Page 3
Copyright © 2010 Eyeblaster, Inc. All rights reserved.

4. their campaigns. The other 27% will pay more—a lot more. The effective CPM that would be
charged may reach close to $12.
This would have a devastating effect on publishers. Publishers will get significantly lower pay from
campaigns with below average CTR. As for campaigns with high CTR, when effective CPM
reaches high levels, marketers and advertisers are likely to run out of budget and cut back on
impressions. Thus, again, publishers will not be able to recoup their revenue from the
underperforming campaigns with fees from the outperforming campaigns.
In both scenarios analyzed here, publishers will lose revenue using CPC. Thus two effects are
likely to happen. First, lower revenues may drive some publishers out of business, and reduce the
media inventory. With reduced inventories, publishers will increase the price per CPC, which
would drive some campaigns to other channels. These two effects may inflict serious damage on
the prospects for growth of the online advertising industry in the future.
It is true that CPC works well in search. However, search is a very different market than display.
Search has very few large players, which excludes it from the definition of a competitive market.
Also, the availability of desirable keywords is limited, and thus allows for a bidding process to take
place. Placements in display advertising are more interchangeable, and therefore the supply of
premium spots is significantly more elastic. At the end of the day, for display advertising, what
may sound like an attractive proposition in the short run, can do an irreparable damage to the
industry in the long run.
Research Note | CPC will Curtail the Growth of Display Advertising Page 4
Copyright © 2010 Eyeblaster, Inc. All rights reserved.