AdSense is not free branding

Over at the excellent Searchblog John Battelle seems to have fallen for 24/7 Media's FUD campaign about AdSense and image ads. Just because the payment isn't based on CPM (pay per impression), doesn't mean that the advertising is free. Especially when Google will drop any image advertisment that yields less than a text-AdSense ad.

CPM or performance-based (CPC/CPA) is about risk allocation between the publisher, the network and the advertiser. Not about getting cheaper advertising, even though that might be the result.

The basic rule to remember in online advertising is who controls the number of advertisments shown and what the ads look like.

If the advertiser pays CPM the publisher show whatever advertisment the advertiser wants (within ToCs, of course) the number of times paid for.

If CPC/CPA the publisher decides how many times the advertisment is shown. If the advertiser doesn't pay enough, the publisher should show other ads. By pushing prices up via an auction (like Google does) or by direct negotiations with advertisers and by demanding better, direct-response oriented ads, the publisher increases its revenue as both CTR and CPC goes up.

To optimize profitability the publisher will mix CPM and performance-based, as few sites can sell all inventory at higher CPMs than the good performance-based deals can generate.