#78: MFA B-School Case Study
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Reading Time: 9 Economic Minutes
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Crossing the Line: Forbes' Contribution Margin Dilemma and Digital Advertising Ethics
In a well-lit conference room, Forbes’ executive advertising team gathered around a glossy mahogany table, each member acutely aware of the weight of the decision before them. The air was thick with tension, as the stark reality of their financial predicament lay bare on the screen: dwindling ad revenue growth and mounting competitive pressures with their audience increasingly scattered across cheaper competing inventory sources along with a contribution margin tipping into negative territory.
"The landscape has shifted dramatically," one senior executive began, breaking the uneasy silence. "Our premium pricing model is a relic of the past. We all know that much. Programmatic advertising has democratized access to our audience, and they're no longer exclusive to us."
Brief History of AdTech and Publisher Relationships
Starting around fifteen years ago, publishers like Forbes let adtech in the front door, back door, basement window, etc. What was once an uncluttered ad server is now a tangled mess. They used to have a healthy, sustainable, and predictable Contribution Margin but those days are gone now.
One day, adtech players realized the publisher’s healthy margin was their opportunity. And they took it. As they say, “All is fair in love and war.” In that sense, publishers are prisoners of their own making. So be it. That’s how competitive markets work.
By 2024, things changed. There was a new glimmer of hope for publishers to regain bargaining power and take back their contribution margin. 3PD cookie deprecation is like a magic key to getting out of prison. Publishers “own” their relationship with audiences and the first-party data that comes along with it. If they can organize and coordinate it, then they can take back control. Given past precedent, that’s a big “if.”
At the same time, adtech is looking to get its hand on the key and hang onto the industry earnings (e.g. margin) they’ve already gained. They have shareholders and stakeholders too.
Back To The Board Room
In the distance, Hotel California by The Eagles is playing outside the conference room…
"Relax", said the adtech man, You are programmed to receive You can check out any time you like But you can never leave."
Nods of agreement rippled around the table. It was a truth they had all come to recognize, albeit reluctantly and slowly. It was like watching a car accident in slow motion. Forbes’ challenge was not just about competing for ad dollars, it was about survival.
The director of ad operations chimed in, "We need to innovate our revenue streams. We need to explore uncharted territories. Desperate times call for desperate measures. The only question is: How far are we willing to go?"
The room fell silent. The moral implications of their next steps were hanging in the balance. It was at that precise moment when the concept of leveraging an MFA approach was introduced. It would solve the problem and plug Forbes’ revenue hole quickly, but it also meant taking a giant leap of faith. It meant taking a big risk.
Behaviroal Economics 101: The funny thing about evaluating risk-reward is how decision-makers tend to overvalue reward and underestimate risk.
The big cheese in the room took it forward, “Sam, show them what you came up with.”
Sam’s proposal was laid out with clear numbers and projected outcomes, promising a significant boost in revenue. The strategy was simple: drive traffic to a hidden subdomain branded as “Forbes,” fill it with hundreds of ad impressions that get sent to auctions, and capitalize on the easy money and demand for cheap-reach inventory that drives a significant share of digital advertising.
There was little perceived risk that buyers would even blink. Verification vendors would never catch it because their tech is not designed to look for this kind of anomaly.
The Economic Conundrum
“Thanks, Sam. Now Charlie is going to take you through the numbers. Everyone here is going to get a refresher on how we make money. And let me remind you, that’s what we are here to do. We are a business after all. Take it away Charlie.”
“Okay guys, let me first break down the broad strokes for you.”
“The whole point of any business including this one is to price our goods at or above the marginal cost. We sell ad impressions. That’s our unit of production.”
A mid-level ads ops manager piped in, “What does ‘marginal cost’ mean?”
“Good question Pat. Marginal cost is the extra amount of money it costs to make or do one more thing. Imagine you're baking cookies. You already have your oven on, the kitchen set up, and you've made a batch. Now, if you decide to bake just one more cookie, the only extra costs might be a little more dough and a bit of electricity. That extra cost for one more cookie is your marginal cost. If you sell your cookies at your marginal cost, you make what’s called a normal profit, typically around 10%. Any time you can reduce your marginal cost and keep prices the same, or even raise, the more money you make.”
Charlie carried on with a few more slides. “Price minus Marginal Cost is our Contribution Margin. We want to maximize it, but unfortunately, we’re going the other way. That’s not good.”
“Next up we have Fixed Costs. That’s mostly you guys and everyone else. Throw in overhead costs like rent and a few other things. As a general rule of thumb, people costs are around 70% of total fixed costs in the type of business we are in. Don’t freak out, but we have high fixed costs across our 500 employees.”
Charlie flipped to the last slide. “Fixed Cost divided by Contribution Margin gives us the number of ad impressions we need to sell in order to break even. And guys, here’s the rub, we are no longer breaking even so something has to give.”
Instructor’s Notes and Unit Economic Example
Let’s break down Forbes’ predicament using basis econometrics (aka “cost accounting” or “managerial economics.” Any adtech company can and should run this analysis. All you need is three columns of time series data like months or quarters:
Ad Impressions Sold in the Period = that’s your economic unit of production
Total Cost in the Period = From an accounting perspective, take the Cost of Revenue + SG&A + R&D + Interest + Depreciation + Amortization. You can also take Revenue – TAC – EBIT and get to the same number.
Total Revenue in the Period = Gross Revenue – TAC
At some point in time, creating and selling online ads was easy. Publishers like Forbes were generating cushy contribution margins. Let’s assume the following:
Fixed costs = $100 (mostly people-related costs). When you run the regression model, the Y-intercept gives you your true fixed costs. Note that some fixed costs are hiding in what accountants book as variable costs and some variable costs are hiding in what accountants book as fixed costs. The regression model shakes the apples from the oranges.
Variable cost = $5. The slope of the regression line is your true variable cost (cost per 1000 impressions).
Let’s the average revenue (aka price) per 1000 impressions = $10. You can run the same analysis to get an estimate of the average price for units sold. All you need is the same time series with total revenue (e.g. monthly) and units sold. The only difference is that you have to force the y-intercept to equal zero. If you sell zero units, you generate zero revenue.
In Excel or Google Sheets, use Linest (Y range, X range),0,True to force Y-intercept to zero. Therefore, the contribution margin is $5 ($10 price – $5 variable cost).
With a fixed cost of $100, the number of units required to break even is 20 ($100 ➗ $5 = 20 units).
Given $5 in contribution, the publisher’s contribution margin is 50% which is cushy. That’s a nice business.
As time went by, things changed for premium publishers like Forbes that were used to selling out inventory at a $10 CPM. Once programmatic audience targeting came into vogue based on a kind of “free rider” opportunity called the 3rd party cookie, everything changed. Some people call it data leakage and others call it a race to the bottom, but they are really talking about the same thing.
Third-party cookies were essentially a free raw material for adtech companies to stake their claim. When publishers allowed 3rd party pixels from all kinds of adtech vendors inside their walls and their pages, their audience data leaked away.
See “Gravity Theory of Walled Garden Data Trades” and why walled garden business models are the place to be versus the open web model that gave birth to adtech.
From the perspective of an adtech company’s advertiser customers, they could leverage this free good to find audiences on all kinds of long tail websites for $2 instead of paying premium publishers like Forbes (with great content) $10. Again, that’s the nature of competitive markets, alternatives, substitute goods, and the concept of bargaining described in Porter’s Five Forces.
Slowly but surely, premium publishers feel the squeeze. Their competitive instincts to survive kicked in and adrenaline takes over.
Before you know it, a $10 market price slims down to $6 but their marginal cost is still $5. As you can see, whoever has the lowest marginal cost structures also has the best chance of taking margin and market share.
Upon reaching this point, publishers have a new situation on their hands. A foreign situation. A duck out-of-water situation. That cushy 50% contribution margin they used to enjoy is now just 17%.
$6 Price – $5 Marginal Cost = $1 Contriution Margin
$1 Contriution Margin ➗ $6 Price = 17% Contributio Margin in percentage terms.Here’s the rub. Fixed costs remain the same at $100. That means break-even units sold went from 20 to 100 — a 5x increase. Publishers in this situation are getting a real-world Titanic experience. While the captain’s confidence in the integrity of the boat was beyond debate, it still hit an iceberg that nobody anticipated. The rest is history.
Behaviroal Economics 101: The funny thing about evaluating risk-reward is how decision-makers tend to overvalue reward and underestimate risk.
Getting Back to 50% Contribution Margin
So, what is the easiest way to regain the lost margin?
What did Forbes decide to do?
They leveraged an amazing brand name, created an MFA subdomain called www3.forbes.com, filled it with hundreds of ad slots, and set auto-fresh on high speed sending hundreds of impressions to unknowing buyers in programmatic auctions.
See Quo Vadis #64 “MFA Arbitrage & Math Model”
In one swoop, publishers like Forbes found a way to regain those 50% contribution margins. Voila. Bob’s your uncle!
In the end, they underestimated the risk of getting caught and ended up in a Wall Street Journal headline. The loss of brand value very likely outweighs the incremental revenue from MFA by a wide margin.
Case Study Student Questions
In one easy and inexpensive move toward MFA, Forbes aimed to reverse their contribution margin situation. The strategy was positioned as a short-term plug to right the ship. It was never meant to be permanent, but that is the fate of many “temporary” solutions. Once things normalized, the idea might have been to wean off the MFA plug, get back to selling legit inventory, and nobody would know the difference. That did not happen.
Ethical Analysis: Beneath the surface of these calculated moves lay the ethical quandaries that Forbes skirted.
Did adopting the same tactics as their less reputable counterparts betray the integrity Forbes had built over decades?
Did Forbes make the right choice in a time of self-preservation? What would you have done to re-boot contribution margin?
Is there a path to redemption for Forbes after deviating from their moral compass? If so, what is it?
Send your answer to to tom@lemonadeprojects.com with the Subject Line: MFA B-School Case Answer.
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Start from the idea that ‘premium publishers’ are a chimera dreamt up by publishers and reinforced by certain ad tech to arrive at the square root of what Forbes did what it did.
I suppose premium meant better editorial content (also false) a few years ago and now means less ads (mostly false)
You don’t need to know accounting to understand content is a commodity that multiplies exponentially every day in both size and ease to create.
That premium is subjective.
That value is knowing the user.
And that there is significantly - like 100’s of orders of magnitude - more demand than supply.