Big Advertisers Look to eBay for Help

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A coalition of some of the largest TV advertisers, including Wal-Mart (NYSE: WMT), Microsoft (Nasdaq: MSFT), Hewlett-Packard (NYSE: HPQ), and Home Depot (NYSE: HD), announced late last week that they would pony up a combined $50 million and enlist eBay (Nasdaq: EBAY) to help them construct an Internet auction site for TV ad time.

When fully implemented, the system, dubbed e-Media Exchange, could shift power toward the advertisers and drive down advertising costs by making the ad-sales market more transparent. In essence, the system would create a trading system akin to the Nasdaq Stock Market.

As the current system functions today, the networks hold most of the power and often keep advertisers in the dark about demand. As such, a vast majority of the prime-time ad inventory is sold months ahead of time, and advertisers are forced to pay rates that bear little relationship to demand. The system is so bad that some advertisers, including Johnson & Johnson (NYSE: JNJ), have simply opted out. Under this new system, advertisers would post their media plans on e-Media and then invite bids from networks and cable channels.

Many of the networks, such as NBC -- which is owned by GE (NYSE: GE) -- have been cold to the idea, fearing that it will commoditize their advertising inventories.

e-Media representatives, however, argue that the system will still allow sellers to set the price -- in much the same way that people on eBay can set their price -- and potential buyers are free to bid or not. They further argue that the price can just as easily be bid up as down, a fact to which anyone who has ever bought or sold something on eBay can attest.

From this perspective, the creation of this system should be a win-win for everyone. Advertisers are likely to get lower rates for off-peak and less popular shows, while the networks should be able to charge higher rates when viewership is high.

All other things being equal, though, I believe that there is so much inefficiency in the current advertising system that the creation of this new "Nasdaq-like" system will tilt power in favor of the advertisers. More importantly, from the perspective of the individual investor, the benefits should also trickle down to the shareholders of those corporations who utilize the new system to cut their advertising costs.

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Wal-Mart, Home Depot, and Microsoft are Inside Value recommendations. eBay is aStock Advisorselection. Johnson & Johnson is anIncome Investorpick.

Fool contributor Jack Uldrich has a DVR, and tries to watch as few ads as possible. He owns stock in Intel, Microsoft, and GE. The Fool has a strict disclosure policy.