A New Silicon Valley Rule? All Great Internet Cos. Build an Ad Network

Even Publishers Who've Bemoaned Networks Have One

Posted by Tod Sacerdoti on 11.10.09 @ 05:20 PM

Tod Sacerdoti

The evidence is inescapable: Google, AOL, Yahoo, MSN, Fox, CBS, Facebook, MySpace, LinkedIn, Cox and many more all have networks of ad placements. In fact, even Forbes.com, the single most vocal publisher about the negative impact of ad networks, launched the Forbes Audience Network in late 2007.

For the purpose of this piece, I am defining an ad network as a product that connects advertisers with properties that want to run advertisements (websites, applications, etc.), typically with some form of automation and advanced targeting (site, user or geographic).

Responding to Reach
Publishers' attraction to the ad network model begins when they realize that, as a single media property, their ability to tap into advertising budgets is inherently capped. Publishers consistently hear from advertisers that they lack the reach, pricing flexibility or targeting necessary to increase their share of campaign budgets. Publishers launch ad networks as a response, and in doing so, demonstrate the inevitability of the ad network decision for an online media property.

The first question a media buyer asks a publisher is, "What is your reach within my target demographic?" Outside of a limited number of properties (12 to be exact, including Yahoo, ESPN and CNN), most media properties do not provide more than 25% reach on the internet. As a result, nearly every publisher is individually irrelevant -- they only matter in aggregate -- and, in turn, sites are forced to offer value-add inventory, custom integration or sponsorship opportunities to stay in the game.

Ad networks, on the other hand, have significantly more reach than individual publishers for nearly every target demographic. This is the reason that all the top properties in ComScore's Ad Focus report are ad networks in some form. Media properties must organically grow their audience, launch an ad network or buy an ad network to compete with those already in existence. Due to the high cost of content creation and marketing required for audience growth compared to the minimal risks of either launching or buying an ad network, most publishers opt for the latter.

Additionally, ad exchanges have a major impact on ad networks' reach, but not in the way most people expect. Ad exchanges commoditize access to inventory, significantly reduce waste and allow ad networks to pay less to reach the right user. The exchanges are technology platforms that massively favor networks (technology companies) vs. publishers (media companies). Ad exchanges largely make it that much harder for publishers to compete.

The Targeting Challenge
The second question a media buyer typically asks is, "What type of targeting do you offer within my target audience?" This query speaks to the core of the publisher's challenge, as their goal is to sell their whole audience as the target rather than slice and dice their inventory into even smaller pieces. Once the discussion delves deeper into data targeting, retargeting or performance optimization, most publishers are left with a tiny budget, if they are still on the plan at all.

On the other hand, ad networks are able to leverage their massive reach and standardized ad serving across multiple properties to better address targeting needs. By drawing inventory from hundreds of publishers, networks can precisely target audiences with more total reach than any individual publisher on the buy.

The Price Advantage
The third question a media buyer asks is, "How much does the inventory cost?" Strong publishers generally have strict pricing tiers. However, they know that a huge (and growing) portion of the ad budget for most campaigns will be placed in much more efficiently priced inventory -- sometimes as low as 10% to 20% of a media property's rate card. As a result, the publishers continue to face price pressure and a reduction in their budget share.

Ad networks don't struggle from this rate card handicap because they have much more flexibility around inventory pricing and pricing models in general. Additionally, as they grow, networks' leverage over publisher inventory often also increases, making finding efficiently priced inventory even easier. There is a lot of evidence that the larger a network gets, the more control it has over publisher inventory. I don't mean to imply that this leads to exclusives, or that networks aren't drawing from similar pools, but fundamentally, the more inventory (and total dollars) is managed by networks, the more publishers become dependent on them. In addition to the clear benefits of flexibility, publishers have long been on the receiving end of this power dynamic and understand its self-reinforcing effects.

Examples of this shift of power abound. In search, Google can basically dictate any revenue share for search deals. In display, vertical networks such as Jumpstart, Glam, Federated Media and others have increasingly gained access to more and more premium inventory in their vertical while simultaneously paying lower revenue shares. And in traditional display, Yahoo went from not working with networks, to working with networks, to buying networks. Today, their entire display ad strategy is dependent on networks working with them through their Right Media Exchange.

In addition to the above challenges, the largest media properties (Yahoo, AOL, MSN and Google) must contend with budget share issues. Essentially, no matter how strong Yahoo's behavioral targeting may be, most media buyers are uncomfortable with any one property representing more than 25% of the budget. As such, the largest properties use their internal ad networks or exchanges to get a larger percentage of the total ad budget, either by selling inventory off their core site as part of a network offering or, more commonly, by allowing external ad networks to buy the same campaign on their inventory at a reduced price.

Publishers Come Full Circle
The inevitability of publisher ad networks exposes a fascinating contradiction: The industry pundits who originally mocked ad networks are now the same publishers launching or buying ad networks. Look no further than Fox, which in 2008 began a process disallowing ad networks from selling Fox inventory to certain advertisers or buying at all on MySpace, and then proceeded to replace them with the Fox Audience Network, which is 100% owned by Fox and has aggregated inventory and data from across the FIM properties (MySpace, IGN, American Idol, etc.) to create an aggregated ad network. (Incidentally, by digging into ad tags running on Facebook, we've observed Fox also sells some Facebook inventory through the same pool).

Furthermore, publishers that have launched ad networks often see benefits beyond their ability to get more ad campaigns and control a larger percentage of the ad budget. Many gain experience with automating their media buying and trafficking processes, creating significant economies of scale from increased ad serving or sales per person. Over time, they begin to experience the benefits of increased market power, which leads to better inventory pricing and overall margin.

In the end, the adage "all great internet companies eventually build (or buy) an ad network" will be realized and this topic will no longer create such a stir. In the meantime, I recommend you come up with a generic brand name (Twitter Media Network), buy your domain name (SkypeNetwork.com), map out your differentiated ad network strategy (you can start with audience extension) or buy one of the big boys before they go public (I think Specific Media, Adconion, Adknowledge, Azoogle, Collective Media and Tribal Fusion are still available). If not, maybe you aren't such a Great Internet Company after all.

8 Comments

  By RICH | MILL VALLEY, CA November 10, 2009 10:28:13 pm:

Truth is that this fad has been going on for the last few years in the startup world. That's because selling a technology platform with a licensing fee or a revenue share is a tough way to make a lot of money (I avoided saying the word "scale"). Media and networks are a better way to make money for a startup's technology (avoided using the word monetize).

The challenge becomes transforming a technology company into a media company, which is a lot harder than it looks. Companies can't be both--they need to be either media or technology companies. If there's a question what your company is, just follow the money and look at how you generate most if not all of your revenue. Even Eric Schmidt is beginning to realize that Google is a media company, and not a technology company, as they have staunchly defended for years.

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  By ARI | NEW YORK, NY November 11, 2009 11:24:30 am:

Tod,

As one of the "pundits" who has been saying engaging an independent ad network to sell off unsold inventory is a bad idea for any publisher who has their own direct sales team, I found your piece to be extremely well written, supported well by market insight, but misleading in one key area -- when publishers create more scale via their own "branded network" they are erasing some of the obstacles you refer to, but by doing it on their own, they eliminate the issue of channel conflict -- the "person" or people responsible for selling this lower priced inventory if different from the "premium sales team" will not call on accounts that are being covered by another rep -- so it can work but only under this scenario -- any other "arrangements" will always result in a bad experience for the publisher and not worth the short term revenue gains initially.

I am still not sure I agree with you but you did make your readers a lot smarter so thanks for sharing your insight.

Ari Rosenberg
Mediapost Columnist

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  By todsac | SAN FRANCISCO, CA November 11, 2009 11:29:23 am:

Ari,

Thanks for your comments. I agree with you that channel conflict is the underlying core issue here and sometimes this is sold via branded networks. However, in a large number of the cases, these internal ad networks end up being run like separate companies with separate sales teams and advertiser relationships. Ultimately, the same channel conflict issues emerge internally.

Regardless, I think the maxim still applies but addressing sales channel conflict should be added to the reasons why it is so often true.

cheers,
tod

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  By zach | sf, CA November 11, 2009 01:45:54 pm:

Tod,
Great article, very well written. My company, Triggit, powers a lot of publishers that use exchanges to extend their reach and aggregate more volume of their audiences. For them one of the most exciting things is that they can use the data they capture about a high value audience segment to reach those people and similar targets across the whole web. Now that real time bidding on the exchanges has made it possible to transparently reach the right audience at scale, they can project a much larger footprint. It is a very interesting twist in the market that will be fun to see play out.

Keep up the great work
Zach

Triggit.com

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  By NavigateBoomerMedia | Santa Monica, CA November 11, 2009 02:30:34 pm:

Hi Tod, Thank you for your insightful and informative article on ad networks. Many small and mid-size publishers cannot afford to hire a sales team nor do they have the traffic and impression volume that advertisers require today. By creating an ad rep firm, our preference over the term ad network, we give the small and medium size baby boomer rich content publishers a voice to the advertisers and marketers.

We now represent 76 baby boomer publishers and deliver 74 million baby boomer impressions. Advertising agencies and marketers such as Del Webb, Ally Bank, UnitedHealthcare like our one invoice, one point of contact service. Baby boomers control 70% of America's wealth and purchase 41% of all new cars, 60% of health care products and services, 74% of prescription drugs and 80% of luxury vacations.

As you discussed media firms have flip flopped on ad networks value - because they are undefined - some sell remnant space, there will always be remnant space on a website. Ad networks don't understand their value when they charge single digit cpm's for a premium audience and understand they deliver immediate metrics - something print, radio and TV will never be able to do.

Thank you for your article and understanding of this important service for publishers and advertisers.

Nancy
CEO, Navigate Boomer Media

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  By nozzlsteve | Portland, OR November 11, 2009 05:10:58 pm:

Tod,

I would add a corollary: All great local publishers should build an ad network. Local markets mirror national markets in that advertisers want one-stop shopping for newspaper, TV, radio, online and mobile buys. If I were a revenue-hungry newspaper, I'd be happy to sell ads not only in my pages, but on my web site and anywhere else the customer felt they wanted a presence. I blogged about this today (http://nozzlmedia.com/2009/11/10-more-things-newspapers-can-learn-from-tech-world-part-ii/) and suggested that newspapers "become the competition."

Steve Woodward
CEO, Nozzl Media
nozzlmedia.com

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  By SCOTT | SAN FRANCISCO, CA November 12, 2009 10:09:33 am:

As the internet continues to fragment into smaller niche sites and creativity and innovation continues to be fostered by the accessibility and low overhead of web publishing, it becomes critical for large and small media companies and publishers to 'partner' up in order to provide significant reach to sponsors. This a growth trend, fragmentation will surely continue for years to come forcing even more media companies to embrace partnership with independent web publishers.

My company, 47 Media, builds ad networks for media and technology companies. Our clients leverage one of the several great licensable ad network technology platforms available in the market and are able to compete directly with their competition for ad dollars and bigger budgets thanks to building a partner network.

Scott Swanson
Principal, 47 Media, Inc.
http://www.47media.com

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  By joellegk | San Bruno, CA November 12, 2009 08:32:44 pm:

Tod - you are absolutely right. Premium publishers must compete on the amount of time they can bring their advertisers to their audience in quality environments. We've added our thoughts - http://web.adifymedia.com/site/there-s-more-to-just-reach/

Adify identified this opportunity for media companies and entrepreneurs in 2005 and built the most relied upon platform for creating vertical ad networks. The challenges faced by large and small publishers as they collaborate are best served by network-optimized ad serving, reporting and integrated solutions.

But this strategy also requires expertise that often does not exist within the publishers themselves. It is not as simple as just partnering with a few sites. Prospective network builders should seek out partners with experience, expertise and services to help ensure the success of their new network.

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