What Happened to the Ad-Network Apocalypse?

Here's Why Most Are Still Surviving

By Published on .

Warren Lee
Warren Lee
Last September, Henry Blodget asked me and several other VCs on an panel -- titled "Dot Bomb 2.0" -- how many of the estimated 300 to 400 ad networks were "toast." (My personal view is that only 15 to 20 really matter.) Comments like "rampant consolidation" and "decimation" were used to describe the impending, inevitable shakeout that was sure to come.

Almost a year later, no apocalyptic shakeout has hit yet. So what happened?

Venture and private-equity investments in ad networks have been robust for the past several years. More than 60 ad networks -- vertical ad networks, video, brand, performance, wireless, gaming, behavioral, contextual, etc. -- have raised $1.5 billion in the past five years, and the top 25 firms have received almost $1.2 billion of that total, according to VentureSource. Significantly, more than 75% of the money has been raised in just the past three years. These funding numbers do not include the more than $250 million that was invested in other companies that have already exited (Adify, Blue Lithium, Quigo, Tacoda, Third Screen Media, etc.).

A handful of ad networks have indeed either shut down or been acquired for nominal amounts (Adzilla, Ad Infuse, AdEngage, Jellycloud, mSnap, NebuAd). A few others, like Peer39 (disclaimer: I sit on Peer39's board) and Ringleader Digital, have switched from building ad networks to selling technology instead. And a few are even thriving. Most, however, are merely surviving in this down economy.

Many of the less differentiated, standard graphical networks have not shut down, because they are easy to run with very little expense these days. Most of the lesser-known ones (and even some of the bigger players) are essentially glorified brokers that acquire their inventory on the exchanges. They hire a trafficker, a salesperson or two, sign a 5-cent-CPM contract with an ad server and find someone who knows how to bid the exchanges to stay in business. They don't need to invest significant resources in acquiring high-quality inventory or professionally managing relationships with publishers. These networks can generate a profit, enough to survive and to eke out a decent living.

Fundamentally, I would argue that the ad-network model still makes a lot of sense today and can be quite resilient. In particular, those ad networks that develop proprietary technologies and offer truly differentiated solutions are the ones most likely to be successful.

The basic reasons why so many ad networks are surviving:

  • Online usage continues to increase and, according to a recent Forrester survey, has reached an average of 12 hours per week. That provides advertisers and agencies with strong incentives to move more of their ad spending online.

  • The number of online sites and publishers continues to increase rapidly, which makes it increasingly difficult for advertisers and agencies to decide which sites to work with. Ad networks can help sort through this bewildering number of sites and target those that are most relevant and appropriate for their clients.

  • Online viewership/time spent continues to fragment, so advertisers and agencies can't just work with the largest portals -- even those sites are losing their primacy with the surge in popularity of other sites such as Facebook and Twitter -- and top vertical sites to achieve its campaign goals. With agencies today struggling with tighter margins and needing to do more with less, many find it easier to work with a few ad networks than a number of individual sites.

  • Most online publishers still find it difficult and lack the expertise to find, qualify, hire and manage ad-sales executives, which is a reason why many smaller and midsize online publishers turn to ad networks to help handle this activity.

  • Through sophisticated analytics and advanced targeting/optimizations, some ad networks can deliver attractive audience demographics at scale. This aligns with the intended goal of most advertisers' media plans. As long as the content is proven to be "brand safe," the exact category of the content often is secondary to demographic profile for many advertisers.

  • Price -- ad networks can offer advertisers more cost-efficient pricing than direct publishers can afford to charge. While large publishers justly sell their premium brands at high rates driven by scarcity of inventory, networks can aggregate smaller, less popular sites (with very similar audience characteristics) that do not command the same price premium but can deliver scale. Many agencies/advertisers will continue to prioritize reach and price efficiency equal to or greater than premium-content adjacency.

I believe that, in the next few years, many ad networks will survive but relatively few will flourish and become great businesses with compelling economics. The former group will remain undifferentiated (in terms of technology, focus or services) and compete primarily on price, leading to the continued commoditization of pricing and tighter margins. The latter group will target attractive segments in which they can achieve critical mass and build true barriers of entry through proprietary technologies, value-added services, advanced analytics and reporting, scale operations, etc. This is hard to do but financially rewarding if you are one of the few who can do it, which is why I personally continue to be fond of the ad-network business model (disclaimer: I sit on the board of Tremor Media, the premium-video ad network).

Ironically, the fact that it is easy for most ad networks to generate some level of revenue will likely persuade many of their investors to continue to fund these companies. Better to fund a company that has some revenue but is unlikely to achieve venture-like returns than to admit defeat and to pull the plug. Unfortunate, but true. It will be interesting to watch.

Ad Networks: Venture and Private Equity Investments

Company Total funding (in millions) Date of first funding Past 3 Years (in millions) % Raised in past 3 years
1 Glam Media $124 July '04 $95 76%
2 Specific Media $110 June '06 $100 91%
3 Adconion Media Group $86 Jan. '05 $85 99%
4 AudienceScience (Revenue Science) $74 March '00 $0 0%
5 Federated Media $57 June '05 $55 95%
6 ContextWeb $52 June '04 $40 77%
7 Gorilla Nation $50 May '07 $50 100%
8 IGA Worldwide $48 Oct. '05 $30 62%
9 Adknowledge $48 March '06 $0 0%
10 AdMob $47 Sept. '06 $43 92%
11 Tremor Media $40 Sept. '06 $40 100%
12 Undertone Networks $40 March '08 $40 100%
13 Turn $38 Jan. '05 $23 61%
14 Double Fusion $37 Aug. '04 $26 71%
15 AdBrite $35 Sept. '04 $23 66%
16 VideoEgg $34 April '05 $30 88%
17 Kontera $33 July '06 $33 100%
18 Vibrant Media $32 July '00 $0 0%
19 Heavy.com $30 Dec. '05 $20 67%
20 Quattro Wireless $28 May '07 $28 100%
21 Grab Network $27 Feb. '05 $19 70%
22 Ripple $26 Aug. '06 $26 100%
23 Collective Media $25 Oct. '07 $25 100%
24 Adap.tv $24 Jan. '07 $24 100%
25 Lotame $23 Feb. '08 $23 100%
Top 10 Total funding $697 $497
Average funding $70 $50
Top 25 Total funding $1,168 $878
Average funding $47 $35
All companies Total funding $1,491 $1,139
Warren Lee is a venture partner at Canaan Partners, where he leads digital-media investments, specifically in the New York corridor, from Canaan's Connecticut office. Previously he was at Comcast Interactive Capital, where he led the media firm's investments in several global technology companies. In the name of full disclosure, he has invested in and serves on the boards of several media and advertising startups, including Associated Content, Motionbox, Peer39, Tremor Media and Vivox.
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