Get Ready for the Coming Land War in Online Display Ads

Too Many Players With Too-Small Margins Will Trigger a Wave of Consolidation

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Tolman Geffs
Tolman Geffs
Online display advertising -- an $8.7 billion market in 2010 -- is undergoing change at a pace not seen since Google transformed search and invented PPC advertising. The change is welcome, as display catches up to the market for search advertising in terms of efficiency and targetability. But, the transformation will bring a sharp struggle for margin in the online ad delivery chain, leading to a new wave of digital M&A.

Online display, primarily a brand advertising medium (as measured by revenue), has traditionally been sold on the basis of sites and specific media placements, or via ad networks that aggregate sites into vertical channels. Now, with the evolution of online ad targeting techniques and the rapid growth of a market for consumer targeting data, it is increasingly common to sell advertising on the basis of audience, reaching individual web users based on specific data about that user. The data -- behavioral, demographic, geographic and contextual -- is generally persistent and useable across ad campaigns via a tracking cookie.

This user data is derived either directly from publishers or via data specialists, such as BlueKai, Bizo and Exelate, who in turn collect the data from marketers and publishers. The execution of audience-targeted campaigns is facilitated through ad exchanges like DoubleClick's AdEx and Yahoo's Right Media, through audience-focused ad networks, such as Collective, Specific and InterClick, through data-crunching demand-side platforms like MediaMath and Invite, and through agencies' own efforts at building data pools, such as WPP's B3. We estimate that approximately 20% of online display media is sold today on an audience-targeted basis, with 80% sold site-specific, and the former is growing rapidly.

Of course, the sale of site-specific advertising by publishers is not going away by any stretch, and publishers offer value like guaranteed flights, premium placements, integration and sponsorships that audience-focused media sellers usually cannot. However, publishers generally cannot sell their entire inventory, and more importantly, advertisers are adopting audience targeting in a big way. So, both site and audience sales will be important to most publishers going forward. The downside for publishers is their traditional display advertising value proposition -- premium content plus efficiency in reaching a particular desired audience -- is partially eroded by these alternative, less expensive ways to reach a target audience.

Rise of Targeting chart

Rise of Targeting

The implication of these developments is an increasingly crowded value chain. The accompanying chart, while illustrative, shows how media spend flows through each of these specialists. (Note that this is for the audience-sold part of the market; the CPMs and value chain for site-specific sales are typically more favorable to the publisher.) New participants are putting added pressures on the margins of the incumbent players; hence, the ongoing "land war," as these groups elbow among themselves for a place at the table and squeeze publishers' share of the advertising spend. Clearly, something has to give.

The initial response of some publishers is "heck no, we won't go" -- they will neither sell inventory into the audience pools nor work with ad networks. Owners of the most sought after premium ad inventory can, perhaps, afford to take that stance, but in our view the "heck no" approach is short-sighted. If advertisers want to buy on an audience basis, the question for publishers should not be "if" but "how." At a minimum, sophisticated publishers should look to ingest data about their users from external sources to better target their own site-specific ad sales. Furthermore, most publishers should consider leveraging the data cloud to reach premium audiences across ad hoc networks of affiliated sites or more broadly across the web, to help achieve coveted repeat impressions to their own highly desirable users. The technology for this is readily available today; it's really a challenge of skills and business approach.

We also expect an increasing number of publishers to think through their own "data value proposition" to complement their display advertising value proposition. After all, publishers originate virtually all of that user data. With cookie deletion running at about 10% per month, the data must be continually updated. Publishers control that stream of premium user data, essentially the oxygen supply to audience-based ad sales. We expect many publishers to view monetizing their data as an important supplemental revenue stream. That, plus leveraging the data cloud for their own sales, will allow publishers to win back at least a portion of the lost margins; again with the requirement of some different skills sets and tools.

At the same time, a number of other players will seek to consolidate and rationalize elements of the display ad delivery chain. Clearly, Google/DoubleClick and Microsoft will be major players, but we also expect a wave of other groups to join the fray, largely through acquisitions. For example, the Content Delivery Networks (CDNs) see an opportunity to be more than just a pipe; see Akamai's purchase of ad targeter Acerno and the acquisition by Limelight of video ad provider EyeWonder. Likewise, we expect data and analytics companies such as Omniture/Adobe, Acxiom, and Alliance Data Systems to get more deeply involved in the optimization and delivery of targeted display advertising. And of course the major agencies are investing in audience targeting capabilities and exploring acquisitions of advertising technology companies.

The net results will be positive, and not just for the investment bankers. The innovative tools and technologies to better target advertising have led to a proliferation of players and a tussle for margin. Consolidation will rationalize the value chain into larger groups that will deliver these services at fair but lower combined margins. Publishers will ultimately benefit from better pricing for audience-targeted advertising, and consumers will benefit from more relevant advertising.

Tolman Geffs, co-president of media investment bank The Jordan, Edmiston Group, represents digital media, marketing and technology companies. Mr. Geffs can be reached at [email protected].
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