Dot-com sea change forces ad networks to rethink strategies

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Online ad networks, hit by slumping stocks and a tightening market for online advertising, are under pressure to change their game.

The networks, a fixture of the online advertising industry, have inherent problems that need to be addressed, such as improving the effectiveness of ad targeting. The networks also are taking a hit as some sites take their work in-house. All of this comes as stock prices of the three largest ad networks -- DoubleClick, 24/7 Media and Engage -- have crashed about 90% from their 52-week highs.

One company that exemplifies recent moves to take ad business in-house is sweepstakes portal iWon, which re-evaluated its relationship with DoubleClick. CBS Corp.-backed iWon, which offers prizes to registered visitors, embarked last year with a limited staff and budget. At that time, it sought out DoubleClick's ad repping services to boost traffic to its site and spread its message, but at a reasonable price.

DoubleClick took over media planning and buying for iWon and placed ads across its network of sites. Within a year, iWon's traffic grew as did the business, but not entirely due to DoubleClick's efforts, said Evan Sternshein, exec VP-sales at iWon. He cited other, unspecified marketing efforts he said also built up awareness, traffic and advertisers for the site.


He said iWon now can afford to have more control over its media buys and realized the value in individual-site targeting, rather than network buying from an outsourced service. The company no longer uses DoubleClick for these services or for very much at all.

"DoubleClick still represents some of my run-of-site buys, but that's not a large portion of the advertising that we do," said Mr. Sternshein. "A lot of advertisers will use the ad networks for [run-of-site ads] and it's a cheap way to go. But when you buy cheap, problems can happen. If you have a brand name, it's much better to use targeted promotions and partnerships for higher returns.

"It's my belief that if you have someone else rep your property or brand," Mr. Sternshein said, "how do you know what clients are being told?"


Issues of control and low returns on investment for most run-of-site or run-of-network buying have become common for ad network services. Some say these issues are not entirely new, but the current environment has brought them more to the surface.

"A lot of [online ad networks'] problem is that they have over extended themselves, particularly with medium to large-size sites," said Chris Hansen, analyst with Banc of America Securities. He was referring to the all-inclusive packages networks often offer clients, everything from data-mining to e-mail and wireless communications.

Overall, ad networks haven't always directly addressed their clients needs, he said. As for DoubleClick and Engage, "I don't think they think how marketers think. Their main message has always been that they don't care how they reach a customer as long as they reach them. [Customers] need to be reached at the psychographic level and in the mindset to buy or respond to the ad."

Ad network services generally claim that their goal is to deliver the ad to the right people at the right time. Yet cases are cropping up in which ads play on certain sites that just don't make sense.

In April, made some site-specific ad buys on its own and also used the 24/7 Media network. The company's goal was to get its message out by targeting an audience that would be interested in knowing where they could go for all levels of information relevant to small and midsize businesses. Yet it found its ads on sites that didn't fit its brand or message. One site on which the ad ran was, a humorous, Generation X- and Generation Y-oriented site with sections devoted to such topics as rotted meat, bartending and take-offs on current events. Another was FortuneCity, a home page building site.

Other instances such as credit card and home mortgage ads appearing on teen sites are common. While he would not admit this kind of activity happens often on his network, 24/7 Media CEO David Moore sees this problem as par for the course. "This kind of thing shouldn't happen, but it does, and part of the reason is that targeting is just not as tightly delivered as it should be," Mr. Moore said. "This problem will also happen when a direct-response advertiser comes along, sprays ads across a number of different sites and waits 24 hours to test where the ads are gaining the most response before they can make specific buys."


Mr. Moore said his company hasn't lost any business due to these issues. But he did say online ad services, his company included, need to do a better job of demographic targeting and evaluation of individual sites. Aside from that, he is all for run-of-network buying over individual, or premier site, buys.

"Some sites need to be better validated in terms of their content and I think there is still the perception that we [as ad networks] are not high-end inventory. But we all have to continue to educate the advertising community that the network [buy] is more effective than a site buy due to the reach you have," Mr. Moore said.

"Yahoo! is a great example [of choosing a network buy over a premier-site buy]. Just look at the problems it is having holding its rate card [prices] on its site. This is not to say we don't favor premier sites; we have those as a part of our network."

Like Mr. Moore, DoubleClick VP-National Sales Greg Koerner said he has no knowledge of ads appearing in the wrong place on his network. But Mr. Koerner agreed online advertising is imperfect.

"I think the biggest problem right now is patience," he said. "People need to be more patient with this medium; it's still such a formative period and we can't address every issue."

Mr. Koerner also said DoubleClick has always tried to sell relevant advertising by site, category or technology, and "scattered, shotgun advertising just doesn't work. We are trying to move everyone away from that."

For his business as a whole, Mr. Koerner said he believes DoubleClick can be profitable through its multiple service and technology offerings, as well as its increased focus on traditional advertisers.


Mr. Koerner would not say whether income from dot-coms would become less significant for his company.

"We initially went after a lot of dot-com dollars, as well as some traditional advertiser dollars, and I think we prepared ourselves well for when things got tight. Our philosophy has always been to go after the huge, international advertisers," Mr. Koerner said.

Engage, another of the three largest online ad networks, has also revised its business model to compete, service marketer needs and work toward profitability.

"We've always thought the marketer is the one with the power, so we are innovating for them. Some of that is being done through buying and building (of other businesses)," said Paul Schaut, CEO of Engage. "We are most excited about synchronizing marketing at the site level and on the Web."

Mr. Schaut said licensed and subscription software will account for 45% of the company's overall revenue this year, whereas it typically accounted for much less.

"A year or so ago I believed everyone would outsource [for their online marketing needs], but the control of a brand's destiny is at issue and as companies get bigger and establish their brands, we are seeing more of a move to bring things in-house," Mr. Schaut said. "I'm a big believer in customer choice and in helping marketers generate results. With our company we make it easy to bundle a suite of solutions."

As for competition, Mr. Schaut said Engage also needs to adopt a model in which customers can bring certain tools and services in-house. He said he believes, as do other market watchers and analysts, that there will be further consolidation in the ad services space. "While there is always going to be need for niche services, I think that DoubleClick and Engage will be the main players and that innovation and good service will dominate."

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