Its funny how quickly perceptions change. A year ago, ad networks could do no wrong. Investors funded several hundred of them. Cox bought Adify, an “ad network in a box” technology provider that helped spawn many of these networks for $ 300 M in April 2008. Now, ad networks are suddenly considered the living dead, a sentiment cogently articulated by none other than the WSJ a few weeks ago in this article – http://online.wsj.com/article/SB122514803617173825.html
Clearly the climate has changed and advertising spend is expected to decline in 2009. At Web 2.0, Mary Meeker predicted that a flat GDP would result in a 4 % YoY decline in ad spend. And on-line spend cannot be isolated from that, especially since financial services, automotive and retail are the 3 largest spenders on-line.
Yet, lets not forget that ad networks serve a critical purpose. They aggregate inventory across 1000s of publishers and re-package that inventory to create “advertising products” (as distinct from engineering products) that target specific advertiser needs. They enable the more than 900 B (yes, billion) impressions that are generated in the US alone to be monetized, especially in a world where the premium publishers (Yahoo, MSN, etc.) are loosing share of voice (see chart below for global minutes share data). Without ad networks, the web as we know it could not be sustained – all those publishers do need a way to be paid for their labor, and ad networks provide that. And while on-line ad spend growth is slowing, absolute spend is not declining. Advertisers continue to need help in navigating the complexity of buying on-line media, and their existing agencies lack the skills to help them. Hopefully, by now, you are convinced that ad networks have a rightful role in the world. If not, take a minute to read a post by Chris Weiss (of Lucid Media) that makes the case for continued proliferation of ad networks – http://www.imediaconnection.com/content/20779.asp
Source: Mary Meeker’s Web 2.0 presentation
Well, having hopefully established that ad networks have a rightful role in the world, I wish I could say that all is well in the world of ad networks. In fact, I do think that ad networks are under threat, but not from the economy. Rather, the advent of ad exchanges like Right Media (now owned by Yahoo) pose substantial (and more fundamental) challenges for the business model of ad networks – by increasing transparency and liquidity in the marketplace, they raise the bar for networks, in terms of the value they need to add to raw inventory to justify their margins.
I do think that the networks which lack differentiated data driven targeting capabilities face a tough future. At the same time, there is role for ad networks in this new world (of ad exchanges), and many (but not all) ad networks will cross the chasm.
The line between large agencies and ad networks will blur with the top 10 ad networks evolving into full service advertising solution providers that will deliver to advertisers leads, sales or what ever business goal they seek to achieve at a pre-negotiated price. Doing do will require the networks to substantially expand their account management/client servicing capabilities, build deep integrations into the exchange to tap into large pools of inventory, and build structured finance like skills to create specialized ad products (where networks assume more risk in return). At the same time, marketers will need to learn to quantify their needs and to set and manage relationships where they out-source more and more of their responsibilities. Maybe, marketers can learn a thing or two from their supply chain counterparts! Do take a minute to read this post by Tom Hepos that also makes the case for ad networks becoming more like agencies – http://www.imediaconnection.com/content/20912.asp
Some of the smaller tech savvy ad networks will morph into hedge fund like businesses whereby they apply unique algorithms to capture arbitrage opportunities. These are likely to be boutique businesses as markets become more efficient, and the next generation of PhDs set up their own advertising hedge funds.
There is a role for networks that can offer advertisers with portal like reach for targetted audiences AND contexual quality control. If such networks can aggregate high quality niche targetted sites/blogs, build quality control content filters/tracking and provide advertisers with transparency into where their ads are being posted, they could emerge as worthy competitors to the portals.
For the rest, well…it was a character building experience.
Equally importantly, this evolution will create new opportunities for start-ups. If you have ideas, do drop me a mail at agarg(at)foundationcapital.com