I got a lot of constructive and encouraging feedback about my post – Ad Networks: Dead or Alive? In general, there was consensus that a shake-out is likely. In order to survive, ad networks will need to determine where/how they add value beyond aggregating inventory as that function is being usurped by the exchanges.
In this and subsequent posts, I will attempt to address some of the questions/issues raised.
First, there are several questions asked about how the business model of the ad networks that survive will evolve. As indicated earlier, I think that there will be 3 broad buckets.
The largest (i.e. top 10) ad networks will expand beyond display into various forms of digital media, and possibly even cable/broadcast and will begin to disintermediate agencies. In some cases, they will even begin to out-source marketing through a performance based contract. The analogy that comes to mind is the ODM business model whereby companies like Flextronics have taken over entire manufacturing functions for large consumer electronics companies. Also, many of these ad networks will begin to provide exchange like services, opening up their inventory to automated bidding systems.
The second category is the “hedge fund” model. This is an evolution of the current arbitrage based lead generation model whereby networks with proprietary data or algorithms begin to build a book of business buying and selling media across exchanges similar to the ways funds buy and sell stocks. Key to scaling model will be the development of more sophisticated exchanges which offer futures and options which is a few years away (IMHO).
In addition, I think there is still a role for boutique ad networks that can offer something unique. What does that mean ? Well, here are some possibilities.
I think that a GLAM like model could survive if it can continue to offer “portal scale” reach, maintain a high level of quality control (in terms of publishers, type of content, etc.) and provide a 20-30% discount on portal prices
Monetizing social media continues to be a challenge. If networks like Lookery can find ways to decipher purchase intent across social networks/blog networks and create category focused inventory bundles, I think they can build a viable business
New media types will have unique requirements that exchanges will not be able to meet and individual publishers will lack scale to sell directly. In these cases, there will be role for ad networks. In game advertising, 3-D advertising, and possibly even video could fit into this bucket. The obvious question here is how big these business can become ? And how they sustainable are they ? For example, will there be stand alone video ad networks 3 years from now ?
The second broad theme in the questions was around what other business models will emerge as a result of this transformation. What is the opportunity for entrepreneurs ? I think that exchanges will create a whole new eco-system around them. Possibilities include:
Data networks/exchanges like Blue Kai and OpinMind
Buy side brokers/optimization service providers like Rubicon Projects and Pubmatic
Sell side brokers/advertiser facing service providers like Teracent, AdBuyer and Invite Media
Marketplaces that enable free lancers/boutique firms to access buyers of services such as creative construction and analytics/reporting
There are probably a host of other products and services that can be wrapped around exchange platforms. If you have any ideas, I would love to hear about them at agarg(at)foundationcapital.com