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Archive for March, 2010

 

Whither Ad Networks?

Tuesday, March 30th, 2010

http://www.flickr.com/photos/nickbilton/2709378784/

The Advertising Network business is dramatically changing due to massive market fragmentation.  It used to be that ad networks were “the way” that people acquired significant reach and met performance targets in campaigns.  Publishers chopped up all of their spot market inventory to dole out to a variety of ad networks and then the networks packaged and resold that inventory in a variety of reach/brand or performance bundles.

I have spent a lot of time thinking about how things will work out for Advertising.com.  After having worked there for many years and recently leaving, I wondered, “what will become of Ad.com?”  I have reached some conclusions that signal to me a dramatic market shift that will rock every ad network and result in the dissolution of most of the advertising networks we see today.  I expect the number of advertising networks to fall precipitously (less than 40?) in the next few years and the networks that survive will be far smaller.  The spot market is going to work a lot differently in the future: inventory will be acquired differently and the inventory will be sold differently.

First, the inventory that ad networks acquire today will be bought via exchanges tomorrow.  Publishers use yield optimizers to manage daisy chains today, but simple daisy chain management can never realize the true value of inventory to individual bidders without a real-time auction of the impression across the entire set of interested parties.  The result is that a few yield managers are slowly turning themselves into RTB exchanges (Admeld, etc.), while other people buying spot inventory directly from publishers will probably see that inventory get sourced to exchanges instead.  Why would a publisher not maximize the availability of that impression to advertisers?  Limiting an impressions availability to a single network or group of networks artificially limits the yield opportunity to publishers.  Exchanges, a technology platform with a minimal transaction fee, will be the primary means by which spot market impressions are liquidated.

Why did no advertising networks seize the opportunity to transform into an exchange?  ContextWeb did.  Alas, exchanges are kind of a winner-take-all market – a natural monopoly.  Why not Ad.com?  Probably margin compression.  Exchanges are a technology platform model.  They are supposed to run on razor thin margins, keep the team relatively lean, and make it up on volume.  The largest ad networks had the benefit of scale, but the margins were much more significant due to the value they added in the process: Sales and publisher support far above the call of duty for an exchange marketplace.  Exchanges are wild places: The ignorant don’t have their hands held, they are killed and fed to the crazier animals.  Anyone remember all the awards that Ad.com got for customer service?  While Ad.com had the biggest network and incredible optimization technology, they were, fundamentally, a service model.  High touch.

So advertising networks are going to have to get their inventory from the same place everyone else gets their inventory from: The exchanges.  They will rapidly (extremely rapidly) become disintermediated from publishers.  Who do they work for?

Not big agencies.  Big agencies are licensing DSP technology to manage their own spot market buying interfaces. The value that networks previously provided of tremendous reach at low CPMs is no longer their solitary purview.  DSPs are a technology platform solution that enables buying into exchanges in the same fashion with a lower margin architecture.  The overhead of sales and support services provided by ad networks is superfluous for Madison Avenue.  For years now, Madison Avenue has been confident that they could vertically integrate into networks and claw back margin.  Now they are being offered products that enable that.

Why aren’t ad networks becoming DSPs?  Two reasons, I think.  First, the same margin problem.  This is all about startups disintermediating the ad network market by taking the 30% or 40% margins that networks made and cutting it into several products that run at 10% margins and serve broader markets.  If you can capture all of Havas’ future online media spend, you have a nice business.  Second, this is about building a real technology product.  Many ad networks had minimal technology infrastructure and were primarily sales and service businesses.  The networks that had technology did not have products.  Ask anyone that has commercialized a product.  The last 10% of the product that you have to build to make the product usable outside your organization is just as much work as the initial 90%.  It is tough.  And it is a core competency not necessarily found in these organizations.  It is something different.

So who uses ad networks?  Small agencies that don’t license DSPs may use ad networks as a buying interface, but even this will be slowly picked off as some of the DSPs that fail to get traction on Madison Avenue unveil their long tail solution or Google meets their needs.

The real customer is direct response advertisers.  Direct response advertisers will still want to buy on a CPA and will be looking for an intermediary willing to take on the risk of marketing their products.  This is an area where skilled technicians can add a lot of value.  Sales people that recognize what CPA deals might work and what is effective CPA pricing to generate the margin needed to drive substantial volume for a DR advertiser will be critical.  More critical, however, is this: The algorithm.  He who has the mightiest algorithm wins.  Now there will be lots of different ways to arbitrage exchanges in the best interest of DR advertisers, so there is plenty of room for a number of networks and the market will certainly evolve substantially, but it all rests on the algorithm of the ad networks.  Each network will go get data and feed it into their system.  Their ability to use that data will demonstrate their utility or lack thereof to potential advertising partners.

What value does a Tribal Fusion add in a world like this?  How much longer can “retargeting networks” justify generating huge margins for cherry-picking exchanges?

This is a great market – and a growing market – but I suspect that we will end up with far fewer and much smaller ad networks.  Margins will be slimmer.  But a few algorithms will rise up, using cheap sources of data that facilitate this slim margin business, that yield such benefits to direct response advertisers that the networks that have designed these algorithms will be sustainable businesses.

In a decade, we will look back on the 2000-2009 period and say, “It is amazing that an entire industry came and went.”

Why Do Ad Creation Tools Build Ad Networks & Self-Service Platforms?

Friday, March 5th, 2010

I have noticed recently that tons of people that have built interesting tools to help people create ads: ClearSpring, AdReady, PaperG, and Jivox among others, for some reason spun that into creating ad platforms of some sort.  That made me wonder:

Why?

Those are actually pretty different core competencies and there is a lot to do when it comes to building great creative building tools.  Are there not opportunities to license this technology?  Is anyone so extraordinarily focused on solving this problem that they don’t think about anything else?  When I look at what AdReady built several years ago, it has not really evolved.  Is “good enough” acceptable?  Why can’t anyone focus on being best-of-breed in a few key areas any more?  It seems like that would be a good idea.

Maybe the market is not good enough.  People like Sprout, KickApps, and Gigya that started out in this space have since moved on to other things.  But Pointroll got rich and sold out doing this.  Medialets started out as a network and has actually decided to focus just on making great creatives.

The approach of people that want to do a lot of things and have this as a “differentiator”, but not the absolute focus of their business sound like people that are unlikely to win.  Focus, focus, focus.  EOM.

Why Ad Networks Don’t Work For Facebook

Wednesday, March 3rd, 2010

http://lifeinthenhs.files.wordpress.com/2009/02/facebook.jpg

The blogosphere is abuzz, errrr, atwitter, err, atalking (“TALKING – A NEW TOOL FROM MICROSOFT – TALKING IS THE BEST WAY TO TALK TO YOUR FRIENDS!  START TALKING TODAY!  IT IS SO EASY TO START TALKING, A TWO YEAR OLD CAN DO IT!”) about how Facebook wasn’t making any money from Ad Networks and their proprietary self-service ad platform is making all the money.  While I am a believer in self-service advertising………..

I have to say that checking out the trees in this forest is fairly instructive.

First, this data is probably wrong.  Inside Facebook revises the run rate from $150m to $50m because it turns out that the $150m includes Microsoft’s cut.  Is Microsoft really paying out a 33% rev share?  Unlikely.  It is far more likely that Facebook keeps at least double that.

Second, Facebook is courting hard-core DR guys on their self-service platform.  The ads they run are ads that Microsoft would never approve.  Those ads perform better because they are designed to.  Facebook is doing things they would not allow Microsoft to do: run brand-degrading ads that are probably illegal all over their site.  This renders higher CPMs.  True story.

Third and more important, Facebook wants them to fail.  Yeah, you heard me right.  Facebook is the reason why banner ads fail on Facebook.  Why would their self-service ads succeed when their banners fail?  Is there some magical structural difference?  Nope.  The difference is this: When you buy a banner ad impression on Facebook from Microsoft, you get exactly that: 1 impression on Facebook.  When you use the Self-Service platform, you get something a little different: A CPC campaign targeted at a man in Wisconsin who likes cheese and the green bay packers.  Exactly what you wanted.  Facebook is not passing data to advertisers on their banner network so their impressions look like the worst ads on the Internet: non-contextual, brand-unsafe, high-frequency UGC inventory.  The ad that shows there is a speculative guess with respect to performance.  The advertising version of throwing stuff at the wall and seeing if something sticks.  Advertisers have no framework for segmenting the inventory so optimizing it is impossible.  It performs like crap because it is crap.  Microsoft can’t sell that on a CPC.  Without data layered in, it performs too poorly to make money on a CPC.

Facebook is selling advertisers on the self-service platform highly contextualized, highly targeted inventory on a performance basis.  Advertisers like that.  Advertisers want to buy that.  Not high-frequency, nameless, faceless impressions.  End of story.

Angels vs. Venture Capitalists – FIGHT!

Tuesday, March 2nd, 2010

Great, great, great post from Ben Horowitz who does an outstanding job of summarizing how structural changes in start-ups have changed the nature of start-up investing.  This is probably an argument for guest posts on blogs.  He waits until he really has something to say, then says it, rather than feeling the need, like myself, to just vomit on the page to keep you all reading.

A few key points stood out to me:

  1. Maybe this hints at why so few angel networks seem to work.  Angel networks potentially re-create much of the meeting/diligence overhead of dealing with VCs.  If angels, at the end of a night, stood up and wrote checks and used a standard term sheet like the new Seed Series, people would be so aggressive about pitching angel networks, it would be crazy.  That would change the dynamic for angels.  Now one meeting for the entrepreneur turns into 40 meetings with angels.  Huge value add.  If you have the same circus you had anyway of a bunch of meetings after that, that is less compelling.  Maybe the angel network could announce that they have developed a “True Ventures” formula where they have 3 pre-money valuations they invest at with certain criteria for each tier.  That would be really out of the box thinking.
  2. Part of what Ben talks about demonstrates the burden on entrepreneurs.  To close a round with an angel in one or two meetings, you need a pre-existing relationship, a warm introduction, or a god-like aura surrounding you.  Sounds like you really have to work your network for those warm introductions!  (At least I do)