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.”