Can 314 Ad Networks Really Thrive?

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manyadnetworks_small.jpgADOTAS EXCLUSIVE — I have heard several industry insiders and experts who closely follow the progress of ad networks approximate recently that there are “hundreds” of them. 200. 300. I’ve even seen 314, written by one bold blogger daring to somehow pinpoint the exact number. When one considers exchanges, affiliate networks, other vertical networks, CPM networks, CPA networks and a plethora of other companies that could fit the purest definition of a “network”, the number certainly seems to be at its highest ever. So what happens next? Can the market bear more networks, or is consolidation a certainty?

A reporter recently asked me whether or not the market can handle so many online ad networks. My response was that right now it seemingly does, since there is clearly a demand for many networks out there, the industry is highly competitive and networks seem to be producing decent revenues — or enough revenue to be in business. Will we wake up in 2009 or 2010 with 20 networks instead of 314? I doubt it, not with online advertising still in its adolescence.

A very popular belief as of late, even from several readers’ comments on the pages of this publication, is to predict massive industry consolidation solely because “there are too many and there just has to be consolidation.” Or, another popular one is “the model isn’t sustainable and there just has to be consolidation because of it.”

Let’s look at some facts which support the business model’s health. In an April 2008 study taken from eMarketer, more than 9 out of 10 advertisers and agencies that purchase online media plan to use an advertising network. 75% said they planned to spend more in 2008 with advertising networks than they did in 2007. 59% said they planned to use networks for both branding and direct response campaigns.

That study just covers the United States; many believe that there is more growth potential internationally under a similar network model.
In 2009 or 2010, will agencies and advertisers have all built the internal capabilities to do what ad networks do, rendering them obsolete? I doubt it. So let’s take a leap of faith and conclude the business model is sustainable for the foreseeable future.

I do not disagree that there will be some changes to come in the space, and in the not-too-distant future. However I’m not convinced that the reason will be because the number of ad networks is arbitrarily too high or the model doesn’t work. As long as there is still opportunity for networks to exhibit a fuller value proposition, then fast consolidation (beyond some inevitable moves by a handful) is not necessarily a certainty. More likely, a cause of consolidation will stem from having too many different types of networks that converge because of advertiser and agency demand and other market factors.

I’d like to reinforce this statement through more statistics from the very same study referenced above entitled “Factors that differentiate Ad Networks according to U.S. Agencies and Advertisers.”

The major differentiators are:
28% Web Inventory Quality
27% Targeting
11% Site Transparency
8% Service
8% Optimization
6% Reporting
5% Reach
2% Price
5% “Other”

None of these items by themselves are really all that surprising. However, ad networks that have the capacity to deliver on several of these factors have a better chance at longer term success based on this study. This statement might seem obvious, but we might be moving towards a Home Depot phenomenon where very narrow niche players or “mom and pop” networks have to evolve, build or buy a wider set of competencies or solutions in order to compete.

An interesting point on differentiation is how far down “reach” is listed above. Countless networks use a reach calculation either validated by a 3rd party or their own in-house number, as the differentiator. Let’s face it: broad, fast and efficient reach is what the network model was built on and is great and necessary to a point; but reach by itself does not make an ad network highly effective. There is no secret sauce in obtaining absolute reach, or saying your network reaches 2, 4, 8 or 9 out of every 10 internet users.

The real differentiator points back to #2 above – targeted reach – and depends on how effectively a network reaches who the advertiser or agency really wants. If nothing else, the study above showcases how the network model has advanced and improved over the years beyond being an efficient platform with which to manage multiple large-scale media buys and lots of traffic from lots of sources.

It would stand to reason that networks – regardless of their type or classification – who deliver, say, the top five differentiators listed above will be in the best position to succeed. Competition itself is not a short-term barrier to entry since so many exist now and continue to enter the market; however if advertisers and agencies truly do care most about the factors above, networks that cannot deliver on more than one of them will be at a decided disadvantage. A driving force behind ad networks’ future and/or any industry consolidation could likely be rooted in depth of offerings, as CPA bleeds into CPC into CPM, new websites and publisher’s springing up and other factors none of us can predict right now.

Networks were born out of demand in the marketplace, they work and they will continue to work. We will reach a point in time, if its not here already, when advertisers and agencies will not have to employ multiple networks for different purposes. Advertisers and agencies will want one or two networks to encompass all of their needs in managing different ad campaign types, pricing models, site transparency, targeting strategy and optimization, or budget management.

Consolidation of networks in the near future will not happen because there are 200, 300, 500 or 700 ad networks and not because the business model is broken. If it happens, the market will move towards broad consolidation because of advertisers’ changing needs and resources, developments in technology, advancement by the top ad networks and the commoditization of other elements which over time are no longer true differentiators. It all points to the need for ad networks to embrace a more complete and well-rounded skill set, and checklist, of competencies.

11 COMMENTS

  1. Great article, Michael! My question to you is this: What do you think of some folks in the industry projecting 1 or 2 large ad exchanges which will serve as market makers for all networks? Something like a stock exchange for our industry? It seems that marketers, more and more, want to go to one central place to make their buys, and, although, I’m all about negotiating the best rate on any media buy, some media buyers are inclined of not picking up the phone, but, going to an exchange to make their deals online. What do you think about this concept?

  2. while i agree that “Advertisers and agencies will want one or two networks to encompass all of their needs,” unfortunately due to #1 Web Inventory Quality, they may not have the luxury of scaling down to only one or two networks.

    I think we are going to reach an era where there will be a middle man between the middle men (networks and affiliates, for example) before we see consolidation of networks. similar to what you mentioned in regards to networks, these middle-middle men will be born out of need. i can’t possibly manage the numerous networks i’m using now, and my only wish is that someone would manage them for me. say, a network mgmt company…

  3. Igor, I think that more and more marketers do want to go to one central place to manage media, and definitely don’t feel they have the time or energy to use the phone to negotiate. I think that’s OK, but also lends more credence to what we might see in the future as there being a handful of “one-stop-shops” that have many different capabilities and control the market. Danielle, I also agree with you, that there is a need right now to “manage the networks”, and that that need will continue into the near future. Many companies right now manage networks, and some networks even UTILIZE other networks to round out their own inventory. Its a virtual circle right now and for the foreseeable future, but at some point will become more efficient and less cluttered I’d have to think.

  4. Like many other media type previously found before internet, consolidation is a must to centralized services to marketers.

    But how soon this thing is going to happend is the only question we have right now.

  5. I’ve seen the number frequently put at 400+ ad networks. And new network launches still seem to be outpacing acquisitions. The reality is that they are just getting started. It is true that there are a lot of ad networks out there, and there is good reason too. Niche audiences and strategic reach, advertisers need both at the same time. They need massive reach to get their message across and hit their key performance indicators. They also need to diversify and specialize and focus depending on what they’re selling or to whom they are branding. One day they may need laser like focus on a specific audience segment and the next they may need numbers on a Biblical scale. Usually they need both at the same time: the “massive niche”.

  6. I love ad networks because they can make life easier for Big 5 media buyers to access remnant inventory quicly and efficiently.

    But in the future, it’s all about transparency.

    Sadly, only a few like Interclick deliver this.

  7. I think its great that more and more networks are coming into play. Google has become way to powerful when it comes to online advertising and having only a few major players is not good for advertisers.

  8. Well this allows companies to spread out their campaigns though the various channels and watch conversions from each network. Maybe your a b2b business and Google is just not working for you. Instead of search these other networks probably have unique placements.

    Having more options to better target your products is a good thing.

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