ADOTAS 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
11% Site Transparency
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.