Digital Thoughts

The studio called Terminator 2 “Rise of the Machines.” Internet advertising observers might call 2004 the “Rise of the Network.” True, the rise of the networks doesn’t really have anything to do with the Terminator movie series or machines. At best, it shares the suggestion that a force to be reckoned with is growing, and this is certainly the case. Ad networks, if not a force in industry clout are a force to be reckoned with in sheer quantity. And despite the crowd, more continue to join the fray. With all these entrants, it appeared time for a look at what it means to be a network, why people might want to become one, and the common paths towards networkdom.

The first point being addressed deals with what it means to be an ad network. At the most basic level being an ad network work means being a middleman between those who spend money online and those that control access to online traffic. Brokers do this, so what differentiates an ad network from a broker. In general, the distinction is a commitment to adding more value above and beyond a sales function. Given the power of relationships, brokers will always exist. There will always be a need for people that know other people, for people that can help facilitate the introductions, and for people that can provide both parties some context on the situation. The downside to brokers is that many on the traffic side feel they add less value than their fees often warrant. When companies look at the cost for a sales function, paying upwards of 20% off top line sales sticks out as one of the first things to go. Add to that the fact that brokers often hinder communication and provide no financial guarantees and it explains why most do not hold brokers in high esteem or seem eager to work with them.

One thing that makes an ad network an ad networks is their ability to add value above and beyond sales. Ad networks typically offer a reporting function, greater offer aggregation, and guaranteed payment. In this respect ad networks are the industry’s version of an outsourced back office, among other things. Ad networks can specialize in various markets – some will have ads for search arbitragers, others for email marketers, others provide a one-stop shop for many IAB ad formats, with others specializing in registration paths, and so on. At the core though, all of these ad networks alleviate the amount of work and stress related to sales and accounts receivables.

Being a network, even a marginally successful one is not an easy task. So, why would any one want to do it? Google advocates doing one thing and doing it very well. If a person can acquire traffic, why would they want the headache of dealing with advertisers and payment? The answer of course is money. Ad networks take a margin, and when publishers / affiliates reach a certain size, they see the next avenue of growth being the cutting out of the middleman even if that middleman played a key role in their growth.  It’s a natural evolution in a way, because people seem to have a natural desire to control their own destiny. In many cases, working directly with the advertisers makes sense. Ad networks must focus on automation. They tend not to offer very customizable offerings. If a publisher has a site that accepts unique ad units, most networks can’t afford the time needed to make their offerings fit that site. Ad networks work in scale and customization often doesn’t scale.

What the evolution of being a large publisher that decides to go directly to an advertiser implies is that many times, companies don’t start out with the intent on being an ad network. As these traffic owners start to look for ways to earn greater returns, it is then that they start to think along the lines of becoming an ad network. But going from inventory provider to ad network is only one way that a network can form. Another path to a network comes from first being a broker? Often the difficulty in being a broker is accountability and the ability to effectively manage and track their various advertiser and publisher relationships. As they look for a means to do so, the technology they build or buy is functionally the same as that needed to run a network. For inventory sources and brokers, becoming an ad network is a means to expand into an area where one is not strong. Being an ad network helps inventory partners deal with advertisers, whereas being an ad network helps those naturally strong with advertising relationships deal with inventory.

 A third way to become a network involves doing it the old-fashioned way, buying one. A similar path for the sake of this discussion entails building one from scratch. Rather than the ad network being an extension of one’s business, some companies choose to enter the space having no inventory relationships and no publishing relationships. The fourth and final way mentioned here for an ad network to form deals with technology service providers. One of the most successful ad networks in our industry, and one that will generate considerable buzz shortly, started out this way. Publishers / affiliates often need technology solutions to help them with their business, such as email hosting. While not being in the email space directly, the technology provider has access to and great information about a large amount of inventory. By becoming an ad network, this service provider expands their relationship with the inventory and finds another value adding way to help their clients.

There are a lot of networks out there without a doubt. We are reaching a point where those in it for the long haul and those in it opportunistically will start to separate. The continued expansion in online advertising along with the increased segmentation and specialization in inventory types has helped enable the rise of the ad networks. We’ll still see more join in, but by year’s end the ad network space will resemble the search space with only a handful at the top and fewer successful smaller players. Many of the technology providers will be acquired with venture funding only speeding up this entire industry metamorphosis. Given that even the slightest chance exists for one to be acquired or raise money, who can blame those wanting to join in?