Finding The Sweet Spot Part 2: Sky Is The Limit

A company’s financials are an affect of their business. In Part 1 located here, we laid the groundwork for our discussion on understanding and evaluating why certain companies attain the size they do. The result was a set of criteria, that when combined could help evaluation and understand the size and scope of a company. We will look at these segments based on the following – number of advertisers, advertiser breadth, audience reach (includes direct buys on media along with publishers for those that have publisher / affiliate relationships), audience breadth, and advertiser automation / scalability, i.e. the threshold for a profitable client. As seen in our Internet advertising overview, companies operate in a multitude of segments. We decided to look at those which have seen the greatest level of merger and acquisition activity in the past two years – lead generation, comparison shopping, and ad networks / affiliate networks. Thus, while we look at only three, this framework should be robust enough for use in other segments of the online advertising space.

We kick off with lead generation and comparison shopping. These two segments both service about the same number of clients. A given vertical, such as mortgage or education can have up to 1000 clients, with five to ten covering more than 80% of the revenues. The coverage of those clients is very narrow. All fall into very specific channels, so while there are a lot of clients, they are all competing for a subset of user interest. The audience that the lead generation companies and comparison shopping companies can reach is large – these guys make good money – but it’s not yet huge. For the most part too, both types of companies have manual interactions with their clients. They do not have a self-service interface that supports a large percentage of the business. Until lead generation becomes more portable and comparison shopping captures greater ecommerce market share, both will remain sizable but capped.

Ad networks and affiliate networks, while not the current belle of the acquisition ball, have seen some sizable transactions. Both Advertising.com and Linkshare went for more than $400 million. And Fastclick was purchased for $200 million by Valueclick with Webclients coming close at $140 million. Let’s look at each using the evaluation criteria above. Ad networks service a smaller number of clients on average than affiliate networks and roughly the same as those in the lead generation and comparison shopping space, about 100 effectively and up to 1000. Like lead generation and comparison shopping the top 10 clients can account for a bulk of the revenues. Affiliate networks can service 1000 to 10,000; they have a longer tail with respect to their advertisers.

Ad networks tend to offer limited audience segmentation although they do not hit each segment nearly as deep as lead generation companies do. Affiliate networks can offer even greater granularity than the 15 to 30 categories that the average ad network can hit. Where ad networks truly excel and affiliate networks to a lesser extent is in reach. LowerMyBills, the most prolific of the lead generation advertisers shows 2 billion impressions per month. A large ad network can show that many in a day. Yet, adding advertisers to ad networks, like lead generation and comparison shopping, is a fairly manual process involving sales and support staff. Affiliate networks offer greater automation, which explains their much larger advertiser set; what they lack though is the traffic that the networks maintain. The networks might have a smaller advertiser base but in many ways it’s by design as they play a much more active role in the media buying process.

So that this article can be kept to a manageable length, we will apply the evaluation criteria to a larger set of industries – co-registration, incentive promotion, content networks, adware, behavioral networks, etc. in another article or perhaps a follow-up post online. More criteria might be added as well, but even this small set and the three industries covered – lead generation, comparison shopping, and ad networks / affiliate networks – gives us enough to make some interesting conclusions and observations. Again, using John’s wide and deep terminology, the profitable businesses today – Advertising.com, Shopping.com, Quinstreet, NexTag, and so on, are a mixed bag of wide and deep on the advertiser and publisher side.

One key takeaway from this – going deep on the advertiser front, i.e. focusing on a particular set, can help a company scale, but one needs to go wide to become a giant. The path to continued growth for any internet advertising company is to find ways to accept a larger and more diverse advertiser set and have a product offering that services a larger and more fragmented audience / publisher community. Doing this usually means automating the customer acquisition process and creating a self-service interface that links to distribution. Paid search is a prime example. Overture was wide and deep with advertisers. Their keyword approach and volume of searches along with the self-service interface allowed them to grow into a billion dollar company that serviced 100,000 plus advertisers, even those paying only $25 per month.

How could Overture become even larger? They could have gone deep on the publisher end, something Yahoo! is trying to do now. They could have built / bought the contextual technology that turns display inventory into search like inventory. It’s this technology that helped extend Google’s reach beyond search and go deep on the publisher side. It’s what allows them to service not only a large, diverse advertiser set but also an equally broad publisher set. No other company, except now Yahoo!, can monetize sites large and small so effectively. These companies have absolutely changed the face of display advertising and given the rest of us a model by which we can grow our companies. Go wide but not deep or deep but not wide and it’s $500 million; go wide and deep and the sky is the limit…you might just have to buy your way there though.