Two Ways to Think about Ad Networks
The sale of Strategic Data Corp to Fox Interactive got us thinking. In the ad network world, there exist very few companies such as Strategic Data Corp. Publishers like Fox, who focus on content and not technology make for a natural fit, but ad networks, who made up a healthy chunk of the client base don’t necessarily make for an obvious fit. If you are an ad network, especially one that has a competent technical team, you spent time developing an ad serving platform. Serving ads, though, requires a campaign interface for uploading ads and managing advertiser accounts. You still need to develope a system of rules for knowing what ads you want to serve. All of this, though, doesn’t do much good unless you have a reporting interface to view stats and perform analytics. Imagine now that you have built all of those pieces but then you decide to, in essence, forgo the internal technology and hand over the entire process to another company. Imagine being the sales guy trying to break into a several hundred person company.
In search, handing over the campaign to another happens all the time. Of the almost $10 billion that companies will spend on search this year, it would come as no surprise to learn that more than half flows through third-parties. If you are Staples or The New York Times it seems incredibly inefficient not to do so. Your core business does not revolve around the Internet. You rely on the Internet as an additional means to conduct business, but people would not consider you an Internet business. I couldn’t begin to fathom the complexities of managing the online component to their businesses, but I would have to assume that the technologies and skill sets involved in each, overlap very little with those required to do search successfully. Staples and The New York Times produce and organize content, they don’t crawl, cluster, and optimize. Trying to do search in-house would only distract from their core business.
If you are an ad network, though, the technology behind your platform sets you apart, or does it? Let’s start with the assumption that it does. In both cases, we can break down the ad network business into three components – advertisers, platform (ad serving and optimization) and publishers. Tech heavy companies tended to have to things in common. First, they took a rather commoditized view of the two relationship pieces, i.e. publishers and advertisers. Unlike search, in the ad network space, advertisers could work with any number of ad networks. In search, if you wanted to work with SEM Firm A, you would work only with them. Exceptions to this include advertisers with affiliate programs where they might have one SEM but any number of affiliates also doing search. Ad networks, instead of being similar to SEM companies, play the role of search engine. An advertiser can work with any search engine, but tends to focus on one that gives them the best return.
Companies that believe in the commoditization of the relationship have understandably invested heavily in their technology, for example, Advertising.com. Of the two major pieces of technology, the piece that serves the ad requires the least specialized talent. That does not hold true for the second component, the decision engine, i.e. ad optimization. Advertising.com for example had a separate optimization office that existed independent of the company’s main headquarters in Baltimore, Maryland. Almost ahead of their time, they had it in Mountain View, California, which meant they could compete for talent and showed their commitment to proprietary software. Their decision to focus on technology came not just from the belief that publishers and advertisers were commodities but also as a result of their business model. They added value to all parties by not just aggregating offers and inventory but taking risk – being paid on a CPA while willing to buy on a CPM. You can’t do that manually, and in their opinion, the only way to scale was to automate.
The second type of ad network doesn’t feel compelled to own technology, or if they do, it gets the job done but doesn’t set them apart. In this case, I’m thinking of a company like Tribal Fusion. Few other ad networks have survived and continued to steadily chip away at the market like Tribal Fusion has. While perhaps not the first, they have been the most successful of the site representation companies. With Advertising.com, advertisers don’t know where their ad will show. Tribal Fusion opens up their kimono. It is that transparency that they use to attract leery advertisers and charge a premium. In this approach, Tribal Fusion doesn’t parallel the search engine, such as is the case with Advertising.com; they parallel an SEM. As a result, their business will not achieve the size of an Advertising.com.
Only the brave and extremely well funded would try to become the next Google. In my mind the same applies with the ad network space. In recent years, I can only think of one company that has tried to enter the mature, tech focused, arbitrage ad network space, and that company, Turn.com raised tens of millions of dollars before even giving it a shot. Their lack on instant success helps illustrate the difficulty. Most other new comers in the space have opted for the SEM route; it relies less on technology and more on relationships and creativity. That helped companies like Adbrite, Adify, and eTology. Neither has poor technology (I hear eTology’s is quite good), but these companies don’t take the same type of risk as an Advertising.com and will overlap little in where they buy impressions. Even the space Adbrite pioneered now has many challengers. What’s next? Perhaps one of these companies already fills this role, but while we have the search engine and SEM equivalents, we still haven’t seen the social network of the ad network world.
