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November 30, 2006

Dave Morgan Says Ad Networks Are Back

posted by MR WAVETHEORY at 11/30/2006 10:31:00 AM
Dave Morgan, the founder of Real Media and Tacoda, provides a brief history of the advertising network market and explains that ad networks are back due to a robust advertising market. I agree with Dave in that advertising networks are in a renaissance and there will be many more of them, but in my view, there is a big difference between quality and quantity. The big challenge for many ad networks is achieving economies of scale so that CPM rates and CPCs are competitive for publishers. That is not the case for many ad networks that offer backfill inventory to publishers. Many ad networks simply cannot offer the depth and breadth of advertisers like Google AdSense by Google Inc. (Nasdaq GOOG), Yahoo Publisher Network by Yahoo! Inc. (Nasdaq YHOO), and MSN Publisher by Microsoft Corporation (Nasdaq MSFT). I believe many of the newer ad networks will have to come up with innovative technical solutions so that advertisers can reach targeted audiences and publishers can receive premium pricing for their inventory.

Ad Network Resurgence
By Dave Morgan

I'm asked a lot these days about why online ad networks are enjoying such resurgence. I have something of an experiential perspective, since my company's behavioral ad network is part of the resurgence--and because, back in 1995, I founded and ran Real Media, one of the Internet's first ad networks. First, some history.

In the very early days, there were only a few other ad networks, with names like Burst, Poppe.com (soon to become DoubleClick), Commonwealth, Petry Interactive and Katz Millennium (soon to be combined to form 24/7 Media), K2, and Softbank Interactive Marketing, which was really much more of a rep firm than a network. Softbank was the 800-pound gorilla since it represented Yahoo, among others. And then there were vertical site sellers like Wired Digital and Turner/CNN and portals like Excite.

By 1998, the role of ad networks had evolved. DoubleClick had begun to establish a strong value proposition among media buyers for integrated ad serving, sophisticated targeting, campaign distribution across a diverse pool of sites, and a simple, single point of purchase. As their public stock did better and better, the ad network marketplace grew extraordinary quickly with dozens of entrants, many with very specific foci. Engage was about targeting, Phase2Media about quality, B2B Works was about business-to-business. Networks hit their crescendo in 2000, and while they didn't control a huge amount of the ad revenue on the Internet, they did enjoy outsized visibility given the extraordinary amount of money that they spent on trade marketing--most at least a million dollars a month. Then, the bubble burst, ad revenues dried up, and the networks largely went away; except, of course, recent entrant Advertising.com, which was focused exclusively on performance-priced advertising and was zigging when everyone else was zagging and Burst, which stayed steady and true to its mission.

Now, after several years of an ad network landscape dominated largely by Ad.com, 24/7 Real Media and ValueClick and vertical plays like Jumpstart Automotive Media and the Travel Ad Network, we have scores of new ad networks on the scene. Why? Here are some of the reasons.

* Robust ad market. Clearly, the biggest reason that we have so many ad networks is that we have a robust online ad market, with more and more dollars looking for more and more opportunities. We didn't have that in 2002 and 2003. We do now.

* Mature E-commerce market. Tens of billions of dollars of stuff is bought online today, and e-commerce continues to grow at an extraordinary rate. Most businesses of any substance now have Web sites. This was not the case in the old days, when many advertisers had no sites and didn't even want to pay to create mini-sites for campaigns. In the very early days, there were ads that couldn't be clicked because there was no site to click through to. Today, all of these merchants and businesses now have someplace to go and something to sell or service online. They need customers, and many times want to pay only for actual leads. This is hard for vertical sites to do on their own, since most want to protect CPM-based rate cards, so ad networks that sell on a performance basis have been filling in this growing need.

* Need for scale. As the market grows and matures, so do the optimal size of campaigns. Advertisers need scale to justify the friction costs of creating, planning and placing online campaigns to keep them competitive with television and print programs. That requires scale--much more scale than all but a small handful of sites can deliver on their own.

* Better targeting and measurement. Much like DoubleClick did in the very early days, ad networks today are using their scale and focus to build and deploy targeting and measurement systems that exceed the capabilities of most of the off-the-shelf systems used by stand-alone sites. This also produces knowledge that can be applied to make subsequent campaigns all the more successful.

* Growth of remnant and "long tail" inventory. As more people come online and more of them upgrade to broadband, the total amount of online ad inventory continues to grow. However, much of this growth is in social networking, photo and video sharing, and user-generated content like blogging--little of which represents intuitive, valuable commercial context for most advertisers. Much of this inventory is either hard to aggregate, as it is spread across tens of thousands of small sites--or is hard to sell on anything but a performance-based or behavioral basis. Thus networks are needed to monetize it.

* Availability of venture capital. Venture capitalists are keenly aware that much of networked technology, applications and services are likely to be ad-supported in the future, from word processing to mobile phones to gaming to premium television. All of this "networked" advertising, which most expect to exceed a hundred billion dollars within seven years, will need companies to enable, sell and serve it. They are funding those companies now hoping to have pieces of the long-term winners.

Will this resurgence last? I think so. Many talk of a coming period of consolidation that will dramatically reduce the number of ad networks in the market. While that may happen at some point in the future, I don't see it happening for years. In fact, I think that we will see many more ad networks before we see fewer. They are filling important needs of advertisers, publishers and application providers that can't be served otherwise. They are not going away anytime soon.

Dave Morgan is Chairman of Tacoda.

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