- What is an Ad Network?
- Why Use an Ad Network?
- Ad Network Categories
- Ad Networks & The Online Advertising Value Chain
- Innovation & Ad Networks
- Prominent Ad Networks
An ad network is a broker between advertisers and publishers, aggregating website inventory into industry-specific channels that allows advertisers to reach a broad range of sites with a single buy. They enable publishers to easily and predictably sell their inventory, which was particularly attractive to non-branded publishers that lie along the long tail of the Internet. Early networks were limited in terms of quality and scope. Advertisers assumed network inventory was filled with second-tier website and leftover inventory (and indeed much of it was) and so approached ad networks with caution. The original ad networks were also viewed as primarily a direct-response medium, meant for generating low-cost clicks and cusomer leads. All of this resulted in the term "ad network" getting a negative connotation among brand conscious online advertisers.
After the bubble burst and the online advertising market shrunk, publishers found themselves with a oversupply of unsold inventory. Ad networks began purchasing this inventory at bargain basement prices, re-selling it high to advertisers, and keeping the profits. This arbitrage model continues to this day, buoyed by the booming online advertising market. However as online dollars began to increase once again, ad networks had to adapt in order to continue to add value to advertisers and publishers. They responded by focusing on their technology and expanding their reach. This allowed publishers to mazimize the value of their inventory through advanced targeting and optimization, and connected advertisers to an extensive yet highly targeted online population - something few individual sites could offer. Eventually the ad networks with the most sophisticated technology were even able to offer their advertisers performance-based pricing. They relied on their targeting ability to shoulder the risk associated with the campaign's performance.
Today, ad networks (particularly those with an recognized track record) are an established and respected part of the online advertising landscape. Even brand name sites rely on ad networks and their optimization technology to fill their inventory and mazimize the eCPM of their impressions. This has resulted in the emergence of two distict models in the ad network market:
- Rep Model: The ad network sells the inventory on behalf of the publisher, as an alternative to the publisher employing
their own sales force. These type of networks are typically "transparent" - they allow advertisers to see which individual sites
their campaign is running on.
- Arbitrage Model: The ad network buys (usually remnant) inventory from publishers, re-assembles it into packages that match the audience requirements of the advertiser, then uses advanced targeting and optimization technologies to further enhance the performance of the inventory. These type of networks are typically "blind" - they do not allow advertisers to see their site list so as not to avoid sales conflicts with their own publishers.
Why Use an Ad Network?
As a broker, ad networks have two distinct sets of customers: advertisers and publishers.
Advertisers
There are four general reasons that advertisers use ad networks.
1. Scale: As mentioned above, one of the biggest advantages ad networks have is scale. A large advertising network such as Advertising.com reaches 81 percent of the online population. (comScore, December 2005). This enables them to deliver great reach for an advertiser's online campaigns, allowing them to target more of their desired demographic than is possible through most individual websites.
2. Targeting & Optimization: Ad networks' advanced optimization technology allows the advertiser to extract maximum value from their purchased inventory through geographical, contextual, and behavioral targeting across the entire network of publishers. In some instances ad networks will even allow advertisers to run campaigns on a pure performance basis (CPC or CPA), removing all risk from the process.
3. Price: Because ad networks typically purchase remnant inventory or represent publishers that are not large enough to represent themselves, the CPM costs realized through ad networks are a fraction of what top branded websites charge.
4. Ease: Finally, ad networks allow advertisers to reach a broad range of websites with just one buy. In effect the ad network is an aggregator, pooling together the inventory from hundreds or even thousands of websites. Managing the ad trafficking and billing relationships with this many small to medium sized publishers would not be economically feasible for the advertiser or their agency.
Publishers
A publisher's overarching need is to maximize their eCPM, which is accomplished by selling each impression for the highest price possible. Ad networks help publishers accomplish this goal in three general ways:
1. Fill remnant inventory: Even the largest, brand name websites (especially those with a large amount of page views) struggle to fill 100% of their available inventory. Ad networks help increase the overall revenue a website realizes by monetizing a publisher's remnant inventory. Although the advertising rates realized for remnant inventory are much lower than the premium inventory that is traditionally sold through internal sales teams, the publisher is earning some return on page views that would otherwise generate no revenue.
2. Optimize inventory: The other way to increase a publisher's eCPM is to increase the revenue generated per impression. Publishers rely on ad networks' sophisticated ad serving technology to serve up relevant ads using contextual, geographical and behavioral targeting. More relevance results in higher conversion rates, which allow publishers to charge higher CPM rates.
3. Outsource sales force: Some publishers will choose to outsource the ad sales function to the ad networks. This is particularly valuable for smaller publishers that do not have enough impressions to represent themselves directly in front of advertisers. Ad networks are able to aggregate smaller publishers into content channels, which are presented to large advertisers for targeted media buys. Other publishers simply choose to focus on their core competency - creating and developing content and traffic - rather than worry about online ad sales.
Ad Network Categories
To differentiate themselves in an increasingly crowded marketplace, ad networks began to focus on specific areas of the online advertising landscape. This allowed them to begin developing specialized expertise in a narrow but deep niche. The market can generally be segmented along the following dimensions: pricing model, vertical focus, targeting/optimization functionality, and medium.
Pricing Models
One way that ad networks distinguish themselves is through their pricing models. The original ad networks that emerged in the late 90's relied on CPM based pricing. This guaranteed publishers a certain amount of revenue based on the number of impressions that were delivered, but shouldered advertisers with the performance risk. A large number of ad networks continue to utilize the CPM model to this day.
Since then, several ad networks have emerged offering advertisers the ability to buy inventory on a CPA basis. They are able to make this model work by either paying their publishers on a CPA basis, or buying inventory on a CPM-basis but using advanced targeting technology to increase the value of the purchased inventory. The emergence of the CPA ad networks is a result of both the overabundance of long tail inventory, and the need for the newer ad networks to differentiate themselves to attract advertising dollars. Today most of the large ad networks offer both CPA and CPM pricing.
Still other ad networks utilize a CPC-based pricing model. The most famous of these is Google AdSense, which places the search giant's trademark text ads across a large network of publishers. AdSense generated approximately 42% of Google's $2.2 billion in revenue for Q1 2006.
Vertical Focus
Another way ad networks seek to differentiate themselves is industry focus. Although the larger ad networks will offer a wide range of content verticals, newer entrants have carved out a niche by focusing on a specific content channel. For example Gorilla Nation focuses on entertainment sites, Jumpstart Automotive Media focuses on automotive sites, and SportsAdMarketplace focuses exclusively on sports-themed sites. Targeting a narrow content channel enables the ad network to concentrate their sales effort on both the advertiser and publisher sides. It also positions the network as a "one stop shop" for advertisers looking to reach that vertical.
Targeting/Optimization Functionality
Ad networks can also be differentiated by the level of targeting & optimization that they offer. Optimization is such a large part of the value that ad networks offer that several networks have succeeded based primarily on proprietary technology that enables them to bring even more relevance to the online advertising process.
The most basic level of targeting is allowing advertisers to purchase media on specific content verticals, or even on specific websites. Slightly more advanced ad serving technologies will allow geotargeting, dayparting and flighting, which allow advertisers to control where (state, city, zip), when and how often their ad appears. These targeting systems utilize a scan and refine methodology to optimize online campaigns based on which placements generate the most amount of clicks and conversions. The vast majority of ad networks will only offer up to this level of targeting ability, either through their own internally developed ad serving systems or through third party services such as Zedo or Atlas.
A more advanced targeting system is contextual targeting, which involves scanning, analyzing, and categorizing the content of a webpage to decide what ads would be most relevant to run there.
| :: A Closer Look: Contextual Targeting | |||||||||||||||
| Contextual targeting involves targeting ads on a Web page based on the page's actual content. First, a contextual advertising system scans the text (content) of a Web page for keyword phrases. The system then dynamically correlates contextual information to relate the keyword to the appropriate context, creating an accurate page definition or category. The dynamically generated page definition is then matched against |  | ||||||||||||||
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a database of advertiser keywords in contextual categories, which returns specific, targeted ads based on
the content people are viewing. There is
currently great debate within the industry as to whether contextual or behavioral targeting is more effective
at delivering relevance.
The contextual camp points to the real-time aspect of contextual targeting - it delivers relevant advertising based on the content that the consumer is interested in at that very moment. Publishers (particularly those with heavy informative text such as news sites) are attracted to contextual targeting because of it's ability to serve up relevant ads that change along with the content of the website. As an individual browses the Web and moves from page to page, they are presented with advertisements that are deeply relevant to what they are reading. True contextual advertising does not download any software on a user’s computer and relies on relationships between advertisers and publishers to market to consumers. In addition, true contextual targeting is intelligent - it knows the difference between Paris Hilton and Paris, France. Company Profiles | |||||||||||||||
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Recently behavioral targeting has been gaining traction among publishers and advertisers. Behavioral targeting analyzes an online consumer's click-stream and behavioral data in order to serve up ads that are relevant to that specific person.
| :: A Closer Look: Behavioral Targeting | |||||||||||
| Behavioral targeting analyzes people, not pages, in order to determine the most relevant ad to serve. For example a consumer that repeatedly visits travel sites would be served an ad for Aloha Airlines even when they are not on a travel-related website. According to a recent study by iMedia and the Ponemon Institute, behaviorally targeted advertising is projected to increase 65 percent to make up nearly 21 percent of all online media purchases in 2006 -- more than double the 2005 figure. |  | ||||||||||
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The dramatic increase in behavioral targeting is being driven by a number of factors:
First, consumers are spending more and more time on the Internet (183 hours per person in 2005). That time is increasingly spent on content sites, and particularly on very rapid-growth, context-poor content sites such as social networks. Behavioral targeting is well positioned to deliver superior relevance on these types of sites vs. contextual targeting. Second, the price of advertising on top-tier online real estate has been steadily rising, making it harder for advertisers to scale their campaigns. Behavioral targteing allows advertisers to spend much less to reach the same prospective customer. For examples it is much more cost effective to serve a targeted travel ad to someone who has just left Expedia.com and is now on FunnyHaHa.com than it is to go through the high-CPM brand name travel property. Third, behavioral targeting allows advertisers to carry out innovative re-marketing campaigns. Remarketing (also called "lead back") involves targeting consumers who've expressed a previous interest in an advertiser's product or service. For example Aloha Airlines could target campaign announcing new, lower fares to all the consumers who visited the Aloha Airlines website within the last two weeks. So which is better, behavioral or contextual? It all depends on who you ask. Both sides will point to research reports that find one or the other to be more effective at reaching prospective buyers, generating clicks, or optimizing ROI. The truth is that both forms of targeting can be effective, as long as they are used with the right type of media. In the future online advertisers will likely be able to integrate both behavioral and contextual targeting into their campaigns. Company Profiles | |||||||||||
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Medium
Finally, ad networks can be broken down according to the medium they choose to focus on. Whereas the largest ad networks offer advertisers a broad range of mediums on which to advertise, smaller players have differentiated themselves by focusing on a specific advertising format.
Website
Almost all of the larger online ad networks offer basic banner and text advertising on publisher websites. Dozens of smaller competitors offer similar services, attempting to compete on nothing more than price. With an abundance of online inventory and ad serving technologies, and a large number of advertising suppliers, website-based online advertising is becoming increasingly commoditized (see Innovation & Ad Networks section below).
Email was originally thought to hold great promise as a marketing and customer retention tool for advertisers. However due to pervasive spam and deliverability issues, as well as a negative overall connotation in the industry, email has yet to fulfill its potential as an advertising medium. Faced with an increasingly difficult market, declining response rates, an impending "tax" on email (e.g. Goodmail), and increasing legislation (CAN-SPAM), most of the original email marketing companies have since diversified into other areas. Although some companies have been very successful at innovating in the email marketing space (such as AdKnowledge, below), the medium continues to face challenges from RSS, a much cleaner and more reliably opt-in medium.
Company Profiles:
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Combine behavioral targeting and email marketing in an auction based self-serve online advertising platform. Recently announced a $48MM investment from TCV. More |
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Provide permission-based e-mail marketing software and service solutions. Backed by DFJ, NeoCarta Ventures and Total Technology Ventures. More |
Search
In an effort to expand their publisher network beyond contextually targeted text advertising, search engines began to offer publishers the ability to host branded or private label search boxes. This alllowed publishers to generate additional revenue from paid search engine listings while allowing their visitors to complete their searches on the publisher's website. Although Google dominates the search-based ad network space, a few smaller players have emerged that offer publishers higher payouts, vertical search, private label solutions, and the ability to customize the blend of paid vs. organic search results.
Company Profiles:
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As part of its AdSense program, Google allows publishers to place a Google search box on their site and collect a percentage of the paid search advertising revenue. More |
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Provide web and site search functionality for publishers that can be tailored to match the look and feel of the site. Publicly listed on the NASDAQ under "MIVA". More |
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Search engine that also offers publishers private label vertical search technology bundled with sponsored (CPC) search results. Publicly listed on the NASDAQ under "LOOK". More |
Blogs
Advertisers have yet to figure out an effective way to use blogs as part of their media mix. A new report issued by PQ Media estimates that a total of $16.6 million was spent on blog advertising in 2005, however that figure is expected to grow rapidly over the next few years. Due to their focus on specific content areas, blogs offer advertisers the opportunity to micro-target advertising messages to bloggers and their network.
However blogs signal a much larger opportunity than just the ability to target the influencer demographic. The rise of blogs represents a change in how advertisers can communicate with their consumers. It signals how marketing itself has become much more about establishing a dialog or conversation with consumers rather than a one way linear communication. Advertisers that can tap into the power in the conversations going on in the blogosphere by fostering peoples voices, listening to and incorporating their comments and feedback, and building a community have a great opportunity ahead of them.
Several blog-focused ad networks have emerged to help companies take advantage of this new medium.
Company Profiles
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Blog ad network representing top-ranked blog authors including Boing Boing & Fred Wilson. Backed by JP Morgan Partners, NY Times, Omidyar Network & Mitch Kapor. More |
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A leading blog ad network, representing some of the most influential and highly read blogs on the web. Advertisers inlude Paramount Pictures, WSJ & Penguin Books. More |
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Announced launch of blog ad network in April '06. Contributors include Glenn Reynolds of Instapundit.com & New York Post columnist/Fox News contributor John Podhoretz. More |
RSS
RSS ("really simple syndication") is an XML-based format for content distribution. News, information, enterprise applications and weblogs (blogs) can all be published in RSS. When a new article is posted or a change is made to an application, RSS feeds can automatically notify the user. Text, images, audio (including podcasts) and video can be incorporated into RSS feeds. Although still a relatively small market, a couple of ad networks have emerged focusing exclusively on RSS-based advertising.
| :: A Closer Look: RSS Advertising | |||||||||||
| Originally developed by Netscape engineers in 1997, the use of RSS really began to take off with the phenomenal growth and success of blogs. In 2002 there were only 100,000 bloggers, with the earliest adopters all but confined to the tech-community. By April of 2006, the total number of blogs tracked by Technorati had grown to 35.3 million, with over 75,000 blogs created every day. Bloggers and blog readers see great value in RSS's ability to "push" new blog entries out to the readers as soon as they are posted. |  | ||||||||||
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RSS is composed of two major components: 1) The content feed pushed from various Web sites: 
2) The aggregators that gather those feeds into one central place for the user: 
The following is the breakdown of feed aggregators currently being used to read feeds. It is interesting to note that Apple has an integrated RSS reader in its latest operating system, and Microsoft is reputed to be building RSS into Vista, its next generation of Windows.  Users access and subscribe to RSS feeds through a publisher's website. The feeds are typically linked with the word "Subscribe", an orange rectangle,  , or with the letters
 or  . Many news aggregators such as My Yahoo! publish
subscription buttons  for use on Web pages to simplify the process of
adding news feeds.
RSS: A Consumer's Perspective Consumers love RSS for a number of reasons. One of the most important is that RSS gives them much greater control over how they receive and view online content. Unlike other mediums such as email, RSS does not require consumers to give up any personal information. Instead, the consumers themselves control the feed URL, adding and viewing only the feeds they've actively subscribed to, and easily removing any feeds that they tire of. This marks a significant signal of change from older models where companies with access to a user's information controlled what content was delivered to them. With greater control in a basically anonymous delivery format, consumers don't have to worry about abuse of their personal information or receiving unwanted messages. In addition, RSS makes content more efficient to read, both by aggregating it in one place, and by putting the content wherever the user chooses (browser, Outlook, mobile phone, etc.) With all of the content in one place, it’s easy for RSS users to scan through each feed’s items and see which deserve further reading. RSS: A Marketer's Perspective Although RSS adoption rates are still relatively small (a recent survey by Jupiter Research found that only 3% of internet users use RSS), the medium is growing rapidly. In fact, the rate at which individuals are adopting RSS is surpassed historically only by the pace at which they embraced the World Wide Web. Although RSS is still closely associated with blogs, today even large news organization such as Reuters, CNN, PR Newswire, Business Wire, and the BBC use RSS to deliver news & information to their subscribers. As a result online advertisers have recently been awakening to the potential RSS has as an advertising and communications medium. In 2005, 57% of marketers told Forrester they were interested in adding RSS to their marketing mix One of the main advantages RSS offers advertisers is a truly opt-in audience. This translates into 100% deliverability, and much higher open and click-through rates. When compared to the deliverability and spam problems plaguing the email industry, it is easy to see why RSS would be attractive to online advertisers. The narrow content focus of most RSS feeds also allows advertisers to effectively target their online efforts. The growth of personalized feeds and the relative novelty of RSS as an advertising medium result in extremely high response rates for RSS-based advertising. RSS ad network Pheedo recently reported that stand-alone RSS ads (where the entire post is the advertisement) were generating an average of a 8% click-through rate, far greater than the average for other online marketing channels. Finally, the nature of RSS consumers themselves provides compelling reason for advertisers to make use of this new medium. RSS-users tend to be younger, more highly educated, and more willing to spend money online (spending on average $465 per year online compared with $333) than non-RSS users. Advertising on RSS allows companies to reach this elusive early adopter/influencer segment. A recent study by RSS provider Nooked found that 87% of influencers are using RSS to keep up with news and other information. There are a couple of ways that advertisers can begin using RSS feeds in their marketing mix. Companies like FeedBurner, Pheedo, Kanoodle, and Google all offer RSS-based ad network services. Much like traditional ad networks, they aggregate feeds across a network of publishers and allow advertisers to reach mutiple feeds within specific channels with a single buy. Alternatively, advertisers can approach large publishers directly to advertise within their feeds. The Washington Post has already opened ad space in its RSS feeds that advertisers can purchase much the same way they would purchase a banner ad on the website. The following an example of what an advertisement in an RSS feed looks like (via Bloglines): 
Most of the RSS-based ad networks offer a range of pricing models, however the creative options are generally limited to text and static banners. Animation and rich media support is expected to be rolled out in the near future. Company Profiles | |||||||||||
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Podcasting
| :: A Closer Look: Podvertising | |||||||
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Despite its promise, podcasting has yet to take off as a viable mainstream advertising medium.
According to an
April
2006 Forrester Research consumer poll, only 1 percent of 5,000 internet users surveyed said
they regularly listen to podcasts, and only 2 percent had sampled them. Podcast advertising has also
been held back by a lack of reliable measurement standards, with most based on files downloaded
rather than actual listeners. Despite these hurdles, it is widely expected that podcast advertising will
grow quickly over the next few years, driven by the increasing adoption of podcasts. Forrester predicts
that 12 million households will regularly listen to podcasts by 2010.
Some advertisers have already taken the plunge into podcast advertising, drawn by the ability to reach the more affluent, tech-savvy trendsetters that are the primary users of the medium today. To overcome the measurement problem most advertisers rely on a sponsorship model, paying a flat fee ranging from a few thousand dollars a month to as much as $45,000 to run a 15- or 30-second audio ad at the beginning of the podcast. In February 2006, Volvo agreed to pay $60,000 for a six-month sponsorship of the monthly podcast of Weblog Inc.'s Autoblog, as well as advertising on the site itself. Over that period, the show was downloaded 150,000 times. Sequoia's Mark Kvamme, who invested in podcast network PodShow, thinks podcasting could siphon $1 billion to $2 billion away from the $30 billion radio advertising market in three to five years. Advertisers are also drawn to podcasting because of its potential to reach a very targeted audience. Several bloggers offer podcasts on their websites, however the format typically only reaches a tiny fraction of the blog's overall audience. For example engadget, one of the top podcasts on iTunes and Odeo, boasts 150,000 downloads per weekly show. While that is quite impressive for a podcast, it is a far cry from the 4.6 million readers per month that check out the Engadget blog. Those numbers could change as the large media companies enter the podcasting market. To enable advertisers to place their audio ads on podcasts in a scalable manner, several podcast-focused ad networks have launched over the past few months. Company Profiles | |||||||
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Video
Broadband video usage has exploded over the past couple of years, fueled by widespread high-speed Internet access and the massive adoption of social networking. In March of 2006, U.S. Internet users initiated a total of 3.7 billion video content streams, each watching an average 100 minutes of video content during the month (compared with 85 minutes in October 2005). In addition to watching premium content created by media companies, consumers are also beginning to create, upload, and share their own videos online in unprecedented numbers. The de facto leader of the online "user-generated" video sites is YouTube.com. The company, which was only founded in February of 2005, announced in March of 2006 that it was serving around 30 million videos, and receiving 35,000 video uploads per day.
Ad networks have struggled over how to deal with online video advertising. The medium is highly valued by brand advertisers, who like how similar it can be to TV commercials. However a mix of technology, control, inventory, copyright, and measurement issues have held online video back from its full potential.
| :: A Closer Look: Video Advertising | |||||||||||||||
| Online video has clearly reached a tipping point among consumers. Advertisers are increasingly setting aside budgets for online video, attracted by the opportunity to blend video's high brand engagement with the Internet's interactive, tracking and targeting capabilities. Online video advertising is expected to grow over 60% per year over the next few years. However the total dollar amount set aside for online video advertising so far - $225 million in 2005 - is a tiny fraction of the overall online advertising pie. |  | ||||||||||||||
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A closer look reveals that although advertisers would like to spend more money on video ads,
they currently face a large set of challenges in actually doing so. Although these challenges have held back
the growth of the medium so far, no one can deny the significance of online video advertising going forward.
eMarketer conservatively predicts that total spending on this medium will reach $1 billion by 2008.
Types of Online Video There are three main types of online video advertising:
Ad networks have responded to the demand for video advertising in several ways. Several of the large ad networks such as Advertising.com and ValueClick have expanded their offerings to include video and rich media. "What we're finding with advertisers is they really want the content. In most cases we're buying as much as we can get. There's so much demand and there's a lot of publishers adding this kind of content," said Mollie Spilman, Advertising.com's chief marketing officer. Rich media creative agencies such as EyeBlaster have extended their business models from pure technology providers to video and rich media focused ad networks. Newer ad networks such as Tremor Network and LightningCast began to focus exclusively on video and rich-media formats in an effort to differentiate themselves. In May 2006, Google threw its hat in the ring, announcing that it would begin offering video advertising on publisher sites (though not on its own sites.) Google's video ads can be purchased on a CPC or CPM basis, will be clickable, and feature a click-to-play format. The company estimated that advertisers would generally need to bid "in the single digit dollars to low double digits" to display their video ads. Below is an example of a sample Google video ad: Challenges & Opportunities Facing Online Video Advertising
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Mobile
One of the most exciting new mediums for online advertising is the mobile phone. The total number of cell phone users in the U.S. grew to 207.9 million at the end of 2005, representing 69 percent of the U.S. population. Traditionally limited to basic SMS text messages due to the limited number of data plan subscribers in the US (around 2 million), mobile advertising is set to explode as an ever increasing number of producers and media companies begin to make more mobile content and applications available.
| :: A Closer Look: Mobile Advertising | ||||||||||||||
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In addition to reach, mobile advertising offers several compelling benefits to advertisers. Because each person
has to provide their personal information to sign up for wireless service, mobile advertising allows for true
personalization and targeting. It also allows for easy sharing of advertising content among networks of friends
and contacts. Mobile advertising is also a measurable medium that allows advertisers to determine how well their
campaign is performing, and make tweaks to optimize it. A big potential benefit is the ablity to use location-
based targeting to deliver relevant advertising messages at the point of purchase.
Although advertisers are optimistic about mobile advertising (according to a recent survey 45% of brands are looking to interact with users on their mobile phones in 2006), the market has been very slow to develop. Fear of a consumer backlash has led many content companies to utlilize subscription models rather than rely on advertising. Traditional ad networks lack the expertise and incentive to push into the wireless medium due to it's small size. Mobile advertising also faces a chicken-and-egg problem with mobile content, which has also been slow to take off beyond ringtones, wallpaper and games. Mobile content, in turn, is dependent on the adoption of broadband wireless access. In many ways, the mobile market today is much like the Internet in 1998 - lots of innovative ideas and applications, which needed to wait for broadband adoption (Pew estimates 53MM households now have broadband internet connections) before they could become viable, thriving businesses. While some innovative new companies have begun offering some interesting mobile advertising solutions, most of the mobile ad networks offer little more than SMS text messages, logo sponsorships, wallpapers and rintones. Video is starting to make an appearance but still has a long way to go. With all the development yet to take place in the mobile market, the opportunities for new entrants to create value by delivering relevance in a way that captures the unique abilities for the mobile medium will continue to be great. Companies that can extend predictive analysis services to the mobile arena will create huge value by allowing advertisers to deliver mobile advertising impressions to the right consumer at the right time. MMS is proving to be highly effective in enabling advertisers to deliver powerful branding messages that drive response rates. Mobile Internet banners and text ads are likely to emerge as WAP page views increase. Video advertising is likely to play an increasingly prominent role, as evidenced by MobiTV's recent announcement that it would begin selling video ads for its live mobile TV and mobile content subscription services. The self-described "cable TV network for mobile phones" already has half a million subscribers. Mobile search and click-to-call technology also offer great opportunities for mobile networks. Consumers will be able to access data and information through voice-enabled search, or by using their camera phones as a selection-tool to receive more information on the world around them. Whether this market will be captured by established Internet companies or by a new entrant remains to be seen. There is still much confusion in the market, which when combined with disruptive technology creates rich investment opportunities. Company Profiles:
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In-Text
In-text advertising contextually matches ads to text on a publishers website, and displays a relevant ad when readers float their mouse over one of the targeted words or phrases. Within the past couple of years, a couple of ad networks have launched focused on in-text advertising. The new format theoretically seemed to combine the contextual targeting ability and relevancy of search with traditional in-page banner advertising. In-text advertising also seemed to offer a solution for sold-out inventory, allowing search advertisers further reach through a new network of publishers.
From a consumer's perspective, in-text advertising is less obtrusive than other forms of online. If a consumer is reading an article to research a purchase they might even find in-text advertising valuable. The issues with this form of advertising arise with the publishers and content creators.
Writers and journalists tend to be very sensitive about the line beteen editorial content and advertising. In order to maintain their integrity writers try to stay clear of displaying any blatant commercial influence on their work. For that reason in-text advertising experienced a strong backlash from the editorial community when it first launched. In December of 2004, Forbes.com made headlines when it decided to stop running Vibrant Media's IntelliTxt ads in response to objections from its editorial staff. Another area of concern is the possibility that writer's may develop stories around the most profitable in-text keywords.
Today the in-text advertising format has become a lot more acceptable, although there is still some debate over how ethical it is from a journalistic perspective. Due to its likelihood to increase relevance, it has proven to generate an effective response rate versus traditional banner advertising. As a result, in-text advertising is expected to experience strong growth over the next few years.
Below is an example of an in-text ad on the IGN website. Edmunds is advertising its price comparison service through the targeted keyword "Toyota."
Company Profiles:
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Launched ContentLink in-text advertising solution based on proprietary contextual targeting technology. Recently announced an investment by Sequoia Capital. More |
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Launched in-text advertising solution in 2004. IntelliTxt product widely regarded as leader in in-text advertising. Publishers include IGN, Entrepreneur.com & AskMen.com. More |
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Yahoo is currently beta testing a new in-line advertising product called Y!Q. Rather than display just advertising Y!Q pops up related search info (including sponsored links). More |
Desktop Apps
A select number of ad networks deliver advertising through applications that are downloaded to a consumer's desktop. Commonly referred to as "adware", these applications will typically monitor the websites that a consumer visits and deliver targeted pop-ups triggered by his or her browsing behavior.
The "adware" will typically be bundled with consumer friendly applications that provide free services such as live weather updates or price comparisons. These applications are typically promoted through a network of publishers, or affiliates, as well as through the adware company's own website. Although adware focused ad networks target consumers directly, they still have to pay publishers for the application downloads that they generate. Payment is usually made as either a flat per download fee, or a percentage of revenue generated from the consumers that came through that publisher.
Because it targets consumers at the moment that they're on a particular type of website or performing a specific behavior online, advertising through adware is more of a contextual targeting solution that it is behavioral targeting. The format can generate extremely high response rates, attracting the attention and dollars of direct response advertisers.
The huge issue with the online adware business is the rampant fraud, which has recently led to extremely negative publicity for companies in this space, not to mention a few lawsuits. The problem is that it is easy for "rogue affiliates" to promote the consumer friendly applications without informing consumers that it comes bundled with adware. In many cases advertisers that use the adware channel have no idea that the software is being installed on consumer's machines without their express consent. The following graphic summarizes the typical chain of events, illustrating why it's so easy for companies to abuse privacy laws:
In April of 2005, the NY Attorney's Office filed a lawsuit against Intermix Media, claiming that the company was installing advertising software on home computers without informing the owners that it was doing so. Intermix would end up paying $7.5 million to settle the lawsuit - all the while denying that it was responsible for the illegal downloads. Later that year, Microsoft announced that it was calling off a potential acquisition of Claria, one of the leading adware companies, a move widely thought to be a result of Claria's image problems. In February of this year, the FTC announced plans to publicly out advertisers that use adware. Commissioner Jon Leibowitz stated "maybe shaming a company on how they are spending money" might benefit consumers' privacy. Finally in March of 2006, Claria announced that it was exiting the adware business. The company would go on to raise $40 million from SOFTBANK and Sand Hill Capital to launch it's PersonalWeb personalized homepage service.
Company Profiles:
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Leading adware company, with 12 million unique users. Focus on real time contextual targeting. Recently raised $35MM from Trident Capital and ABS Capital Partners. More |
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Provide an advertising-supported live weather desktop application that has been downloaded 63 million times. Raised $23 million from Sequoia and Polaris in 2004. More |
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Before exiting the adware business in March 2006, Claria had 44 million users of its advertising-supported GAIN price comparison application. More |
Affiliate Programs
An affiliate network is a unique type of ad network that aggregates advertisers rather than publishers. Advertisers submit their their campaigns to the affiliate network, along with the CPA or CPC amount that they are willing to pay publishers to run those campaigns. The affiliate network then aggregates those campaigns into a central location that "affiliate" publishers can browse through to find offers that they can run on their websites and newsletters. In return, the affiliate network receives a commission of each sale that is generated by its affiliates.
To become an affiliate, publishers have to pass through an application process to validate where the advertising offers are to run. Once approved, publishers can browse for advertising offers, grab the code for the campaigns they're interested in, and check on their performance all through the affiliate network's platform.
Company Profiles:
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LinkShare is the first and largest performance-based online affiliate network with clients such as Wal-Mart & Match.com. Acquired by Rakuten for $425 million in Sep '05. More |
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Commission Junction is one of the leading performance-based affiliate network, with clients including Buy.com & Yahoo! Acquired by ValueClick for $58 million in 2003. More |
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Affiliate Fuel is an online performance-based affiliate network that was acquired by Experian in April 2005 for an undisclosed amount. More |
Ad Networks & The Online Advertising Value Chain
In the online advertising value chain, ad networks sit in between advertisers and publishers. Through the various differentiation and value-add services described above, they have managed to continue to add value in the way that they bring these two parties together.
Because of the broad range of services that they offer, ad networks can also be viewed as many different players along the value chain. They can be seen as advertisers by the publishers whose remnant inventory they purchase. They can be seen as publishers by the advertisers who purchase media from them. They typically offer some type of lead generation services themselves, but will also work with traditional lead generators such as LowerMyBills. Finally because most of the larger ad networks provide their own proprietary ad serving solutions, they are often viewed as ad servers by the industry at large.
Advertisers/Agencies & Ad Networks
Advertisers/agencies work with ad networks in much the same way that they work with publishers. For all intents and purposes an ad network will be treated as a single publisher by the advertiser - they will be included in RFPs, issued Insertion Orders, trafficked creative, and have their performance monitored over time.
Publishers & Ad Networks
Publishers work with ad networks in a number of different ways:
- Individual Media Buys: Ad networks that purchase inventory from the
publisher on a campaign by campaign basis act much like a traditional advertiser.
- Joining the Network: Ad networks will often encourage a publisher to apply to join their network.
Publishers that are eligible (based on website content and traffic) will receive set of code
(called "tags") that will display the ad network's advertising campaigns. The tags are uploaded to the publisher's
own ad serving system, usually along with the tags of several other ad networks. Based on the effective CPM rates
that are seen from each ad network, the publisher will rank the order in which to serve each ad network's campaigns.
The publishers are then paid at regular intervals based on the number of impressions, clicks, or sales that they are able to generate. CPM-based payments often fluctuate based on the level of performance and the mix of advertisers that end up running on the website. Large publishers with extensive reach or a highly targeted audience are often able to negotiate fixed CPM rates for their remnant inventory.
- Rep Model: In a rep model the ad network is responsible for filling all of the inventory on a particular website at the highest eCPM rate possible. Publishers are paid on a revenue-share basis at regular intervals.
Innovation & Ad Networks
Ad networks have historically been forced to innovate and re-define themselves in order to maintain their position in the online advertising value chain. They've had to adapt to a rapidly changing marketplace where new technologies were continuously redefining how companies could communicate with consumers online. All the while they needed to stay ahead of the curve in order to continue adding value to their two sets of customers - advertisers and publishers. As a result of all this, the current of innovation still runs strong among ad networks. The following areas in particular are currently seeing a very high degree of innovation, creating an opportunity for potential investment opportunities.
Convergence
A much heralded trend in the online advertising world is that of convergence - both of online advertising technology among companies in the market, and of the Internet as a whole with other mediums such as TV and radio.
Several online advertising firms have been able to create value by combining best practices from different areas of the online advertising market. For example AdKnowledge has experienced tremendous growth by combining behavioral targeting, email marketing, and a self-serve advertising interface. Although most firms today focus on one area of targeting - site-specific, contextual or behavioral - it is widely expected that in the future online advertisers will be able to utilize all of these technologies within the same campaign and through a single provider. This creates unique opportunities for technology providers, particularly those that develop an expertise in using technology to deliver true relevance. It also points to a continuation of the strong M&A activity in the online advertising space.
The convergence of the Internet with other mediums is already taking place. Almost all of the major media networks are putting their content on the Internet through ad-supported video portals or pay-per-download applications such as iTunes and MovieLink. The media companies aren't just using the Web as a content delivery channel, they're also tapping into the explosion in user-generated content, social networks and blogs to inspire their own programming and predict the popularity of upcoming shows.
Meanwhile, online advertising is increasingly migrating to television, driven by the spread of digital video recorders such as Tivo. In November 2005, Yahoo and Tivo accouned a deal that would connect Yahoo content and services to Tivo's set-top boxes. Six months later in May 2006, Tivo launched Tivo Product Watch, the first advertising search product for TV. Finally in June 2006, Tivo announced the launch of TiVoCast, a new service that will deliver broadband video to the television sets of TiVo subscribers. Content providers include the National Basketball Association (NBA) and Women's National Basketball Association (WNBA), the New York Times, Heavy.com, iVillage, CNET and Rocketboom.
Convergence with the Internet is also happening across other mediums, such as radio and game consoles. In Jauary 2006, Google acquired dMarc Radio, a radio ad distribution company, for $102 million cash and up to $1.1 billion of contingent cash payments over the next three years. The search giant stated that it hoped to explore "new ways to extend targeted, measurable advertising to other forms of media," including print and eventuall television. Internet enabled gaming consoles are beginning to allow for significant and interactive in-game advertising. According to interactive entertainment market research firm Parks Associates, PC in-game advertising will increase from $80 million in 2005 to more than $400 million in 2009. In May 2006, Microsoft acquired Massive, the leading in-game ad network for upwards of $200 million.
This drive towards integration creates a host of opportunities for online advertising companies.
New, interactive formats are likely to be needed that allows advertisers to engage with their audience while taking advantage of the Internet's interactivity. One possible solution is product placement. Companies such as NextMedium are taking what was once a highly labor-intensive process that depended on who you know, and developing product-placement marketplaces that enables entertainment companies and advertisers to define, measure and manage product placements.
There will also be great opportunities for extending behavioral and/or contextual targeting from the Internet across other mediums. This would result in more "pull" driven advertising that is relevant to what consumers are actually looking for. In June 2006, Microsoft announced that it was extending its adCenter search advertising model to offline media, including TV and mobile devices. Its acquisition of Massive and IPTV broadband TV technology position the company to make this type of convergence work.
Greater integration will also result in a need for advertisers to better manage and measure their campaigns across mutliple platforms. TV audience tracking firm Nielsen Media Research has already responded to this need by announcing plans to track TV viewing online and on mobile devices, as well as in restaurants and bars. This trend is likely to result in even more convergence among agencies and ad networks.
Company Profiles:
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Connects advertisers and agencies directly to radio stations through an advertising platform that automates sales, scheduling, delivery and reports. More |
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Brand integration technology allows entertainment companies and advertisers to define, measure and manage product placements. Backed by Bessemer. More |
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Use the Internet to enable small businesses to create, traffic, and monitor local TV advertising. Funded by Battery Ventures & Index Ventures. More |
New Mediums
The emergence of new medium such as online video, RSS and podcasting have already created opportunities for new entrants in the ad network market. These new mediums typically require a technological expertise and skill set that are not easily replicated. The market for new mediums also tends to be too small in the early years for the larger players to devote significant resources to. This is the case today with RSS and podcasting. If developed over time however, the entrant's knowledge base can give them a head start over the more established competition by the time the new medium reaches mass adoption.
A Forrester Research survey of 253 interactive marketers in May 2006 indicates that companies are not yet into emerging media. Some 72 percent of marketers said they don't have plans to advertise in videogames in the next year. Only 13 percent reported using blogs or social networks in their marketing efforts, and 49 percent said they don't plan to do so during the next year. Given how early we are with regards to adoption of emerging mediums such as RSS, podcasting and social networking, it likely that there will still be plenty of opportunities for new entrants in these markets.
Some firms have already begun positioning themselves to take advantage of emerging mediums. In June 2006, digital marketing agency Organic announced that it will launch a new practice to help clients determine opportunities in social networks, videogames, video on demand and other new digital channels
Local Advertising
The Internet has disrupted most of the mediums that local advertisers had traditionally used to reach consumers. Sixty three percent of American adults now go online to search for products and information. As a result, the print yellow pages (a $25 billion industry) has been declining dramatically - a Kelsey Group study found that only 36% of people use print Yellow Pages in 2006, down from 52% in 2003. Newspaper usage has declined 10% in the past decade. Meanwhile a recent study by Kelsey-Bizrate estimates that 25% of all Internet searches are local in nature.
Lacking the resources and technology expertise of larger companies, local advertisers need a simple solution to reach their customers through the Internet. Local businesses nationwide are estimated to spend $100 billion on advertising targeting local or regional audiences. However only 1% of that advertising budget has migrated online. New entrants have emerged in response to this opportunity, hoping to help bring local business advertising online.
Initial results are promising. According to Borrell Associates, online ad spending on locally-focused ads increased 78% to $4.8 billion in 2005, and is expected to grow to $5.8 billion in 2006. Total online advertising spending is estimated to have been $12.5 billion in 2005. Local businesses are also expected to double their paid search spend to $1 billion in 2006.
In addition to paid search, new innovations are emerging that will enable local advertisers to integrate local search, maps, and click-to-call technology. Some new venturesare even using the Internet to help local advertisers take advantage of local TV advertising.
Company Profiles:
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Local merchants can build online profiles, network with each other and get help placing search ads. Received $4 MM from Rustic Canyon, BA Ventures, Steamboat Ventures. More |
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Provides local advertising products and services that are sold through local ad sales dept. of yellow pages, newspapers & online marketers. Raised $5MM from Redpoint. More |
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Use local search to bring Internet marketing to local businesses. Raised $7.5 million from Vantage Point Partners. More |
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Developed paid search-based advertising system that allows any advertisers to receive phone leads rather than clicks. Funded by Benchmark Capital & Carlyle Group. More |
An Online Advertising Marketplace
The online advertising market today is full of friction and imperfect information, which allows the larger ad networks to play the arbitrage game through blind publisher networks. More and more, advertisers and publishers have been demanding a more open and fair way to buy and sell online media. Several entrants have emerged in response to this need, promising more transparency and convenience through open online advertising exchanges. Their vision is to create a "Nasdaq-like" system for trading advertising inventory that would allow advertisers and publishers to interact directly with each other.
If technology is able to aggregate the long tail of publishers while also providing targeting and optimization services, this trend could pose a significant threat to the traditional ad networks by distermediating them from the online advertising value chain. So far these type of exchanges seem to gave caught on with advertisers and publishers. Right Media recently announced that over 2 billion impressions a day were being traded through the Right Media Exchange. Meanwhile AdBrite, the "Internet's Ad Marketplace" has seen it's publisher network grow from 4,000 publishers in early 2005, to over 16,000 publishers by June 2006.
Online advertising exchanges tend to be less-labor intensive than traditional ad networks, however they also take a much lower percentage of revenue (typically around 15%) than the established players (who have been known to collect as high as 50% of the ad revenue through arbitrage). Due to the fundemantal differences in their business model, it is unlikely that the larger ad networks will rapidly evolve to the marketplace model. Established ad networks such as Advertising.com and ValueVlicl provide the vital sales function, demand for which will not evaporate with the new exchanges. Some media buyers may not want to scan through hundreds or thousands of websites, or perform queries for the inventory that best suits them.
Although a dominant online advertising marketplace may emerge over the next few years, it will likely be created by a consortium the large online advertising players, rather than by a single entrant. In fact, in May of 2005 eBay announced that it had won the bid to develop an electronic trading system for buying and selling media, mere days after an ad industry task force unveiled the plan to test the idea.
Company Profiles:
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Launched the first open media exchange for the interactive advertising industry, allowing buyers and sellers to trade online impressions. Raised $7.25 million from Redpoint. More |
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"The Internet's Ad Marketplace." Positions itself as an eCommerce site selling ad space across thousands of websites. Raised $8 million from Sequoia in 2005. More |
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Operate IBGraphics, an auction-based contextual advertising marketplace that allows advertisers to purchase ads on premium sites such as Business Week & PC World. More |
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AdMarket allows publishers to create a private CPC marketplace for advertisers to bid for placements directly. Traditionally operated as an ad server. More |
Prominent Ad Networks
| Ad Network | Impressions (monthly) |
Unique Users | Reach | Publishers | Pricing | Medium | Vertical | Targeting/ Optimization |
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35 billion | 135 million | 80% | 3,000 | CPM/CPC/CPA | Website Video |
General | Content Demographic Geographic LeadBack |
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25 billion | 112 million | 65% | 13,500 | CPM/CPC/CPA | Website |
General | Content Demographic Geographic LeadBack |
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17 billion | 90 million | 53% | 2,500 | CPM/CPC/CPA | Website |
General | Content Demographic Geographic LeadBack |
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12 billion | 81 million | 47% | 900 | CPM/CPC/CPA | Website |
General | Content Demographic Geographic LeadBack |
|
10.5 billion (searches) |
N/A | N/A | ~ 185,000 | CPC/CPM | Websites Blogs RSS Video |
General | Contextual |
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10 billion | 100 million | 58% | 13,000 | CPA | Website |
General | Content Demographic Geographic |
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7 billion | 79 million | 46% | 5,500 | CPM/CPC/CPA | Website |
General | Content Demographic Geographic |
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6 billion (searches) |
N/A | N/A | 2,000 (Just launched) |
CPC/CPM | Websites Blogs RSS |
General | Contextual |
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5 billion | 128 million | 75% | 3,000 | CPM | Website | General | Behavioral |
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4.6 billion | 62.5 million | 37% | 2,000 | CPM/CPC/CPA | Website |
General | Content Demographic Geographic |
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2 billion | 105 million | 61% | 1,000 | CPM/CPC/CPA | Website | General | Contextual |
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800 million | 60 million | 35% | 300 | CPM | Video | General | Content Contextual |
|
300 million | 8 million | 5% | 1,100 | CPM/CPC/CPA | Blogs | General | Content Demographic |
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60 million | 11 million | 6% | 168,000 | CPM | RSS Blogs Podcasts |
General | Content Demographic Geographic |
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RSS: 35 mm Web: 80 mm |
3 million | 2% | 9,000 | CPM/CPC/CPA | RSS Blogs Podcasts |
General | Content Demographic Geographic |
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65 million | 13 million | 7.5% | 30 | CPM | Blogs | General | Content Demographic |