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The Death of Ad Networks: Fact from Fiction

Posted by Julia Casale-Amorim on July 13, 2009 at 10:18 AM PDT

I recently came across an article published by MediaWeek entitled, Not Dead Yet: Ad Nets Have Survived, Thanks to the Recession. I think it’s ~~a little~~ very presumptuous to infer that the ongoing survival of ad networks (as if they were a species facing extinction) can be attributed to recessionary times alone. The sentiments of this article summarize a lot of the points made in past articles that too have prophesized the death of ad networks. There is certainly no shortage of opinions on the subject of ad network viability. Here’s my take.

So, are ad networks dying? Yes, some ad networks are dying, but the species is hardly facing extinction. Hundreds of ad network infants (founded in the last two to three years – a.k.a. the ad network bubble) all began with a similar objective: work with publishers and advertisers to maximize buying efficiency and inventory yield.

Despite this clear, seemingly sound objective, the mass proliferation of ad networks has lead to tremendous inefficiency and a tarnished perception of the value and “place” ad networks set out to occupy at the inception of their kind – effectively rebranding the ad network as “Chief Inventory Commoditizer”. While this label may be fitting for some networks, it is certainly not appropriate for all.

So how did this happen? Consider the following:

The vast majority of these infantile networks use the same technology, the same platforms, and the same approach – each applying a different “sales spin” to what are essentially identical offerings. Many are simply selling “air”, acting as just another needless cog in the machine that more often than not fails to add any real value to the supply chain. Today, the tools exist for almost anyone to become one of these “cookie-cutter” networks.

The effect:

On Publishers

Publishers have grown tired of working with upwards of twenty different ad networks at a time and of allocating the resources required to optimize the efficiency of their relationship with each. They are having trouble differentiating between the seemingly endless ad network options and share amplified concern about how to safeguard their brands and their audiences from potentially hazardous advertising. To put things in perspective, the burden has become so great for publishers that an entirely new category of company has emerged – ad network optimizers – to help manage these relationships.

On Media Buyers
Similarly, media buyers are growing tired of all of the ad network sales pitches, each sounding like a different version of the same thing. Differentiation is top of mind for buyers, but beneath the “brand”, most ad networks are virtually the same and so they are hard pressed to present unique selling points. Buyers are shifting their focus to the one metric that can provide a straightforward means for differentiation – RESULTS.

On Ad Networks
The current state of our economy is starving ad networks of VC dollars and advertising budgets. The money fountain that these companies were established on is starting to run dry. Most importantly, the inborn accountability of the interactive medium is catching up with ad networks – old and new, who aren’t actually creating value. So yes, many of these cookie-cutter ad networks are indeed dying.

Survival of the Fittest
The networks that will survive will be those that are focused on (and that actually deliver on) one clear objective - creating value for all industry stakeholders (i.e. publishers, advertisers, web users). The survivors will be companies that have the ability to truly innovate and that do so in a way that makes the process of buying and selling online media more efficient, including, of course, companies that first and foremost deliver RESULTS.

The nature of this emerging generation of ad networks will be much like the companies that survived through the end of the year 2000 – that’s right folks, this phenomenon is nothing new…it’s happened before. Few remember that there was a similar explosion of ad networks just before the dotcom bust; only a handful survived and nearly every one that did is still a top-ten ad network.

Are ad networks a threat to direct sales?
No. Why? Because an ad network will never be able to offer the immersive media opportunities that a direct sales force can. We can’t create the premium custom sponsorships that allow brands to buyout sections of a property, align closely with content, and generally become one with the publishers with whom they have chosen to associate. These experiential direct sales offerings deliver undeniable impact value and deserve the premium CPMs at which they are sold.

Yes, we can deliver instantaneous results, but in the world of engagement, immersive experiences and branding, results are only one part of the equation. In that same breath, I will say that ad networks can negatively impact their publisher partners if they are of the breed notorious for saying one thing and doing another. Ad networks that sell direct sites within their network without permission, or that provide information that they do not have authorization to disseminate, are harming direct sales. As I see it, these networks are acting out of desperation, and represent the breed of ad network that is dying.

Publishers who insist on selling, in addition to premium immersive experiences, the long-tail of their properties without the scale, breadth and technology prowess offered by a “real” ad network, risk diluting the premium value of their brands. This is where technology comes to the rescue and is another reason why ad networks are not a threat to direct sales, but instead are complimentary – actually working to preserve the value of those publishers’ direct sales efforts.

Are publishers walking away from ad networks?
No. There will always be a handful of publishers who go against the grain because they believe that they can or that they are entitled to because of their stature. But in a year’s time, this group of anti-network publishers has not grown significantly in size – a fact that isn’t likely to change. Why? Because ad networks really do produce an efficient and reliable revenue stream for their publisher partners – one that cannot be easily replaced, especially in today’s economic climate.

I do applaud the ESPNs and Martha Stewarts of the world for speaking out because they are putting the spotlight on what I consider to be a real problem – the ad network space is crowded (300+ and counting), and this degree of saturation is not helping anyone. There are far too many companies in this space who frequently say one thing and do another, undermining the relationship ad networks and publishers have with each other, ultimately damaging industry perception of the value offered by ad networks and contributing to the perception that inventory is becoming commoditized. Moreover, this is creating a strenuous burden on the planning and buying side that is impacting both direct and network sales efforts alike. This needs to change, and I believe that it will, as our segment begins to shed its fat.

The Phenomenon Everyone is Overlooking
The key problem – plummeting publisher CPMs – for the most part can be attributed to a simple economic reality: excess supply and not enough growth in demand. The internet is still growing like wildfire. Ad budgets are not…yet. Year-over-year from 2007 to 2008 display budgets grew just 9%. Internet traffic on the other hand is growing between 30 and 50% year-over-year (a statistic that pre-dates the point where Facebook and Twitter really started to rock the Web’s world), which one can only assume has at least a loose tie to ad impression growth.

If the supply of advertising inventory is skyrocketing at an annual rate of roughly 30-50%, but advertising budgets are rising at the modest pace of 9%, then CPM rates are naturally going to fall, not rise, which is exactly what has been happening. It’s easy to point the finger at ad networks (and all that talk of “inventory commoditization” sure does make for good headlines), but on the whole, ad networks aren’t responsible for this.

So, who will survive? In the interactive mediaspace, where accountability reigns supreme, surely only the fittest will survive. But, what is considered “fit” will only be revealed in time.

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