Ad Nets & Ad Nots
Nice post by Andrew Chen about the proliferation of ad networks and the surprising success of several that have sold for very high multiples. He summarizes it this way:
My overall lesson from all of this is that a lot of times, people view things as “winner take all” and sometimes it is that way – but in this case:
mature industry + real revenue + adjacent space heating up
= huge outcomes for everyone
I think this is true, but it’s probably cyclical and there’s bound to be a lot of consolidation ahead. True, thanks largely to MySpace, YouTube, Facebook, et al, total ad inventory available has skyrocketed. True, no single network or handful of networks can meet 100% of this growing demand. And true, multiple pricing models and targeting technologies help to make this a market for the multitudes.
But consider some of the pressures working against “huge outcomes for everyone.” Various estimates put the total number of operating online ad networks in the hundreds. Yahoo’s Right Media Exchange and nascent others can accommodate all of them – but only for as long as they contribute real value to the marketplace. Better targeting, better optimization, better something is required for establishing a niche, staying in business and succeeding.
Without the exchanges, there is almost literally no hope for dozens of these networks. Media buyers are humans, and they are in short supply as it is. There is simply no way for them to add another thirty phone calls and meetings to every day to give serious attention to every network that wants their business.
Ultimately, there can and will be “a number of” winners. That number will probably be closer to 20 than 200, however, due to basic Darwinian principles. Some reasons why this is so:
1. The largest contributors of inventory to ad networks already work with 10, 20, 30 or more networks. It’s a big, ugly, inefficient process in which networks pass ad impressions back and forth, up and down a daisy chain or waterfall, depending on your metaphoric predilections. As in a beauty contest, there can only be one true winner, and that’s the number one network in line. Ad impressions get stepped on many times, the way poppies get reduced to heroin and then to a street mix that’s cut time and again before it hits the “user.” (At last, an excuse to relate web users and drug users 
2. Conversely, the hundreds of ad networks are all selling the same media placements. They are all offering every known and quite a few imagined forms of targeting, but they all base their targeting decisions off the same limited data set – primarily context. This is true of contextual ad networks and of behavioral networks that rely on context to define behaviors or interests.
In the end, individual networks won’t win simply because inventory is growing and they’re bigger and badder in getting to the best of it first. Media placement, context-based targeting or some new spin on optimization don’t matter that much. With apologies to my publishing colleagues, that’s the commodity end of the business.
Advertisers need a better, more predictive and accurate data source to drive much more value through the media value chain.
