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Ad Company Original Advertising
A Charlie Brown Ad Agency
Digital Media Ad Networks And Lead Generation
(Abhishek Uppal, Piper Jaffray Investment Banking; Reference to The User Revolution)
The ad network is an intermediary that aggregates or purchases advertising inventory (i.e., banner ads, text links, and rich media slots) from a number of Websites and sells this inventory to advertisers or agencies. The ad networks group the different Websites into a number of verticals or content channels, typically 10-20, depending on the content of the site. Examples of different content channels include sports, technology, gaming, men¡¯s interest, women¡¯s interest, and teens. In addition to content channels, the ad networks target specific users based on a number of other factors including geographic, demographic, time of day, and behavioural analysis. The ad networks also offer a number of value-added services to advertisers including strategy, media planning, creative, optimization, campaign management, and reporting.
Advertising Networks fulfil a valuable role in the online advertising market for both advertisers and publishers. Ad networks enable advertisers to reach thousands of smaller publisher sites without having to form direct relationships. If an advertiser wants to run a large branding campaign, an ad network can fulfil the advertiser¡¯s reach and frequency targets and complement the advertisers branding on the key portals and large vertical sites. For smaller publishers, typically beyond the first few hundred, ad networks provide a cost-effective method to sell their ad inventory without having to hire their own sales force. The larger sites, including the portals, also use the ad networks to sell run-of-site or remnant inventory. Below are some of the key benefits to using an ad network:
Reach. Ad networks can be used for brand marketing to reach millions of consumers across multiple verticals. For example, an auto manufacturer launching a new car may want to maximize its branding impact by using ad network inventory in addition to large portals and vertical sites. While the top portals and vertical sites often experience inventory shortages, there is often no shortage of ad network inventory.
Pricing. Ad network inventory is often priced at a fraction of that of the large portals or vertical sites. A typical ad network CPM is $1-$2 compared with $8-$10 or more from a portal or large vertical.
Targeting Across The Network. Ad networks can be used by advertisers to target specific content channels that may not exist with the large vertical sites. Additionally, improved targeting technologies such as behavioural analysis should increase the value of the network to advertisers.
Optimization. Optimization technologies enable the networks and the advertiser to analyze which sites or offers are performing the best and to shift impressions to those areas that are performing the best. By contrast, when an advertiser contracts for inventory with a specific vertical site, it would be much more difficult to adjust the campaign once it has begun.
Key Themes For Ad Networks
During the first phase in the evolution of the ad network industry, the networks received a relatively bad reputation. The original ad networks were focused on scale only, recruiting as many publishers as possible, without regard for quality of the publisher. The first ad networks also lacked solid targeting technologies and provided little site transparency to the advertiser. The second phase of the ad network industry corrected many of these issues, with the networks providing better quality sites, increased transparency, and better targeting technologies (such as behavioural analysis).
Given the advances made by the ad networks, they are experiencing increased adoption by larger advertisers and many brand advertisers, and will increasingly become a standard component of an online campaign. Additionally, as inventory on the portals or large vertical sites becomes tighter,
the advertisers will increasingly seek out the ad networks, which can meet their reach and frequency targets. Finally, with the advent of behavioural analysis, advertisers can serve ads in specific verticals (e.g., auto) on essentially any site.
The ad networks are making progress in increasing their value to the advertiser through improved targeting methods. There are several forms of targeting used by ad networks today, including geography, demographics, time of day, content channel, and behavioural analysis. The big focus today on targeting is behavioural analysis. There are essentially two types of behavioural analysis:
1. Cookies. An Internet user¡¯s actions are tracked through the use of cookies, and ads are served to the user based on the type of content that he or she is viewing or has viewed. For example, someone who is on an auto site and then moves to a news site may be served an auto ad.
2. Purchase Intent. Purchase intent targeting tries to identify and target a consumer based on the stage of the purchase cycle in which the consumer is.
Improved targeting technologies enable the advertisers to generate a higher ROI while also enabling the publishers and networks to earn higher fees. According to a recent report by Jupiter Research, 88% of advertising agencies that have used any type of behavioural targeting in the past 12 months are ¡°very or somewhat¡± satisfied. For the ad networks, better targeting technologies could help increase pricing given the potential for higher conversion rates and ROI to the advertiser. There are a number of companies that specialize in analyzing user behaviour on the Internet (such as Revenue Science and Tacoda), and these companies will often partner with the ad networks or build their own network.
The level of competition is currently healthy in the ad network space. The market is currently represented by a few larger players, including Advertising.com and ValueClick, as well as many smaller networks. A key concern for investors is if the arbitrage opportunity, and thus the gross margins of the networks, will shrink from current levels. Gross margins today for the ad networks range from 20%-50%. I expect margins to decline over time; do not foresee any big near-term risks to margins. The biggest concern for the current players is if a larger player, including Google, were to gain increased traction and price very aggressively in order to gain share. That said, the ad network space is a zero sum game, nor do we believe it will be dominated by two players as we have seen in search.
About the Author
Abhi Uppal is a cornell grad and a marketing expert.
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