FUNDAMENTALS OF AD NETWORKS: POST 4

DOES THE WORLD NEED ANOTHER AD NETWORK?

Hmm. For the first few months of this year, there was rarely a week when AT LEAST one new ad network wasn’t launched. Some of the forces that have driven this growth include:

• Relatively low learning curve and infrastructure requirements
• Potential for high profitability (if successful.)
• Investor frenzy to invest in networks, and the payment of extremely high multiples for such networks as Glam.

There are many that feel that too many ad networks have been launched without a great deal of unique competitive strengths or critical mass.

Given the glut of networks out there, those who are contemplating starting a new network should consider some or all of the following questions:

Proof of Concept

• Is the offering of the proposed network unique? The world does not want or need another me-too horizontal or vertical network. It may want and need one with a clearly defined and differentiated purpose.
• Is there high quality, desirable content to be aggregated? In some market segments, there really isn’t much high quality inventory left to represent.
• Can you expect consistent advertiser demand? If a particular category is simply “hot” but not one for which consistent, sustained demand has been proved, you need to consider the odds of market stability. As an example, a number of widget ad networks have sprung up, among many others. While at the height of the widget craze it may have seemed possible to have half a dozen or more successful networks in this space, as this market cools to a simmer it is likely that only the strongest will survive.
Logistical Issues

• Can you build a quality team for your new network? It is brutally difficult to attract and retain sales, marketing and other staff in the current environment. Anecdotal evidence suggests that it is easier for vertical networks to attract teams because potential employees may be very passionate about the vertical. For example, one would expect an ad network like Sportgenic, which is geared to sport enthusiasts, to have an easier time attracting employees than, say, the 37th general audience ad network.
• Do you have pre-existing relationships with publishers and advertisers within the market segment you are targeting? Without them, it may be difficult to get on the radar of buyers or publishers.
• Can you achieve critical mass?

Financial Issues

• Do you have the capital necessary to get started? It would be highly inappropriate to expect profitability immediately in a market with so many players. You will need resources to sustain you as you build.

Other Issues

• In an environment of hundreds of networks, does your team have the passion necessary to succeed? This will be critical because providing unsurpassed customer service is essential in a market as competitive as this.
• Can you bring thought leadership to the market that you are serving? Along with price, quality, and reach, publishers and advertisers consider factors like the extent to which you can add to their knowledge and expertise with an audience. This knowledge may increase CPMs over time, or allow advertisers to develop more effective programs and creative. This will not make a buyer pay $20 CPM over a $5 CPM, but over and over buyers tell us that they are loyal to networks that add to their knowledge and provide game changing ideas.

CONCLUSIONS

There are many reasons why ad networks are playing a large and growing role in digital. These factors, coupled with the massive multiples investors demonstrated a willingness to pay for such networks as Glam.com, Blue Lithium, and 24-7 Real Media, have made ad networks the “darlings” of 2008. As the market has grown, networks have specialized into broad reach horizontal, niche-focused vertical, and new media categories, all of which continue to get play in the marketplace.

But as is typical in an emerging business area, there will likely come a day of reckoning when the market culls the weaker companies and concepts and consolidates more share and revenue in a small set of major players.

As companies contemplate entering this space, they need to take a hard look at their network concept to ensure it is strongly differentiated. Because great ideas will profit, but weak ones will surely wither and die.