Disaggregated Media (continued) – The Rise of the Ad Networks

Yesterday I posted on the subject of the disaggregation of the vertically integrated media model. In my haste to to finish the post and head off to dinner with friends, I left out probably the most important part of the system – the revenue producing function.

Just like content creation is happening separately from editorial which in turn is happening separately from distribution of the content, I believe the ad sales function will be largely divorced from the production and distribution of media.

That’s not an obvious outcome and certainly all major internet media businesses (from NewYorkTimes.com all the way to MySpace.com) have direct sales organizations to monetize their pages. So why do I think the monetization function will largely be divorced from the creation and distribution of content online?

Well first, we can see it happening already. Search is a classic example of this. The first step in the content consumption process (finding the content you want) is being monetized by Google and Yahoo! and others, not by the companies that a producing the very content you want to find.

I spent some time this morning looking for the 2005 online ad market data broken out by the key categories but I couldn’t find it. If and when I do find it, I’ll update this post with the numbers. But search probably represents about 35-40% of all online ad revenues right now and none of that is sold by the media properties.

The next fastest growth category in the online ad market is third party ad networks. They’ve been around for a while, really since the beginning of the Internet when Doubleclick and others offered to sell advertising for their customers. Those early entrants are largely gone from the scene now, but they’ve been replaced by ever more complex and effective ad network approaches.

In the bleak years after the first bubble burst, the "remnant" networks rose to prominence. They bought or simply took on the role of selling all the ad inventory an online property couldn’t sell themselves. And in those years, that was a large portion of the total inventory a site had to sell.

Companies like advertising.com, fastclick, valueclick, burst, and others aggregated that inventory, did some segmentation, and performance monitoring, and sold it off in bulk at CPMs between $0.25 and $0.50. And they built very large businesses doing this.

Last year, these networks represented at least 20% and possibly as much as 30% of the online advertising market. And I suspect they continue to grow more quickly than the portion of the online ad market that is sold directly by a media property’s own sales force.

But we are now witnessing the rise of "premium" third party ad networks that do more than just get rid of remnant inventory. They often are able to generate effective CPMs approaching those that a direct salesforce can generate. The contextual networks like Google’s AdSense and Yahoo! YPN are the best know of these. And for certain kinds of content, like a gadget blog like Engadget or Gizmodo, or a highly targeted healthcare site, they are likely to result in CPMs that approach what a direct salesforce can get.

Now were are seeing the next generation of ad networks like behaviorally targeted networks (we have an investment in the leading one – TACODA), video ad networks like Tremor and Lightningcast, feed powered ad networks (we have an investment in FeedBurner), lead generation exchanges like Root and LeadPoint, and many other emerging premium third party ad networks.

These premium networks use scale, reach, and data to deliver better ad performance than any single web property, with the possible exception of the portals, can offer on their own.

Today, most ad servers have a "waterfall’ algorithm that puts ads that are sold internally at the top of the ad server rotation, then they move down the value chain, measued by effective CPM, in order to move all of their inventory at the best available price.

I predict that within the next couple years, we are going to see these algorithms start putting some  third party ad networks above the internally sold ads. And in five years, we will see some major online media companies starting to question the wisdom of having an internal sales force.

This doesn’t mean that ad sales people will be out of jobs, it simply means that they will end up working for companies that specialize in the revenue producing function, not the content creation function (of course if you read the previous post, those companies are going to look a lot different too).

Just like the computer industry went from a vertically integrated model 30 years ago to a horizontal model today, we are seeing technology force that change upon industry after industry. The media business will be no different. Of that I am sure.