SpectatorBytes

The online display advertising business is likely to undergo significant changes over the next few years as key participants try to deploy new tools to enhance overall performance. First, the business is becoming increasingly tiered between premium advertising solutions and run of network solutions (RON). In this post, I will focus on the RON performance segment given the focus on ad exchanges and networks.

The RON performance display market has been dominated primarily by performance-driven Ad networks such as Advertising.com, Value Click, Tribal Fusion, Casale, etc. until this point. These networks have developed sound relationships with advertisers and money-driven relationships with publishers. These ad networks have succeeded by enabling advertiser to easily purchase reach and scale across multiple sites. Each of these networks offer a different solution (I called them Mousetraps) on how to help advertisers reach their goals. These networks were designed to help both publishers and advertisers. However, they were ultimately designed to mainly maximize the profit for the network (while helping their customers and partners achieve their goals).

At the end of 2007/beginning 2008, new tools emerged to help publishers identify which ad networks can provide them greater value such as Rubicon Project, Admeld, and Pubmatic. These tools are designed to help publishers manage the “daisy chain” of ad networks. These tools will help increase efficiency for publishers as in many cases they were doing the work manually and with spreadsheets. All these tools are becoming popular with publishers.

Many folks in the business expect 2009 to be the year in which exchanges gain a more prominent role in the ecosystem. Right Media had gained significant traction prior to the Yahoo acquisition but it was not yet rivaling the ad networks in a meaningful way. With Right Media technology and exchange, Yahoo has an opportunity to create an exchange which provides greater transparency and ultimate efficiency between buyers and sellers. Yahoo’s APT tool certainly seeks to do that for Yahoo and its main partners inventory.

For exchanges to succeed, they should not seek to extract a benefit for itself (as networks do) and should benefit equally advertisers and publishers. The exchange should offer high quality and broad set of ad inventory to advertisers. Some of the issues exchanges have had till this point is that mainly low quality inventory has been contributed by publishers. This seems to be changing for Right Media post Yahoo acquisition.

Exchanges success will also depend on their ability to attract the major ad networks and advertisers to buy from exchanges. One way exchanges can and seem to be doing this is by providing better targeting data (actual gender, demographic, interest, location, context, etc. data). Enabling many of the new “mousetraps” to easily plug in to the exchanges and offer this new data/solutions to advertisers is one way that exchanges can further enhance their data position relative to ad networks. Moreover, ad exchanges can better serve smaller publishers than ad networks can as Ad networks are not designed to serve the long tail of publishers. It was interesting that in their last quarter Valueclick indicated that some of the growth in their revenues was driven by their ability to buy inventory from exchanges and selling them at higher value after being optimized using their propietary technology.

Similarly, Google-owned Doubleclick is well-position to go after the exchange opportunity and will likely make a significant push behind it.

The battle will not be easy given that ad networks are well-entrenched in the ad agency/advertiser current ecosystem, and have secured their publisher networks through monthly payments. However, in a market where performance seems to be deteriorating, exchanges have an opening to drive change. Yahoo and Google can certainly leverage their relationships with advertisers and publishers to turbocharged their exchange efforts.

There is one segment of the RON display ecosystem that still requires further development: The spend optimization tools for advertisers and ad agencies. In the search market, there are several companies which are helping agencies to optimize their spend. However, this is not the case in the ad market. According to the WSJ, agencies are taking matters on their own hands and developing their own solutions. However, I would expect venture-backed solutions to emerge soon given the growing complexity of the display ad market (this is an area I am looking into opportunities for investment).

These seem to be the market realities in the performance display advertising business. Do you see these realities to be different? I would appreciate your thoughts.