Ad Budget Crunch Puts Pressure On Supply Line

interCLICK homepageTightening online advertising budgets have caused a fundamental shift in the industry that has more companies holding out hands in front of brands to collect a piece of the ad spend, according to Michael Katz, president at interClick, an Internet behavioral targeting company based in New York.

The list of companies continues to balloon from three layers--agencies, publishers and networks--into six or seven. The emerging business consists of "meta networks" such as B3 Media and MediaMath, network optimizers such as PubMatic and Rubicon, and ad and data exchanges like Media6° and BlueKai, which Katz calls "data 2.0 players."

"There are many more intermediaries becoming involved in the supply chain," Katz said. "I don't know if it's a bad thing, but rather born out of necessity. It will be interesting over the next year to see at what point as you continue to add intermediaries will disintermediation start to occur."

Executives have been paranoid for years that the model might emerge and transform the network into a hodgepodge of companies that overlap and make the supply chain disjointed. As the industry adds more layers, the paranoia could turn into reality.

The impact of adding more layers will cause publishers to make less because they sit at the bottom of the chain. Katz said the industry will likely see Effective Cost per Thousand Impressions (eCPM) decline.

As for interClick, Katz would not provide financial guidance, but rather insight into the strength and performance of the company and the industry during the first quarter in 2009. "We expected to see the sky fall, but that wasn't the case," he said. "We're getting a higher share of wallets, so we're able to get more budget and in turn see revenue and margins grow."

Revenue for interClick in fourth-quarter 2008, which ended Dec. 31, rose 46% sequentially to $8.4 million (original guidance $6.5 million), compared with about $5.5 million in the year-ago quarter.

Gross profit for fourth-quarter 2008 jumped 160% to $3.3 million, compared with $1.3 million for the year-ago fourth quarter. Gross margin increased 750 basis points to 38.6% from the prior quarter's gross margin of 31.1%, according to Jeff Bishop, partner at Beacon Equity Research, Dallas.

Advertisers and agencies are shifting budgets away from publishers that deliver high-price real estate and "shifting the money to guys like us who deliver ads to target audiences," Katz said.

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