Bottom-Feeders or an Advertising Revolution?

by Christopher M. Schroeder, Nov 22, 2004, 12:00 AM

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AOL paid nearly half a billion to do it. A small start-up, Fastclick, just raised $75 million to do it. Tacoda, the erstwhile enterprise behavioral advertising software company, just announced they're doing it. There are a dozen newcomers trying to do it. In the last six months, the online advertising network has become all the rage!

At one level, there is nothing new about businesses trying to aggregate the eyeballs of viewers across many properties to create a one-stop powerful advertising buy. Newspapers have long participated in groups that do this. "Online," one publisher recently said to me, "these guys are just bottom feeders. Everyone has some remnant, unsellable inventory sitting around doing nothing, or serving house-ads. Why not sell it off to a network if they're willing to pay for it?"

Certainly this was the history of advertising networks online. Groups would buy remnant inventory for a low CPM and sell it to advertisers on a pay-for-performance basis. Their arbitrage in buying cheap and selling for more was their margin. "Value add" - the ability to maximize conversions through strong networks and creative algorithms - offers the potential competitive advantage.

While traditional, Online Publishers Association-type sites tend to avoid them for concerns of quality and creating competitive sales channels, the portals and countless smaller niche sites have happily engaged with them. Based on speculation from publicly available information last spring, Advertising.com was on track to achieve more than $150 million in gross revenue this year. Those are numbers to raise eyebrows let alone valuations.

Skeptics say that since online advertising has grown and publishers have become more efficient at managing their own inventory, advertising networks have capped their growth potential. Others add that the "arbitrage model" will only last so long, as spreads inevitably narrow in those businesses.

I think something much bigger is going on here. And it could be revolutionary.

Online advertising networks are, today, about leftover and niche inventory. But belying this tactical truth is an important message to marketers: the USER matters more than the publishing site! Think about it. The network's sell to the advertiser is "tell me what your cost-per-action needs are, and we'll hit your numbers. We don't guarantee when or where your ad appears (though we can guarantee banning porn or other sites that make you uncomfortable), we just promise to get you results!"

Finding the right customers to send to the right marketer is the fundamental essence of successful marketing. The site, while not irrelevant, matters less than finding the user. The measurability and accountability of the Web, along with a dose of smart predictive algorithms, offers marketers quantity AND quality of leads. And they only have to pay for success!

Again, over time, it is argued that quality portals and Web sites will sell more of their own inventory directly, making it less available to networks. I have three reactions: first, I suspect that there will be plenty of inventory these folks are happy to monetize for some time to come. Second, it is unclear why, over time, these networks might not be able to attract even higher quality inventory especially for smaller quality sites if they are willing to pay for it. Third, and most provocatively, there is a TON of inventory that isn't even inventory now.

I haven't seen these numbers anywhere - and if anyone has run them, I'll publish them in a heartbeat. But if you added up all the inventory of quality smaller sites - blogs, niche sites, community sites, even smaller traditional publishers -- who cannot afford an ad sales force, and could never get to first base with most quality brands anyhow - you are talking about billions of potential ad impressions!

Blogs like Wonkette allegedly are already taking in more than $10,000 per month. Multiply that by communities like TheServerSide.com, who attract hundreds of thousands of active users - active BUYERS of technology - and the networks offer a powerful capability for which sites would be happy to pay 20 percent or 30 percent of dollars they are not currently attracting. And marketers would be thrilled to find these communities of users.

So imagine a world where a network creates access to this inventory and achieves real critical mass comparable to any large publisher site or even a portal. Further imagine they go to top marketers and offer them access to this network on a pay-for-performance basis. Why would this not be the most significant competitive force since the beginning of interactive advertising?

Is Google reading this?

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