Log Off: Innovate, Don't Replicate

by Doug McFarland, Oct 31, 2005, 5:44 PM

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More than a year ago, some in our industry began to lament the dearth of innovation in rich media. Nate Elliott of JupiterResearch complained the loudest in MediaPost's "Rich Media Insider." I thought he made some valid comments, and not just about rich media; I thought what he said was true about our industry as a whole. Some of what we've seen in the markets since then has only proven how valid those complaints remain.

In fact, I think there is little meaningful innovation in all areas of our business today, except for Google. Many interactive companies today are primarily in the business of replication, which is understandable. After all, replication is expedient in a growing market, and replicators are trying to make money, which they do through the consolidation that ultimately follows. But most of the search engine marketing companies and ad networks are confusing the marketplace and offering no meaningful differentiation.

Over the past few months, a few interactive media companies have gone public, but most didn't do so well. Industry observers were surprised, for instance, at the lukewarm reception Fastclick received in April. Its initial public offering raised about $68 million. ValueClick then acquired Fastclick in another consolidation. Anyone who owned Intermix was happy when News Corp. produced $580 million in cash to buy what amounts to MySpace.com and some other properties.

These are different companies, of course. But it begs the question: What do investors value in companies they're willing to spend hundreds of millions of dollars for? And why are the multiples being paid for these companies so frothy in some cases and barely tepid in others?

Fastclick does what a number of other companies do. So, when Fastclick's lukewarm IPO was followed by its acquisition by ValueClick, months after both Datran Media and Netblue had enjoyed large private investments and retained their independence, there was a clear message: First-to-market innovators win.

At about the time we began hearing complaints about waning innovation, America Online purchased a company I was working for, Advertising.com, for $435 million in cash. Advertising.com developed a popular optimization technology designed to deliver ads to consumers at precisely the moment they've shown interest in something. Real mathematical optimization is just now beginning to be understood by enough people that we're beginning to see more optimization networks being developed by companies in the behavioral business. They're all following Advertising.com, of course. Or some may argue they're following Google.

Let's face it, the agency business and the media business as a whole are labor-driven. This is unfortunately more true for interactive than it is for TV these days. It's easier to reach women 18 to 49 with a media buy against gross ratings points than it is to target them on the Web.

But agencies and service providers that avoid replication and stress innovation are going to make a ton of money while doing the industry a great service. Agencies, as they exist today, offer no real sustainable business model. They sell the services of their people, especially the creatives. The problem with buying media, especially online media, is that it requires planners and buyers to justify their plans. Instead of solving problems, the entire construct creates problems, especially on the business model level. Innovation isn't dead, just dormant. I believe that people will step forward and develop the technology to productize innovation and simplify labor-intensive processes. Those that do will be the big winners. Are they working with you?

Doug McFarland is General Manager of North American Operations for Eyeblaster. (doug.mcfarland@eyeblaster.com)

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