The last few weeks have been dizzying in the online ad industry. Google is buying DoubleClick for more than $3 billion. Experian is buying Hitwise for more than $400 million. Hachette is buying
Jumpstart Automotive Media for approximately $100 million. And, to start off this week, Yahoo said it is buying the 80% of Right Media that it doesn't already own for $680 million and will be the
primary sales channel and ad-serving provider for Comcast.net. So, if you are like most folks inside the industry, or are just an observer, you've been trying to figure out what this all means. I
have, too, and here are my thoughts:
It's game time if you want a seat at the table. It's clear that companies hoping to be major players in the online ad industry are starting
to make some big moves to try to assure themselves a seat at the table in online advertising's next round. The companies making big bets now want to be "consolidators" in the industry, not "be
consolidated." There are probably 15 companies that want to own a seat at that table, from the search portals to the major media and content companies to the big ecommerce companies to the major
telecommunications infrastructure companies. Unfortunately, there are not 15 seats available at the table. The Monitor Group tells us that 92% of gross online ad spending in the U.S. in 2006 was
captured by just four companies (68% of net ad spend). That tells us that there were really only four seats at the table here in the U.S. for round one. While the table might expand a bit over the
next few years, it is probably unlikely that it will grow by more than one or two seats. That is why we are seeing big valuations for these companies. In most cases, they are being bought for more
than their potential cash flow. They are being bought for their strategic value in securing a top position in the market. advertisement
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While I think that their "exchange" stories helped drive the sales for those companies, I don't believe that either of their acquirers actually expects to
operate them as the kind of open and democratic exchanges that some would imagine they could be. Why? Because both of those companies derive 99% of their revenues from the sale of advertising. They
bought the exchanges because they can provide extraordinarily efficient platforms for scaling their networks of third-party publishers and providing highly efficient, self-service access to tens of
thousands of small and medium-sized advertisers.
It is not about exchanges; it is about enabling dramatically more display ad network reach for Google and Yahoo. These platforms add
tremendous efficiency to managing massive networks, and already have hundreds and thousands of pre-built relationships. That is what drove those deals.
In many respects, the Jumpstart
deal is no different. No one would argue that Hachette is buying Jumpstart to operate a neutral exchange of automobile inventory. Hachette made the purchase to efficiently aggregate much more scale in
the online automotive ad vertical on both the publisher and advertiser side. But, make no mistake, this will be the means for Hachette to create a proprietary ad network. So will DoubleClick and Right
Media for their new owners. Clearly, these kinds of platforms are imagined as essential to holding a seat at the table
Effectiveness is coming. It may seem like ancient history,
but it wasn't that long ago that News Corp bought SDC, an online ad and offer optimization service. Hitwise was just bought by Experian because of the value of its data and analytics. Many pundits, as
well as some Yahoo executives, have pointed to the potential of ad exchange platforms to permit "off-site" behavioral targeting by portals with massive databases of audience behaviors and registration
data. This is probably what is coming next for a seat at the table (disclosure: my company operates a behavioral ad network). It will no longer be enough to have a platform, like Right Media for
example, that can make it efficient for MySpace to sell, and advertisers to buy, incremental ad units for $0.07 CPM, as they do today. Without automated exchanges, those ad avails would be left empty
since no one could justify the cost of filling them for only $0.07 CPM and a lot of friction cost. The next opportunity, and certainly why News Corp. bought SDC, is to use tools and data to turn that
$0.07 CPM into $0.17 CPM then $0.70 through techniques like yield optimization or because you know that the person on that page at that moment also happens to be in market for a hybrid SUV. Next up to
get and hold a seat at the table will be making the inventory more effective at scale. So, how will this big game of musical chairs play out? Will we have 15 players chasing five or six
seats? What will happen when the music stops? When will the music stop? Please tell me what you think.
