The Truth About Ad Nets: Profit Margins of 45% To 60%
- by Erik Sass @eriksass1, July 28, 2009
Big online ad networks have an average profit margin of 45%, according to Jordan Rohan, a veteran Internet analyst and the founder and managing partner of Clearmeadow Partners -- and some are taking an even larger percentage. Speaking at MediaPost's OMMA Adnets conference in Los Angeles on Tuesday, Rohan pulled back the curtain on the inner workings of the ad network business, arming the audience with facts that might help media buyers negotiate lower prices -- "because if you know the person across the table is making 60% spread, wouldn't you offer them a little bit less?"
As a preamble, Rohan noted that the core metrics for Internet advertising seem to be recovering after a trough at the end of last year. "Things like conversion rates, response rates, frankly really sucked in the late fourth quarter and early first quarter. They're a little bit more normal now." But this means that inflationary price pressure will return as well, raising rates that are already yielding substantial profits to the networks. Citing publicly available information, Rohan observed that "Burst.com has 47% margins on 116 million unique, ValueClick has 45% margins. Intermediaries receive about $0.45 cents every dollar -- you're paying them almost half of your spend."
How can media buyers remove some of the fat from their ad network buys? First of all, they should be aware that there is a great deal of redundancy in the ad network business. Rohan said that TechCrunch had "27 pages of listings of ad networks that received more than $2 million of funding since 2005."
Furthermore, many of the qualities (and quantities) that supposedly differentiate them, in fact, do not. "Anyone who's trying to tell you that reach is a key differentiator, you need to ask them 'what else?' It's much more complicated than that." Rohan dismissed other so-called differentiating factors like "efficiency" ("since the margins are so wide for the ad networks, wouldn't it be more efficient if you did it yourself?") and "diversification" ("it's a lot easier to achieve broad reach across many publisher outlets than they would have you believe").
On this last point, Rohan also took issue with the veracity of terms like "blind" and "transparent" networks. In the first case, publishers should realize that "It's not really blind -- just pose as a media buyer and ask the networks. Absolutely they advertise the publisher brand. It has to work that way, because at the sales force level, what else are they going to sell -- just say 'trust us?'" In the second case, "they're not totally transparent. Total transparency would mean that they transfer terabytes of data to you that you would have no idea what to do with."
Rather, useful transparency (for media buyers) consists of data filtered to describe the context surrounding online conversions: "Typically you don't know where all the conversions came from. Which sites did they visit, how many impressions before they converted, these are the kinds of data you need." While ad network sales forces may object that these demands are too onerous, Rohan concluded: "Especially when you see the profit margins they're getting, you have a right to have much more transparency on their side of the business."
Wow, this guy has quite an agenda which is really completely misguided.
First off, margin is a function of two things: prices charged to advertisers and secondly cost of inventory charged by publishers. This guy has clearly never run a business in his life and is only here to try and stir the pot b/c he nobody mentions his name since he left RBC.
Prices are set efficiently by supply and demand forces within the network and are a function of the value being created for the set of advertisers.
Margin is a byproduct/ a reward for the value created by effective supply chain management. Assembling raw materials (under-utilized pub inventory) and adding layers of value on top of that, be it data enabled targeting technology, customer service etc. packaging it up delivering a finalized product certainly warrants a mark-up to cover fixed and variable costs along the way. Doing it as efficiently and effectively as possible is basic idea of successfully running any business.
Advertisers and agencies cannot do what networks do as effectively, and its not just about having a technology platform to enable it. Its about execution fueled by technology, process innovation and relationship building.
I'm embarrassed for even responding to this nonsense but someone needed to.
lol... good response Michael. As a former media planner/buyer, a good Ad Network deserves to make that much profit IF they provide excellent customer service. I am not talking about taking the Account Planner out to lunch or baseball game every week, but actually working hand in hand with a Media Planner who CARES about performance.
A Planner who cares about his/her client's campaign will utilize a Network's capabilities to make optimization decisions that can substantially eliminate media waste. And if that Network can meet a cost-per-acquisition goal and exceed client expectations, then why not make some money while they are at it?
From a publisher's perspective, I am going to have to agree that most ad networks take too big of a piece of the pie, but it is not at the expense of the advertiser.
Google shares 80-85% revenue with the publisher. They set the bar. There is no ad network that comes even close to paying publishers what G pays us.
So the problem with every other ad network is they don't have the enormous volume of advertisers that G has, so they have to take a bigger cut of the money to try and look profitable enough to get that next round of funding. Meanwhile, they need to keep their advertisers happy, so they give them competitive rates as compared to G, so who loses? The publisher's cut gets lowered. Which is why you see so many of these ad network startups sharing around 50% revenue with publishers.
So your article is a bit misleading (I believe). The advertisers are not over-paying, it is the publishers that getting underpaid and the networks taking a bigger slice for themselves.
I can see the frustration Erik is expressing about media buying "waste" as well as the frustration publisher's have in paying such a high commission for online ad sales to ad networks when in most other lines of business an outside sales commission is generally in the 15-20% range (where Google seems to have settled).
As an owner of an ad network I feel compelled to present some facts that were left out of Erik's assessment. I present these not as a means to justify a higher commission fee , but as a way to provide some clarity (and yes, additional transparency) into the business.
First, when Erik speaks of profit - he's really referring to gross margin or revenue after the cost of paying inventory/publishing partners. So an ad network's entire business is generally run on less than 50% of the dollars they bring in - all expenses, salaries, hardware, software, technology, cost of sales, rent, G&A, etc... is paid from that gross margin. There are many other industries and businesses that have significantly higher gross margins (software, technology, consulting, pharmaceuticals, energy, etc..).
A little history here is useful too. Anyone who's been in this business long enough to remember the days of the dot.com boom, will recall that the "standard" ad network commission at that time was 35%. They will also remember that when the bust happened (and even before) many ad networks went bust - they were among the first casualties since they could not sustain their cost structure with even a small dip in revenues. As failed business models emerged from the wreckage, the 50% standard was born.
Google was trumpeted as having the "scale" to offer publishers 80% of revenue. I love Google. Their search results are great, the founders are philanthropic and I've yet to meet a Googler who hasn't impressed me. But when it comes to the business model of being an ad network, it's important to note that they also own Google.com and they can choose where and when to deliver what ads on their own site, and what to deliver on publishers sites. Anyone running AdSense through this recession has seen their Google CPMs drop as Google.com gets more of the higher paying ads and partners get the scraps from the table. A network can offer you 99%, but you have to examine their business model and economic motives. If in doubt, just read Googles financial statements and examing both their gross margin over time as well as their profitability.
Free Market for Publishers:
It's a completely free market. Publisher's are free to take on all aspects of ad operations and sales themselves at any point. Many are too small to warrant it. Their are costs involved. A good ad network provides a relatively seamless service, that many publishers would not want to take on, and would not find it profitable to do so. Furthermore, without the scale of millions of dollars invested in technology and processes, they would simply not be competitive with their offerings.
Efficiency for Agencies:
Kevin Ryan cited as a principle reason for Doubleclick to exit the ad network business was "Friction Cost". That is to say the frustrating fact that often less than $.20 of a media spend actually goes to purchasing media online. It is frustrating because this is the Internet - it's supposed to be more efficient. But with millions of web-sites it is a highly fragmented market that still requires a great deal of manual intervention to deliver on a media campaign. There are many fingers in the pie when it comes to online advertising starting with agencies (who frequently charge upto 30% of the media buy in fees when the "normal" media fee is now well under 15% because digital is so work intensive). So your $1 for media is already down to $.70 when it leaves the agency. It often then goes to a network who takes $30-$.35 in exchange for the value they provide in putting your ad on hundreds of sites simulataneously (saving the agency work, allowing for frequency capping "across platform", etc...) and then the remaining $.35 may goes through yet another intermediary or towards the purchase of media. How much more would an agency charge if they had to contract with 25 million sites one by one instead of the 10-20 buys that might be on the typical media plan?
Finally, for any publisher considering an ad network partner: Do your homework on your ad network - talk to references - look for inherent conflicts of interest in their business models. Like many professional services, often they are well worth their fees, and the money they pay you goes right to your bottom line. Ask yourself "Am I making more profit through this partner than I would make on my own (after taking on all the costs involved of doing this myself)".
For more thoughts and muses like the above please visit my blog at www.e-healthcaresolutions.com/blog I welcome your feedback.
The only question that needs to be asked is how much value the "middleman" brings to the table.
Both advertisers and publishers should ask themselves that question and route their budgets / inventory, respectively, to those ad nets that bring the highest value.
As a result-based, blind, ad network our conversations with both sides are about their value and not our commissions or margins. Values, that are definable and measurable: eCPM to pubs and eCPA to advertisers. These measures can be easily compared by other channels.
Any marketer reading this column and its comments would "freak" at the analysis that suggests only 20 percent of every media dollar winds up in media. Yes there are process costs, salaries and overhead that need to be considered ... but losing 80 cents on every dollar to "process" should be unacceptable under any circumstances.
The only alternative to leveling off a playing field is tying your purchasing to analytics that target individual consumers that are 5X more valuable than your average buy.
There are solutions in the marketplace if one looks hard enough.
Paul Benjou
Industry Blog: www.MyOpenKimono.com
Thank you, Michael, and I agree wholeheartedly. I sat through the presentation yesterday, and was frankly blown away by some of Jordan's assertions. However, his last and final point stopped me in my tracks. As my jaw dropped, I asked a couple of people around me if I had heard correctly. I attempted to ask him to clarify, but questions and answers had been shut off.
Jordan stated, bemoaning the fact that publishers (at least according to Jordan) give up 25% of the inventory in exchange for 3% of their revenue stream, stated the only good purpose for an ad network for a publisher would be to have their sales team monitor the ads running on the publisher's site by the ad network, and then contact the advertisers directly. I couldn't believe my ears. After the presentation, I asked him if his statement was accurate, and Jordan looked at me with a mix of incredulity and disdain for my naivete on his face. "Of course, it's a viable business strategy, and an excellent prospecting tool!"
All of us know that client poaching goes on constantly, yet that doesn't make it right or ethical. No wonder ad sales people are viewed as being on the social scale two notches below used car salespeople! Scarier yet, was when I related our conversation to a senior level executive with one of the largest ad networks. He said, "Welcome to the world of ad networks!"
Have the integrity of business relationships been washed away in this downturn economy? Is it the fault of publishers, or ad networks? Why don't the ad networks hold these publishers accountable? Jordan's comments are akin to marrying someone (another contractual relationship) for the sole purpose of stealing their jewelry, or raiding their stock portfolio. Does it happen? Of course? Is it right, moral or ethical? The answer is obvious.
I have worked all sides of this fence - from publisher to agency to client; so I am neither naive or ignorant. But the amorality of Jordan's comments made me sick to my stomach, and to make such statements in a public forum in front of industry leaders is without excuse.
Perhaps an ad network should, when such an act is discovered, sue a publisher for "tortuous interference in a business relationship" and name Jordan as a co-conspirator!!
Clearly Mr Rohan won't be invited to speak at the annual Friends of the Ad Networks convention, with this.
He is right about the transparency/differentiation issues on one hand, which are competitive Sales issues every Network out there faces.
He is also right [more or less] on the "margin" issue...but here I say, 'so what?' That is just standard Wholesale/Retail factoring, that applies across all Industries.
If you want the service, you pay the cost. Simple as that.
I used to run an ad network that had 200 million impressions a day. We took margins that ranged from 30-70%, so Rohan's numbers are right on.
While this felt like stealing at first, we easily justified what we did by comparing ourselves to what the other guys were doing. Perhaps that's the drug dealer defense-- that someone else will step in if we don't do it.
Google does share anywhere near 80% with publishers. In fact, unlike most adnets they don't even share the actual rev share % with most publishers. I imagine their splits are similar to other ad networks.
Did this guy have the infamous "I hate ad networks t-shirt on?"
I'm pretty tired of hearing about the supposed 400 ad networks out there...or the "27 pages of ad networks that TechCrunch has..." it just serves to make it seem like the network space is crowded with a bunch of sleazy vendors picking your pocket and confusing media buyers. Truth is, even if there are 400 networks (i've never seen a list that long) - let's do the math -- 370+ are pretty much aggregators -- so give them the margin that justifies simply making buying inventory a little more efficient if you need that service. A few are specialized verticals based on buckets of publisher inventory, so they serve to let you run somewhat focused/predefined impressions without much targeting or technology behind it. But the ones who deserve the margin are the very, very few networks that are actually building technology platforms that boost ROI for advertisers -- and can prove it against run of site or network buys -- i.e. -- if you bought the same media you would not get the same results. The networks building technology are the ones that will survive -- it's only a matter of time. And it won't just be about leveraging or being an expert in one type of targeting -- the ultimate winners will be the ones that can build a "hybrid" targeting platform leveraging as many types of data as possible -- including BT, geo, demo, social, purchase intent and others...to get the most robust and complete picture of the consumer to make the decision on which ad to ultimately serve.