
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."