• by Gurbaksh Chahal , May 24, 2007

The past 24 months have been some of the best in the history of online ad networks. All the leaders in the space have been growing rapidly, and that growth has culminated in some stellar M&A deals. But what will happen to the future of display advertising?

That's what many are asking now that a new model has entered the online ad industry.

Open ad exchanges automate the buying and selling of bulk online ad inventory. By allowing networks, agencies and marketers to bid on inventory, the exchanges promise to introduce efficiency and automation to the digital world of media sales.

The acquisition of DoubleClick with their ad exchange and the acquisition of the Right Media exchange by Yahoo seem to validate that the industry is looking for this solution.

However, the problem with exchanges isn't what they do, it's what they can't do. And that is add value.

Ad exchanges simply out-arbitrage the arbitragers. Instead of a publisher selling remnant ad space to a network who sells it to a marketer, they list it on an exchange where it gets picked up by an agency or a network.

In either case, the exchange is simply playing the role of an arbitrage-model ad network--turning cheaper inventory into more expensive inventory without fundamentally adding any value to the inventory itself. In essence, an open exchange becomes just an "automated intermediary."

Automating legacy processes to make them cheaper and more efficient is nothing to be ashamed of. It's part of the maturation process of every industry. But in my eyes, it's not the future of online advertising.

The future of online marketing lies in making graphical display ads and video perform as effectively for marketers as search marketing has. And the key to that is data.

If you're looking for a marketplace that works--search is the best model to look at. Marketers are essentially bidding on "data"--in this case keyword data--to create an economic marketplace that ties them together with consumers.

Every time you search, you're telling marketers exactly what you're interested in at that very moment. That's why search ads are so targeted and perform so well. What many people don't realize is that by merging behavioral and other data sets with real time analytics and sophisticated targeting, we can now achieve that same level of performance with display ads.

For marketers, application of this data often improves bottom-line campaign results by 10x or more over contextual targeting and means they can enjoy search-like performance across a wide swath of the Web.

For publishers, applying advanced data can triple the value of their display ad inventory.

For the handful of "next-generation," targeted ad networks capable of adding this type of value to inventory, it means we hold the keys to a market that's potentially five times the size of the search market, measured by total available ad impressions.

So to those who ask me whether the good times will last for ad networks, I respond that it depends which type of network you're talking about. The traditional arbitrage networks that simply pass along deals or the targeted networks that use data to add as much value to the graphical display ad as search has to the text ad.

I welcome the success of open exchanges. The best ad networks have already evolved into a model that's higher up on the online marketing food chain. With a good shakeout, people will finally notice.

So will the good times continue for ad networks? Absolutely--at least for those that have the power to elevate the value of inventory and not just automate a process.