• by Dave Morgan , Featured Contributor, March 6, 2008

Last week started off with a pretty extraordinary annual meeting of the Interactive Advertising Bureau in Phoenix. Not only were most of the major players in our industry there -- from Wenda Millard of Martha Stewart to Jerry Yang and Sue Decker of Yahoo to Randy Falco of AOL to Brian McAndrews of Microsoft -- but none of them were shy about saying what was on their mind.

Wenda got it started with her opening keynote, imploring the online ad industry not to compromise the premium value of content and over-commoditize their audiences and media environments to sell themselves like "pig bellies." Jerry and Sue talked about trying to take the friction and pain out of online advertising with Yahoo's new Apax system. Randy told the audience that he wasn't too worried about Microsoft's proposed merger with Yahoo, believing that it was a mistake that they would later regret. And Brian was not afraid to talk head-on about Microsoft/Yahoo merger issues, offering probably the most memorable commentary of the conference when he told the audience to get prepared for a duopoly in the online ad business, with Microsoft and Google as the only surviving providers of a full suite of end-to-end online ad buying and selling platforms and services.

Yes, it's true. Microsoft's view of our world is of a duopoly. It believes that only two major online ad platform companies will survive and drive the future of our marketplace.

Wow. Is that really where we're headed? I'm not so sure I agree with that view. Full disclosure: until Monday of this week, I was executive vice president/global advertising strategy at AOL, one of the companies not on the list as long-term platform players in this market.

The core of Microsoft's position apparently is that the cost and complexity of building, managing, maintaining and innovating a massively scaled online ad platform that serves the full needs of both buyers and sellers is far too great for more than two players to be able to sustain such endeavors. And further, that there are only two players today with such capabilities: Microsoft and Google. While there is certainly a significant amount of truth in those statements, I don't know that the long-term market dynamics will really play out that way. Here are my thoughts:

• Consolidation. I do believe that we are in a period of consolidation in our industry and we will see a limited number of very large players control a majority of the marketplace -- similar to the television market, where we have four broadcast networks and a large number of more niche cable networks. However, I don't think that automatically means we will only have two large players, with everyone else relegated to niche status.
  
• Cost. Competing in the online ad market is certainly very expensive, particularly at massive scale. However, there is no shortage of capital in this market. All of the players and their investors are aware of, and desirous of, the fruits of a $35 billion global market growing at 30% per year. Having the money to own and innovate a full-suite online ad platform will not be the barrier that some would hope it would be.
  
• Complexity. Managing massive online inventory, data and demand systems is extraordinarily difficult. Making it simple is even more so. Big companies tend to thrive on complexity, since complex problems can frequently be solved by throwing bodies and money at them. Yet the online ad market seeks simplicity, not complexity. We have not yet seen the solution to our market's need for better, simpler and cheaper advertising that helps clients grow their businesses, certainly not from any incumbents (with the limited exception of search advertising for certain small and medium-sized businesses). This problem is yet to be solved -- but whoever resolves it well and at scale will see the market come to them.
  
• Clients and competition. Microsoft's view seems very competition-centric, not client-centric. What about the clients? What do they want? How will they react? Maybe some clients and agencies will take solace that a duopoly is better than a monopoly, but I suspect that most clients will want and will support more alternatives. Since a significant portion of each large online ad budget is quite naturally going to go to two large players, much like television, the market will most likely support at least one other large player. You need at least one of the big folks to lose out each time a budget is allocated to create enough competition to insure the best rates and service. Thus, there will have to be a No. 3 and maybe a No. 4 player. If the majority of every client budget is divided up among the same two players every time, one thing is certain. Products and service will decline in quality and increase in price -- and clients will lose.

What do you think? Ready for a duopoly?

Dave