• by Peyman Nilforoush , March 27, 2008

While the overall economy has nearly slipped into a recession, the economics of online publishing are also going through some major turmoil.

Microsoft is aggressively pursuing an acquisition of the biggest "destination" site of the '90s--Yahoo, an event that will undoubtedly have a cascading effect on ALL online media. CNET is losing control of its board, and AOL keeps changing its starting lineup every few weeks.

Many other media companies are going through major restructuring as they grapple with the digital age. It seems that all the "destinations" of the late '90s are troubled in an online sector that has been experiencing 25-35% year-over-year growth in the past couple of years. So what's with all the turmoil at traditional destinations and portals?

One of the driving forces behind almost all of this disruption is very simple to understand: content and audience fragmentation. The fragmentation of content online has led to major portals and publishers losing traffic to niche content sites. Search engines have become the major distributors of online traffic, and their algorithms by design find the most relevant content. Social media and blogs essentially do this in a very similar, although less automated, way.

In effect, the entire ecosystem is driving traffic to the most relevant content. At the same time, Internet users have become much savvier, using specific search queries like "Sony Vaio laptop" rather than just laptop or Sony. The combination of the two has led to an astonishing flight of traffic away from the traditional "destination" sites and portals to the "new destination" sites that are the more niche content sites. This has given birth to vertical ad networks as the new distributed media companies.

Vertical media networks are making lots of noise in the marketplace. First there was the acquisition of Jumpstart Automotive Media for somewhere between $84 and $110 million by Hachette. Then came the controversial attempt by Glam to raise $200 million (that resulted in an $85 million round at a half billion valuation.) DoubleClick just announced that they are now entering the space as a platform for vertical ad networks.

New vertical networks have recently been launched against industry categories such as health and wellness (Good Health Advertising); entertainment (Biggerboat.com); and the kids and teen market, (GoFish). Even traditional media companies such as Forbes, Viacom, MarthaStewart.com, and Readers Digest have launched vertical networks of allied sites to give media buyers increased reach within targeted niches.

Meanwhile, Avenue A released a report this month that highlighted out of their $735 million billings in 07, vertical networks and content sites got 39%.

Avenue A|Razorfish 2007 billings by category:

Vertical Networks: 39%

Search: 31%

Portals: 19%

Ad Networks: 11%

Will Google, Yahoo and Microsoft go vertical? Should they?

Some vertical networks have scaled very quickly. The Travel Ad Network in just four years has become the largest provider of travel news and information--ahead of Travelocity, Southwest Airlines, Priceline, and Yahoo Travel--with 12.5 million monthly unique visitors. This achieved with less than $1 million in funding.

All of this activity is great, and certainly validates what we have said all along about the value of having a highly concentrated audience--but make no mistake about it, not all vertical media networks are created the same.

Just like many companies tried to ride the coattails of Google and began to offer "contextual targeting" there are plenty of pretenders in the vertical space. One loose network of sites has simply taken the same audiences they have offered for 10 years, given them cute new names like "Weekend Warriors," and is calling them a "vertical ad network."

In subsequent columns, Nilforoush will detail what publishers and advertisers should look for in a vertical media network that adds real value to their respective businesses.