• by Peyman Nilforoush , April 3, 2008

There is a major misconception as to what the fundamental business model for a vertical media network is and how it differs from that of horizontal ad networks. It's not about the vertical, the color of the logo and certainly not the cute name; it is about differences in business fundamentals.

Here are five questions you should ask of anyone slapping the "vertical ad network" label on a random collection of sites:

1)Scale--do they have it? The whole point of vertical media networks is to reach highly qualified audiences at great scale. This is arguably what identifies successful vertical media companies. Only a handful have been able to achieve this; you can see them in comScore in their respective verticals.

2)Dependency on a few comScore 100 publishers: If you take away their top five publishers, do they have enough value to attract major brands? If they don't, they are simply a rep company that caters to one particular industry, NOT a vertical media network.

3)Do they control all of the ad inventory? They should. If not, then they are a blind direct response-focused ad network with a cute name. The key here is, can they offer custom publishing programs? These are marketing programs that manage the entire buying cycle beyond IAB standard media vehicles and ad units.

4)What is the quality of publishers? Spend some time looking at the sites in the network. Ask yourself if you would buy any of them individually. If not, why buy them collectively?

5)What does the sales force offer? It takes time and resources to build a sales force of experienced executives who really understand the vertical industry they represent. Putting up a pretty website does not provide the depth of experience that working in the same industry year after year does.

For years successful horizontal ad networks created scale by partnering with the HEAD Internet sites (i.e., sites in the comScore top 100) even if they had to commit to revenue guarantees and smaller rev shares (think 20-25%). The strategy worked like a charm as Advertising.com, BlueLithium, Quigo and TACODA all enjoyed a big payday in the past year or so.

However, the latest move by ESPN has made a lot of industry folks asking: Is this the end of the horizontal ad network model? Because of the arbitrage nature of the horizontal ad network model (i.e., purchasing ads on sites at X CPM, then marking them up and reselling to advertisers at Y CPM) I predicted in early 2007 that all horizontal ad networks would gradually move into an automated Ad Exchange model (e.g., Right Media, DoubleClick Exchange, ADSDAQ, etc).

The rationale is simple: It is a business based on low margins and high volumes. To maximize EBITDA you need to minimize cost and maximize volume; ad exchanges use automation to achieve this efficiently.

Successful vertical media networks, on the other hand, tend to be more focused on building media companies by partnering with the mid- and long-tail content sites. Their dependency on any particular site is minimal. They are very different than a site rep. They are in fact the media companies for the fragmented media landscape, the solution to the fragmentation that has crippled "destination sites" and portals of the late '90s.

They partner with the mid-tail sites which are defined as sites in the 1 million comScore Uniques. They feature creative, very niche content and editorial from the most knowledgeable experts/editors in their respective fields. They offer brand value but more importantly are so perfectly relevant to the advertiser's message that you get the most targeted experience any ad vehicle can offer. This results in high CTR and brand engagement metrics for advertisers, plus the ability to offer highly creative custom publishing programs.

Successful vertical media networks work exclusively with their publisher partners. This gives them full control over ad inventory and allows them to offer custom publishing programs. These programs use high impact media offerings that brand marketers were only able to get at traditional "destination sites" and portals. The key is that they provide brand marketers with choices for precisely reaching their target audiences on relevant content sites using high impact media units.

Think Resource Centers, Web Stores, Welcome Ads and other large custom programs manage the entire buying cycle from consideration to evaluation and finally purchase point. This results in media plans that produce high ROI and brand engagement metrics. Can marketers still get this on the traditional "destination sites" and portals? Yes, absolutely. Can they afford to leave vertical media networks out and just focus their branding on the "destination sites" and portals? No, because as a result of the media fragmentation the Head sites and portals reach a decreasing 35% of their target audiences. How do they reach the growing 65% that are on the mid- and long-tail sites?

Finally, let's talk about the folks selling this! Just like any media business, the expertise that vertical media network sales teams brings to the table, especially for creating and selling custom publishing programs, is key. These folks are difficult to attract because A) they are very expensive. B) they are in high demand and have many choices.

So how can a vertical media network attract top sales talent? Scale, unique media offerings and high quality content publishers (yes, content is still king and forever will be regardless of the medium). These are folks who have been around long enough to know that a cute name and flashy logo doesn't make the media plans, value does. So unless you have the media offerings, the scale and the quality sites with highly concentrated audiences to add value to marketer media plan, you cannot attract top sales talent. Without them you can't sell enough value to marketers to get attractive CPMs and pass them on to your publishers.

As with any successful business model, once it's proven, others follow suit and that's the stage of vertical ad networks today. The key is to understand that being vertical is not about the name or the PR twist. It's about the fundamentals of this business and that is scale, quality of sites, control over inventory and the industry expertise that management teams bring to the table for advertisers.

Bottom line: Successful vertical media networks are those that create significant scale in the size of their audience, the number of sites they manage and the revenue they generate. Just like any other media business, if you can't offer scale your packaging doesn't matter. Your business doesn't add value to major advertisers or publishers.

Next week in part 3, Nilforoush will discuss what it takes for successful vertical media networks to scale up and how that transforms them into distributed media companies that offer significant value to advertisers and publishers as well as the traditional media companies.