• by Peyman Nilforoush , April 10, 2008

Last week I discussed how successful vertical networks have established scale by forming deep partnerships with the mid- and long-tail content sites. Some have exploded to beat the reach of similar audiences offered by the likes of Yahoo, iVillage and CNET. This trend raises an important question: Are vertical media networks to remain simply advertising networks with concentrated audiences, or will they become the new "media companies" for the Web 2.0 era?

Traditionally, media companies have relied on producing outstanding content to attract audiences of interest to advertisers. I explained in part one how the fragmentation of content and audiences online has lessened the importance of portals and traditional media branded sites as must-read destinations.

So, if you are a traditional media company, you are getting squeezed by Google on one side and from the other side you are stuck with overhead (like staff costs and real estate overhead) that the mid-tail and long-tail content providers simply don't have. What will happen if vertical media networks become major distributors of professionally produced content providing not only higher reach but more revenue for the content producer? What you have is a whole new ball game.

While traditional media companies are trying to figure out how to best align their business to offer their clients the same scale online that made them dominant in print and TV, they are betting that vertical networks are the way to go. Since the start of 2008, Viacom, Conde Nast, CBS, Reader's Digest and even Martha Stewart Living have launched a vertical ad network. Just this past Friday, Forbes was the latest to join the pack.

The viability of traditional media company-owned-and-operated networks is an open question since The Washington Post just closed the doors on their network. Why? Well, conflict of interest comes to mind.

As a publisher, how can I be sure that you are in fact selling my site (and giving 60% to me) when you can sell your own and keep 100% of it? These networks are finding it hard to scale beyond a few small long-tail publishers that are too small to care or question this. Perhaps the answer lies in partnering up with leading vertical media networks. Distributing content for traditional media companies and sharing ad revenue was a key part of our rebranding in January.

There are other examples. Since Hachette bought Jumpstart Automotive Media in April 2007 to reach a critical mass of potential auto buyers, Jumpstart has begun to distribute the content of Hachette's well-established offline brands such as Car and Driver to other sites in the Jumpstart auto network. I suspect there is a rev-share benefit for both the content producer who gets higher distribution and the landing page that gets newfound revenue along with professionally produced content. In a similar development earlier this year, Lifetime chose to partner for Glam's distribution network.

Successful vertical networks are not just rep firms or ad sales agencies, nor are they blind ad networks with low-quality ads. Successful vertical networks have emerged as the only scalable distribution media model online. They are media companies of the future, and the past year has proven exactly that both in terms of traditional media following suit and launching their own vertical ad networks--but more importantly, by the way of strong valuations that investors and buyers are giving to vertical media networks.

Jumpstart Automotive Media sold for $100 million last year. Glam just recently closed its $85 million raise on a whopping $500 million valuation. Federated Media is reportedly close to raising $50 million on a $200 million valuation. April will see a few more funding announcements for vertical networks. These are media company-type revenue multiples and NOT rep firm or horizontal ad networks valuations.

Somewhere between 30 and 50 new vertical networks have been launched since the start of 2008, and many more are certain to follow. The vast majority fall under the category of the no-scale, therefore don't care category. However, successful vertical networks--which have beaten old destination sites and portals in their respective categories in audience, and have invested in the smartest industry folks--have major media companies and investors betting that their business model will create leading media companies of the future.

I hope that the last three weeks have provided some insights that will explain the value and future for vertical media networks. I welcome your comments at peyman@netshelter.net.