Internet Chases Its Long Tail: How Much Advertising Will Thrive?

The long tail could be online advertising's undoing.

A glut of ad networks is clamoring for finite advertising and consumer dollars spent across infinite options. And we're still in the early stage of the digital age. If fragmentation should ever become counterproductive, there would be a hasty return to the critical mass hunt. By then, the next-generation search engines, aggregators and social networks will be general audience clearinghouses, and traditional big media--from the broadcast and cable networks to The New York Times and USA Today--will be reduced to glorified digital brand content providers.

Anything is possible as developing interactive options continue to replace old business models and the Internet's grand experiment in targeted niche advertising and e-commerce unfolds. For now, it's the hundreds of ad networks and exchanges that manage as much as three-quarters of online advertising, per some estimates.

A recessionary economy and intense confusion over ad networks will make it difficult to assess their effectiveness in attracting advertising support for the Web. There seems to be too much of everything, from online ad inventory and Web content to ad networks and other aggregators. The law of large numbers dictates an eventual shakeout.



Ultimately, search engines and social networks will be charged with cutting through still more layers of clutter. For now, the race is driven by a single intent: to beat Google at its mass automated placement of ad dollars. Even the largest branded players (including NBCU, Viacom, and Conde Nast) are fighting for attention by creating their own in-house ad networks. For instance, Fox Fusion sells ads across dozens of News Corp.'s disparate sites from The Wall Street Journal, and MarketWatch to MySpace, the Fox TV networks and Twentieth Century Fox films.

The emergence of vertical ad networks online could take a larger share of online ad dollars by significantly boosting CPMs paid for delivery of premium content. Even the biggest industry-wide ad networking effort--Project Canoe's sale of national ads across the leading cable systems--was designed to counter Google's increasing move into TV ad sales.

However, retaining and mining initial advertiser support will prove to be an even more formidable challenge as more than one-quarter of $7 billion in online display ad spending will filter through ad exchanges and networks against a backdrop of $35 billion in total U.S. online advertising by 2010, according to eMarketer. The Washington Post. Co. collapsed its company-wide ad network after only 16 months. ESPN recently ended its use of third-party ad networks to protect the ongoing direct sale of its premium brand content.

Indeed, the mounting backlash could eventually be significant, especially given Web producers' unwillingness to pay a 40%-plus placement fee to ad networks in a challenged advertising economy. Major Web publishers are becoming concerned about the potential damage from the commoditization of their brand content and brand advertising inventory, being traded like "porkbellies," according to an Omnimedia executive. A recent Avenue A/Razorfish Digital Outlook found that ad networks' spending has gone flat, noting that vertical site share of advertising increased to 39% in 2007 at the expense of major portals whose share declined to 19% from 24%.

The one thing that ad networks--like search engines and other aggregators--can afford is convenience. Nine out of 10 ad agencies and advertisers buying online media indicate plans to work with ad networks this year, and even commit more dollars than in 2007, according to Collective Media. About 60% of brand advertisers and direct marketers will use ad networks this year, although only about one-quarter are into behavioral targeting--which means they could still end up on major portals such as Google, Yahoo, MSN and AOL. That does not include major acquisitions such as Microsoft-aQuantive; Yahoo-Blue Lithium; and It is telling that AOL, Yahoo and Google topped all ad network reach in March.

But reach does not assure long-term success. A recent report from desilva + phillips does not quantify the financial success of advertising networks, but it does identify them as the focus of healthy merger and acquisition activity--especially those "that attain scale." In 2007, nearly $2 billion was spent on the acquisition of 10 smaller pure-play ad networks, while another $300 million was invested by venture capitalists.

Still, it is not clear that ad networks are effectively working long-tail magic. The top 100 Web publishers sell only 40% of their inventory through direct means. Still, ad dollars for the 10 largest online publishers represent 70% of all industry revenues, the desilva + phillips report states. Unless smaller, specialized ad networks and Web publishers become more sophisticated about distinguishing and pricing their inventory and content, the big guys will continue to have their way. Of course, Google is ready to do its part with a new revenue-sharing Ad Manager service Web publishers can use to manage their own ad sales. But the ultimate weapon held by Google and other major players is the one-stop digital dashboard--from upload to distribution. That technological approach to optimization just might help long-tail advertisers to settle the age-old conundrum: which 50% of my advertising dollars work?

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