NEWS: Ad Networks, Confusion Grow on Web

Ad Networks, Confusion Grow on Web

By EMILY STEEL
April 16, 2008; Wall Street Journal

For the past five years, SOAPnet.com has been the Disney-ABC Television Group's hub for all-things soap opera. It has hosted clips of shows like "All My Children," featured behind-the-scenes news, and even sold souvenirs.

But starting Wednesday, it is an "ad network" as well. The Walt DisneyCo. unit plans to announce that it has struck agreements with 45 smaller, separate Web sites that allow it to distribute content on them and, more importantly, sell advertising on their behalf. By doing so, it joins roughly 300 other companies that also call themselves ad networks.

The business of brokering ads across clusters of Web sites has become one of the most popular -- and overcrowded -- niches on the Web. The result is a glut of networks competing with each other, confusing media buyers and guaranteeing that some sort of shakeout is inevitable.

For some, starting an ad network is about survival: SOAPnet.com's traffic was light and diminishing, so in order to sell ads it needed to be able to offer access to other sites as well. Others are hoping to capitalize on the rise in online ad spending, either to capture an expected explosion in display advertising, or follow the lucky footsteps of previous ad networks that have been snapped up at high prices by large companies.

The ad-network business relies on two factors for growth: Web publishers ceding more of their ad inventories to the networks to sell, and the networks being able to actually sell that ad space to marketers. For the most part, publishers have little to lose by letting an ad network try to sell some space for them.

The bigger problem is that because so many ad networks are now competing -- in some cases, multiple networks are trying to sell the same slice of ad space -- it's harder than ever to rack up sales. Already, a number of networks are ailing.

"There will be a squeeze," says Jeff Lanctot, senior vice president of global media at the digital ad agency Avenue A/Razorfish, a unit ofMicrosoft Corp.'s aQuantive. "For those networks that fall out of the top 10 and haven't carved out a real niche, it will be tough for them."

The whole idea behind ad networks when they first started cropping up a decade ago was to simplify the process of buying ads online by offering one-stop shops where marketers could buy across dozens or even hundreds of Web sites. But now the ad-network population consists of so many permutations and combinations of services and expertise that media buyers, who often control ad spending for marketers, are left scratching their heads.

"After awhile, you just start to get blind with how many options you really have," says Adam Shlachter, senior partner and group director at Mediaedge:cia, a media-buying unit of WPP Group's Group M. "It becomes really difficult to tell what the difference is and what the benefits are between the different networks."

Some ad networks specialize in a certain topic area, like home decorating or physical fitness, while others cut across multiple subject areas. Some ad networks charge advertisers only when a consumer clicks on an ad or makes a purchase, while others simply charge by the ad. Some only broker text ads, others banner ads, while still others do nothing but video ads.

The technology used by ad networks also varies. Some deliver ads to Web sites based on whether the ad topic matches the personal interests of surfers based on the sites they've visited before, while others use the content of the Web site as their guide. As an industry, the ad-network business is healthy. An estimated 80% of ads are now sold through a network, and that number has been increasing the last couple of years. The top-20 ad networks that sell display advertising earned more than $2 billion in revenue in 2007, or about 14% of the total graphical-ad market, according to a report by JP Morgan analyst Imran Khan.

And there has also been a flurry of deal-making in the ad-network arena. More than $2 billion was spent last year to acquire 10 ad networks and exchanges, and venture-capital investment in ad networks reached nearly $300 million, according to media investment bank DeSilva and Phillips. That figure doesn't include the $649 million that WPP Group spent for 24/7 Real Media, the $6 billion Microsoft paid for aQuantive, or Google's $3.1 billion purchase of DoubleClick. All of those companies earned portions of their revenues through advertising networks.

Microsoft's bid for Yahoo -- which has drawn AOL, News Corp. and Google into the mix at various points -- at its heart is largely about the business of placing advertisements on Web sites, underscoring the significance that media and technology companies are placing on the business of brokering ads.

But despite these signs of health, some ad networks are stumbling. The Washington Post Co. was one of the first traditional media companies to make the leap in November 2006 when its Washington Post Newsweek Interactive unit started stitching together some 130 blogs on which to sell ads. It all started off fine, with big marketers such as Lufthansa and Marriott paying high rates to advertise on the small sites in the network. But the advertisers stopped coming back, and the Post decided the effort wasn't worthwhile and shut down its network.

"It really was an experiment. It never got to be a business," says Jeff Burkett, director of ad innovations for Washington Post Newsweek Interactive.

Meanwhile, some of the oldest ad networks are also struggling. Take the case of Burst Media. Started by a former newspaper ad-sales executive in 1995, it was one of the industry's first ad networks. It survived the collapse of the dot-com bubble, grew to become one of the industry's most prominent networks, and went public on the London Stock Exchange in 2006. But since then, the company has several times missed its own revenue forecasts as advertisers canceled deals or scaled back spending. Burst has been trying to stage a recovery, but analysts say there is a good chance it won't survive.

"We managed to navigate our way through the first Internet correction, and now we continue to build our business," Chief Executive Jarvis Coffin says. "Along the way, we got caught up with operational difficulties. Now we are aligning ourselves with the future."

For bigger media companies like Disney-ABC Television Group, the hope is that they can link enough small sites to increase the size of the audience they deliver to advertisers and ultimately boost their online revenues. For instance, SOAPnet.com, combined with its sister site ABC Daytime, reached 1.2 million unique U.S. visitors in March, down 24% from the same period in 2007, according to Web measurement firm comScore. With addition of the 45 new sites, which include BeautifulStranger.TV and Stylehive.com, it is aiming to double its reach and its ad revenues.

In the same way that ad networks grew out of the explosion of Web sites, there is a new type of business that is emerging because of the proliferation of ad networks. These companies, with names like the Rubicon Project and PubMatic, help Web sites figure out which ad networks to work with to generate the most money.

"Without this, it's a full-time job," says Chris Jones, vice president of business development at auto-focused Web site Streetfire, which works with the Rubicon Project and sells ads through eight different networks.