Ad Networks Are a House of Cards – But a Great Deal

A groundbreaking study by the Interactive Advertising Bureau (IAB) and Bain & Company shows that ad networks’ share of display ad sales soared from 5% to 30% from 2006-2007. (Read the excellent full report here)

It seems the rise in Internet advertising (~20% per year, according to eMarketer) is creating a flurry of new sites, and a scenario where established sites keep adding more content, and thus more ad inventory.

For agencies, the opportunity is tremendous because ad networks charge $2-$3 per one thousand ad impressions, while buying ads direct from a site can run $20 or more. Certainly, sites often hold back premier ad placements for direct sales, giving ad networks less attractive, run of site inventory. However, if one ad buy is at a $2 CPM, and the other ad buy is at a $20 CPM, it is extremely unlikely that the premium inventory will perform 10 TIMES better than the non-premium placements.

There are literally dozens of ad networks now, each willing to place ads for your clients on Web sites, including highly targeted behavioral and retargeting opportunities. (Decent list of reputable ad networks here) Given that you can buy solid inventory at a fraction of the cost, why wouldn’t you use ad networks almost exclusively, especially for test campaigns when you’re trying to optimize creative and call to action? (my blog post on how to optimize online ads)

From 2006 to 2007, sell out rate (the percentage of overall ad inventory sold) by premium publishers covered in the IAB study actually went UP from 55% to 72%, but that was due almost entirely to the huge increase in ad network placements. Thus, sites are turning more and more of their ad inventory over to networks that are paying them a pittance for it, figuring “some dollars are better than no dollars.” This of course is true in the short-term, but eventually this house of cards will fall.

Sites cannot continue to sell an increasing share of their ads at a couple bucks per thousand, unless their content creation overhead is extremely low. And even ad networks that are booming at present with a 600% annual growth rate, cannot sustain it. As more ad networks come online, downward price pressure will only increase, making it difficult for ad networks to make much margin on their arbitrage. Failures and consolidation will occur quickly.

Advice for Agencies

Consequently, my advice for agencies is to use ad networks as much as possible for your online media purchases, especially in the testing phase. However, use first-tier networks at all times, and use multiple networks.

Realize that your preferred network may not be around very long, and when the consolidation begins, it will happen FAST, so make sure your in-house team (either media or account executives) legitimately know enough to be dangerous about Internet advertising placement to keep you in the game if the precarious ad network situation blows up in your face.


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