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In my last post I said that the traditional ad network model was dying — what I didn’t talk about is how I think the network model will evolve over the coming years.

The fundamental flaw with the traditional network model is that the network is incentivized to optimize it’s own revenue — not maximize value for the advertiser. As long as you keep the advertiser happy that he’s getting a great ROI, and the publisher gets his paycheck — the network can keep the rest. The less demanding the advertiser, the less intelligent the advertiser — the better for the network!

Let’s take a simple example — A classic agency IO line item has a size, cpm, budget and some basic targeting parameters and goals. For example, one agency may buy $10,000 worth of US based inventory at a $0.50 CPM for 728x90s with a target CTR of 0.5%. Another way to think about this is that $10,000 @ $0.50 is 20M impressions, and at a 0.5% CTR means the agency is expecting to receive 100,000 clicks.

Now the smart network will go out and see how cheap he can go and acquire 100k clicks on news inventory. Why? Well, assuming he can deliver the volume his revenue has already been fixed — it’s $10,000 no matter what he does. The only thing on the line is whether or not this IO will be renewed or expanded next quarter. Since cost is the only variable the network can manipulate to increase profit he will go out and find the cheapest possible inventory that at least a 0.5% click through rate. The chart below demonstrates this with fictitious data. Buying cheaper inventory results in a lower CTR, but also significantly higher profits. All the network has to do is figure out how happy he wants to make the advertiser — just happy enough to renew (and maybe increase) next quarter’s IO, but not quite enough to cut into his healthy profit margin.

Network Profit & Cost w/ Campaign Performance

Now you might think that this only works if advertisers are buying on a CPM, but sadly that is not the case. Whether it’s on a CPC, or even a CPA — it’s all about finding the cheapest way to fill the requirements. You see, there is actually a strong difference in lead-value depending on the source of the inventory. A click from Yahoo’s homepage is actually worth significantly more than a click from a social networking site such as Myspace or Facebook. Similarly, a lead or conversion from the New York Times (one of the most affluent properties on the web) is worth more than a conversion from The majority of buyers out there today do not have the necessary lead tracking tools to accurately identify who is sending them good or bad leads.

I think that it’s this fact alone that justifies the need for central exchanges — which charge transparent fees to connect buyers and sellers. The problem with exchanges is that most agencies lack the deep buying knowledge that the ad-networks have. Just because there direct access to billions of impressions per day doesn’t mean that anybody *can* just buy them effectively. It takes serious skill and agencies still need help finding the inventory that will work best for their campaigns.

It is here that we are starting to see a new breed of ‘network’ — 100% advertiser focused buying networks that put their interest squarely with the actual agency. By charging transparent fees (say 10-20%) and being open about the inventory they buy — the agency can trust that efforts are spent optimizing and acquiring the best possible inventory for each campaign — not the cheapest that will fulfill the actual requirements.

Yet there is also a longevity question. Although agencies lack the skills to buy effectively today, this is something that they are all working on — at what point does the agency become a competitor of the “buy side” network — and visa versa? Logically these business don’t need to be separate, but practically I wouldn’t be surprised if they remain that way. Agencies are naturally filled with “right brain” people — they are creative, imaginative. Networks are naturally “left brain” focused — analytical.

Next post — we’ll take a look at the publisher rep firms and their growing role over the coming years.

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  • Steve Jobs

    Great post Mike, keep up the great work!

  • Paulo Cunha

    Very interesting perspective Mike, and pretty much on the ball with what I’ve been seeing.

    How about the elimination of some or all of the cost/effectiveness optimisation work through yield optimisation technology? Would that be the end of any of the current playing roles?

  • Mike

    Hi Paulo,

    I think it’s actually far more about integration technologies than yield optimization. There are plenty of standalone systems that work quite well for optimizing yield across a # of properties & advertisers.


  • Rob Leathern

    Great post! You touch on several areas we believe are inherently problematic from network incentive issues to lead quality assessment and so on. I would love to put together a larger set of discussions around these topics – perhaps something we can get a bunch of industry folks interested in helping us arrange… :)

  • atoh

    Hi, Mike great post.

    would the analogy of dark pools of liquidity exist perhaps?

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