Vertical Ad Networks

A vertical ad network is typically a collection of content sites that are focused around a particular topic such as finance, parenting, sports, or autos, offering advertisers the ability to reach contextually and demographically similar audiences in a more efficient way than on a site-by-site basis. Vertical ad networks can offer publishers much higher CPMs based on the premium advertisers are likely to pay for the quality of content and added inventory to the network. Doug Anmuth, internet analyst at Lehman contends that as online advertising budgets rise and more brand-oriented campaigns migrate to the web, there is likely to be a growing need for higher-value, premium ad inventory, particularly for traditional brands which have greater sensitivity about the placement and context in which their ads appeal.According to Doug, bundling of publishers in order to leverage sales infrastructure costs is not a new concept and has occurred in other media, including radio and print, long before the Internet. However, the limitless nature of the Internet (unlimited sites, low barrier to entry with blogs, and minimal start-up costs) only amplifies the need for more efficient solutions for advertisers and media buyers. Further, as online advertising budgets rise and more brand-oriented campaigns migrate to the web, there is likely to be a growing need for higher-value, premium ad inventory, particularly for traditional brands which have greater sensitivity about the placement and context in which their ads appeal. According to Avenue A I Razorfish’s 2007 Digital Outlook Report http://www.avenuea-razorfish.com/reports/RegOutlook2008.html, vertical sites accounted for 39% of total media spend in 2007, up 20 bps Y/Y, and aside from search spend, was the fastest growing category in terms of media billings, growing 43% in 2007 compared to 14% in 2006. This compares to 36% growth across all billing categories. The relative out-performance of verticals was largely at the expense of portals, where media billings fell 500 bps to 19%. While most of the vertical billings Avenue A I Razorfish reported were likely placed directly on verticals and not through vertical ad networks, the continued strength and growth in vertical advertising likely exemplifies the continued shift in advertisers’ preferences to purchase inventory around the audience rather than primarily guaranteed impressions.This targetability and transparency is leading to higher average CPMs, with some of the larger vertical ad networks achieving average CPMs in the $10-12 range. While the value of hyper-targeting an audience seems apparent, historically, small-medium publishers focusing on a specific vertical likely lacked a sufficient audience size, overall scale, and investment needed to maximize the monetization of their content. With the emergence of ad networks like Advertising.com and Google’s AdSense, web sites which were mainly in the tail were able to monetize their content. As these sites grew in audience and scale, they likely reached a monetization ceiling, setting the stage for vertical ad networks to emerge.Different from traditional ad networks which are generally content agnostic with little (if any) O&O inventory and focus mainly on providing maximum reach across the Internet, vertical ad networks are typically built by publishers that directly operate sites that have achieved scale in terms of users, and also expand their ad network inventory across similar content sites. By focusing on a content niche, these networks can achieve audiences that advertisers desire and in a particular vertical that would otherwise be difficult to achieve. Some of the advantages vertical ad networks provide for advertisers include an efficient way to reach a highly-segmented and targeted audience. Whereas an advertiser could seek out individual golf, auto, or health sites on which to advertise, it is likely that few individual sites would have the available impressions needed to satisfy the reach goals of a major advertising campaign. For example, while there is no shortage of parenting sites on the web, most would have difficulty providing a large enough audience to satisfy the reach goals of a major national brand such as Pampers or Gerber. If a publisher is associated with a vertical ad network, it could potentially deliver the desired audience and reach that an individual niche-oriented site could rarely provide. In fact, this ‘problem’ is one of the key solutions Yahoo! looks to offer publishers with its announced Advertising Management Platform (AMP!) by offering the ability for publishers to fulfill audience and impression demands from advertisers. The current fragmentation of the Web has increased the availability of inventory online, but it has also created challenges for advertisers, agencies, and publishers alike as they seek to coordinate across different metrics and standards.For publishers, participating in a vertical ad network offers a way to outsource the infrastructure and staff needed to support the various components of online ad sales including sales, sales support, ad-serving and management, reporting, and billing while achieving higher effective CPMs than through more general ad networks. For example, the average effective CPM publishers generate through run of site ad networks is likely less than $1, vertical ad networks can offer publishers much higher CPMs based on the premium advertisers will pay for the overall quality of content and added inventory to the network in general. While some bigger name-brand publishers, including ESPN, have recently shown a preference to handle all ad sales in-house, eschewing the value of putting their inventory in a network, for small to mid-sized publishers who lack the resources, audience, and brand-name to build a large audience and manage direct relationships with advertisers, the value of a vertical ad network is more apparent.Vertical ad network playersTheKnot.com, Bankrate, iVillage, Glam Media,
Martha Stewart Living Omnimedia’s Martha’s Circle, Kaboose , Quadrant One (newspaper consortium including Tribune, Gannett, others), Revolution Health, CondeNet (blogs on fashion and technology), and Nickelodeon’s Parent Connect network. Doug quotes that while there is a revenue share component when expanding a network, the average split to content sites across vertical ad networks is likely below 50%, although some publishers could also receive guaranteed CPMs.What about major portals?While the major portals—Yahoo!, MSN, and AOL—have largely cornered the market on mass reach as they offer content across most verticals and are generally ranked within the top 5 sites per content category within comScore, their recent focus has been on expanding their monetization engines. This approach is largely consistent with their large scale in terms of audience and page views both across their O&O and their networks. One example of the solutions being built by the major portals could be delivering ads targeting specific users across content verticals. For example, if an automotive company is looking to reach “auto enthusiasts” and “people shopping for new cars,” the major portals would serve those individuals it believes are shopping for cars across various environments, including while that user is checking e-mail, reading a news article, or spending time on a social networking site. This is a form of behavioral marketing, in which the ad is served to the user rather than affixed to a particular page of content, and can be offered by most major Internet companies, particularly through Yahoo!’s SmartAds and its acquisition of BlueLithium, and AOL’s acquisition of TACODA. The portals would argue that it is the advertiser reaching the potential consumer that matters more than the context in which the user is reached (i.e. on specific content verticals). This form of advertising will increasingly gain adoption, and the larger Internets will have to eventually strike a balance between this type of laser-like behavioral targeting and the concerns an advertiser may have around the particular setting in which their ad appears.However, the investments of 2007 are likely to provide a basis for the major Internets to offer better targetability, customization, and scale, including the technology needed should they launch vertical ad networks. And the major portals are shifting their approach to verticals by bundling properties and launching new sites and networks targeted to specific demographics. Yahoo!’s newly released Shine site caters to women, and AOL’s recent launch of the AOL Technology Network couples some of its technology blogs such as Engadget, Switched, and TAUW (The Unofficial Apple Weblog), each of which could be used as starting points for larger vertical ad networks targeting women and technology enthusiasts. Ultimately Yahoo!’s AMP! platform is likely to include access to specific verticals as it focusing on providing publishers access to impressions across the web. Additionally, Google’s DoubleClick could be working on a similar vertical ad network solution. However, for the portals to be successful, it is important to view the expansion into vertical nets as premium content in order to benefit from the relatively high CPMs compared to current run of site ad networks.While ad networks, both mass-reach and vertical, are serving an important role in the online advertising value chain, there are many major publishers who have articulated dissatisfaction with the network model and have actively removed inventory from networks. Most recently, ESPN has stated that it would no longer work with advertising networks as it believes ad networks diminish the value of its content, while the WashingtonPost.Newsweek Interactive recently closed its ad network, Blogroll, as many advertisers could find cheaper inventory elsewhere. While mass each ad networks are effective in monetizing unsold inventory for publishers, participation in ad networks in general could: 1) dilute and diminish the differentiated nature of the publishers’ brand; 2) put downward pressure on CPMs based on the seemingly endless supply of inventory within a network; 3) minimize the relationships with the main advertisers; and 4) produce lower page yields when outsourcing sales to a network as opposed to inhouse or a vertical solution.Conversely, vertical ad networks seek to position themselves as an efficient way to achieve high-quality audiences in controlled contextual settings, while also providing an audience that meets advertisers’ reach goals. Vertical ad networks have emerged as advertisers are increasingly demanding more relevant and for lack of a better word, safer, environments to run their ads. And while many general ad networks do offer audience targeting tools which can likely accomplish many of the same goals as a vertical network, these networks can often suffer from the “low-hanging fruit” stigma given the early dependence on direct-response ads and use of remnant, low-cost inventory. The use of vertical networks will only grow as consumer packaged goods, pharma, food and beverage, and in general, more brand-sensitive advertisers increasingly turn to the Internet to reach their target audiences. As vertical ad nets expand their publisher reach, there is a risk to the operator that rising TAC rates could impact overall margin expansion. Currently, the average revenue split across vertical ad networks is less than 50%, with higher quality sites and those sites that give the vertical network more control over the inventory potentially receiving guaranteed CPMs. Although vertical networks sell the entire network’s inventory to advertisers, as traffic to O&O properties grow, it should mitigate the impact rising TAC rates could have on overall margins.InfrastructureAs the concept of vertical ad networks continues to gain adoption, several companies have emerged that provide the infrastructure and technology to power a vertical ad network by providing “white label” network management solutions. These “white label” solutions make it easier for a leading category publisher, such as Forbes in finance, or Martha Stewart in home and living, to launch a vertical ad network without significantly investing in technology. They also enable the main publishers to focus on the advertising relationships without having to build and maintain the technology to handle the ad-serving, yield management, and the analytic tools. Forbes and Martha’s Circle are using Adify’s vertical ad network solution for their vertical networks. Adify specializes in creating white-label ad networks and powers an estimated 90 vertical niche-oriented ad networks. Other providers of vertical network solutions include Collective Media, and DoubleClick could also be working on a similar solution as an extension to its DFP product line, while some of the larger vertical ad networks, such as Glam Media, also offer to provide the infrastructure for 3rd parties to build their own networks upon.
Thanks Doug Anmuth, April 2008