The Emergence of Online Ad Exchanges

A recent report by RBC Capital Markets Corp. says the emergence of advertising exchanges is inevitable, and that the success of a handful of exchanges should benefit publishers and could pressure the margins of existing ad networks, the largest of which is VCLK. Last month, Yahoo purchased a 20% stake in RightMedia, a New York-based advertising exchange, at a cost of around $45 million, valuing the company at $225 mio. RightMedia has roots as a CPM-based advertising network similar to those run by ValueClick, 24/7 RealMedia, AOL's Advertising.com, and dozens of private companies including Tribal Fusion, Casale Media, and Vendare. However, RightMedia’s business model has certain differentiating factors. RightMedia is an open exchange for buyers and sellers of ads, and not a closed network. The company realized that there were several limitations to the closed ad network business model in 2004 and moved to create an open marketplace. There are currently 127 members of the exchange, including Yahoo, Fox Interactive, and LookSmart. Several small to midsize ad networks have become members of the exchange, enabling those networks to deploy advertiser budgets across inventory in their own network or access inventory from other exchange members. The combined network now has access to inventory from over 13,000 publishers. RightMedia charges a fee of 7-10% for the exchange, which includes campaign management tools and ad-serving. This is well below the fees charged by the traditional ad networks. Generally, there could actually be two or three intermediaries taking a cut of an ad budget, so the fee charged by RightMedia may be additive. RightMedia's benefit to advertisers is the centralization and consolidation of a massively fragmented ad market. For publishers, the exchange offers higher yield. Publishers experience 40%-50% yield improvement on non-premium inventory with RightMedia. However, those advertisers who were able to snap up cheap advertising inventory before and turn it into leads/sales should now face more competition for that inventory and will likely have to pay more for media, pressuring margins. The largest ad networks do not currently participate in the RightMedia exchange. DoubleClick is currently forming a similar network and stands to benefit from its relationships with thousands of publishers, for which it already serves ads. Behavioral targeting companies like Revenue Science are also using the exchange to retarget consumers who have been tagged with a specific tendency or likelihood (an in-market car buyer for example).

There are currently 127 network, advertiser and publisher members with seats on the Right Media Exchange, including Yahoo!, Fox Interactive Media and LookSmart. Exchange members represent over 6,000 buyers and 13,000 sellers. More than 175,000 creatives are currently active in the Exchange. The exchange reported that over 566 billion ad impressions were traded during the last six months of 2006.

Thanks RBC Capital Markets Corp. February 2007