China Online

The Chinese Internet market is the second largest in the world, only a whisker behind the US with 150 million users, compared to the 154 million in the US. But the U.S has 68% penetration. That 150 million represents only about 10% of the Chinese market. At full saturation, the Chinese market will be almost seven times as large as that of the US. However, it may be a mistake to project the US experience onto the emerging Chinese market. Chinese culture is vastly different from US’, and their online community reflects this difference. Much of the Chinese online experience will likely happen through mobile devices, since the mobile market is much more mature. While the number of Internet subscribers is 150 million, the number of cell phone subscribers is significantly higher, nearly 500 million (as of October, 2006), and is growing at the rate of 5.5 million subscribers per month.

The Chinese like to be bombarded by visual stimuli. They operate at a frenetic pace, juggling several things at once, each loudly demanding attention. Some look at this as a lack of maturity in the Asian market. Western eyes see Chinese Web sites as garish, and this is because the designers aren’t very sophisticated yet. Perhaps it’s just designers catering to their audience, who like it “hot and noisy.” The other difference is how Western cultures treat information, compared to the Chinese. In the West, information is in no short supply, and for the most part, people inherently trust the source of that information. People in the west believe most things they read online to be true. The biggest challenge is to wade through the mountain of information available to people and to eliminate the irrelevant. The Chinese treasure information yet has a healthy skepticism as to its veracity. While Western Web users are ruthless in their filtering of information, particularly on a search page, the Chinese are more apt to gather and consider, taking time to digest and choose. They often have multiple windows open at the same time, both as a way to keep busy with the slower load times typical in China, and also because they like their desktop “hot and noisy.”

Two main Chinese search properties, Baidu and Google.cn experience significant difference in user behavior. In North America, the average interaction with a search results page, from launch to first click, is generally less than 10 seconds. In China, it averages 30 seconds on Google and up to a minute on Baidu. While North American scan activity is condensed in the Golden Triangle, in China, it's spread around the page. It’s fascinating to watch an individual session. The eye zips around the page, picking up information in an apparently haphazard manner. Baidu has been taken to task for the opaque nature of its listings, where you can pay for placement. The results are also much more prone to affiliate spam (on both engines, but particularly Baidu) than in North America. But the Chinese don’t mind. Baidu has captured 62% of the search market in China, compared to 20% for Google. After all, lack of trust in information is nothing new to the Chinese. Why should it be any different on a search engine? This is a market ready to explode. Innovation is happening organically and at an incredibly rapid pace. The development cycle to turn out new functionality on Chinese sites is 30% to 50% as long as their North-American-based rivals. In China, you point, shoot and then aim. Deliberation will kill you in China. This is a lesson Google is learning the hard way. The Chinese Internet market is like a Beijing taxi: there may be no logic to its route, but it’s sure getting to wherever it’s going in a hurry!
Thanks Ravi Srinivas, May 2007.

EBay Online Media Exchange System

The Online Media Exchange system, created by eBay and a group of about 10 high-profile advertisers, including Home Depot, Hewlett-Packard and Microsoft, uses an online auction site for buying TV ad time. It represents a massive shift from the way ad time has been sold for decades, breaking from the traditional model, which is heavily dependent on personal relationships and haggling via phone, fax and email. Initially, the exchange failed to find any TV networks willing to sell ad time through the site. But now, the Oxygen network has agreed to participate, leading organizers of the exchange to decide to push forward with the venture. The exchange is still in testing mode to determine whether it's a viable way to buy and sell ad time. And even with the participation of Oxygen, which reaches only about 73 million homes, compared with 94 million for a network such as ESPN, the project faces long odds. Nonetheless, it is a sign of the new pressure that the decades-old model of buying ads is facing. Companies like Google are trying to take the way that Web ads are sold online and apply it to traditional ads. Google recently signed a deal to sell TV ad spots through satellite-TV provider EchoStar Communications via an online auction.

The consortium of advertisers behind the new exchange won't disclose their ad budgets for the site, but people close to the process say that the total ad dollars committed to the initial pilot over the next 60 days will be about $5 million to $8 million. The group signaled that it was trying to raise about $50 million from advertisers for testing the site. The exchange offers advertisers the ability to post online a request for ad time during a specific time frame, including details about the type of consumers they want to attract. Participating networks can look at all the requests on the site and decide if they want to bid for any of the business. The exchange has met with a tremendous amount of resistance from network and ad executives, who worry that, among other things, it would further commoditize ad time. Some of the biggest-spending advertisers, meanwhile, have been opposed in part because they get price breaks under the current system. The biggest blow for the exchange came when the Cable Television Advertising Bureau, a trade group that represents the major cable networks, came out against the plan. It said the system wouldn't help in buying ad time because ad deals have become more complex and now often include Web components, retail extensions and product placement on TV programs.

The advertisers behind the venture believe it will attract additional cable channels because, as networks lose ad revenue to the Web and other newer media, they can ill afford to walk away from sales opportunities. The consortium of advertisers hopes that their pledges to buy ad time via the site will stimulate more interest among other marketers. Thanks Suzanne Vranica, wsj.com, May 2007.

Going Vertical

It is interesting to witness the new focus towards vertical ad networks, and away from the previous model of broad-reach, broad-targeted networks. The first wave of the network model focused on large reach networks, such as ValueClick and Advertising.com. These companies aggregated a large volume of audience for advertisers, and allowed for contextual targeting and demographic targeting, mostly via contextual relationships. The second wave focused on behavioral targeting being layered over the existing infrastructure, offering advertisers the ability to reach the same audience either contextually or based on previous traffic patterns and usage, thereby giving birth to behavioral targeting. The current trend appears to be focused on building a singular portal to reach a specific audience by tapping into them via a collection of smaller to medium-sized sites of a similar contextual relevancy. One of the first players in the category was Gorilla Nation. The company amassed a large collection of sites reaching the entertainment category, and has continued to build them over the last few years, while acquiring more into the mix. Recently, we saw Jumpstart Automotive Media being acquired by Hachette Filipacchi, aggregating together a large collection of automotive targeted sites and inventory. This deal enabled Hachette to build relationships with larger portals to weave together its inventory, either contextually or through behavioral targeting, to reach in-market auto buyers.

Even the start-up world is getting into the act, with properties like Real Girls Media and its first site, DivineCaroline. These start-ups are trying to pull together women-targeted sites in much the same way that early trailblazer iVillage did, but is focusing on the Web 2.0 elements such as blogs and user-generated content. Going beyond the network model, we are even seeing the development of platforms and services to help advertisers reach the types of verticals they are interested in. Centro is a platform and service that objectively aggregates together local online content for advertisers, while Adify is a start-up that builds vertical networks for specific advertisers, to reuse that inventory, building a marketing asset for later growth. All of these models signal the shift away from large aggregate audiences towards the development of solutions to reach the long tail and provide advertisers with the ability to go deeper into the lives of their audience. This is a means for reaching the portal audience without advertising on the portals. It is a means of going around them when they cost too much or wanted too much in the form of an upfront deal. These are all ways to build to the ever-important tools of reach and frequency. These long-tail vertical networks provide access to a targeted audience at a lower cost, in a way that is attractive to advertisers. You are able to do more than just run banners and buttons. You are able to run large page take-overs and larger rich media units, but in a smaller, more efficient, and possibly more effective environment. The venture capitalists seem to have gotten the message loud and clear. The majority of the dollars are going to business models that are focused on video and vertical. Of course, that means that a vertical video network or platform would be the most attractive option for VCs and advertisers alike.
Thanks Cory Treffiletti, May 2007.

Vertical - Universal – Holistic – Search

Google's new universal search initiative incorporates some of its vertical and specialized search results into the main search engine results page. Google has been working on this since 2001. The first iteration of universal search right now centers on video, news, local, and books. Searches with video results showcase the most dramatic changes. For instance, for a search on “Coke Mentos”, Google includes three videos in the results, two from Google Video and one from YouTube. Each of the video results has a thumbnail image from the video, along with a "watch video" link which, when clicked, opens the video right in the body of the results. All three of those videos can be played at the same time. It looks like the purity of text-only search results is waning at last.

Typically, marketers have one of three reactions to the universal search news. Some say they have been anticipating this since 2001, and have aligned their search engine optimization strategy along these lines for years. There are others, who have been thinking this way for a while, but haven't done anything about it. However, some marketers feel they are screwed, and this is where the holistic SEO strategy comes into play. Right now, one has to optimize around all of Google's vertical and specialized offerings, namely news, video, and local. This is how universal search works. Consider a search on Google for a newsworthy topic. Previously, Google would sometimes feature listings from Google News atop the 10 natural listings on the first page. If links from Google News didn't merit appearing up top, then that section wouldn't appear at all. The inclusion of Google News links didn't affect the ranking of the first page of search results at all, though it did require that users scroll a bit more to see everything on the page. Now, with universal search, Google's algorithm decides whether or not to include Google News up top, or somewhere else among the first page of results. A search over the weekend for "Mets" brought up Google News listings on top, followed by nine other listings, including News. A search for "Tigers" brought up the Google News results as the fourth listing.

The first takeaway is that search engine optimization continues to get harder. Universal search gives Google one more way to compete with every other listing. There's something almost mythical about appearing on the first page of search results, but click patterns reliably show that clicks on search results follow a power curve distribution, where the top few listings get the most clicks, and each listing down, especially on subsequent pages, is stuck in the long tail. To tackle this challenge, marketers need to pursue a holistic approach that involves optimizing for all of Google's vertical services. With local, a starting point is Google's Local Business Center. For news, it means press release optimization. Video is a more complicated issue, as universal search aims to improve the indexing of Google Video and YouTube videos. Marketers who focus on optimizing video on their own sites will still want to redouble those efforts, especially if syndication isn't part of their strategy. Marketers should also look to the future. Google's specialized search functions span images, code, patents, scholarly journals, and blogs, to name a few examples. Marketers should optimize any asset they think Google will find of interest, keeping the other engines in mind. With Yahoo, marketers should optimize for Flickr, del.icio.us, My Web, and any of its vertical search engines. For Microsoft, marketers may well one day be optimizing around the Xbox. In other words, universal search's action item for marketers is to optimize everything.
Thanks, David Berkowitz, Director of Emerging Media, 360i.

Localized Search: A Threat to SEM?

According to industry analysts, Localized Search is attracting billions of dollars in ad spending growth, and new players like BooRah and Oodle are striking lucrative deals and securing funding. Even big player like Google, Microsoft and AOL are concentrating on developing local and personal search capabilities. Organizations have finally started getting a handle on search engine marketing, only to have it change on them. The fact is, localized and personalized search are a danger to SEM campaigns. Both local and personalized search extend the "what" of typical search to add the "where" and "who." Geo-location techniques help search engines tailor for local and personalized search. In fact, if you have a Gmail account, you will see personalized and local paid search items based on your email content. What users may not see, however, is information from companies that span multiple geographies, who are at risk of losing ranking spots to more regional or personalized search algorithms.

With the rise in popularity, it would be particularly timely to take a look at how organizations can revamp their SEO strategy in this changing search landscape. First off, businesses better make sure that their Web site is fully optimized for content and is search engine "friendly" to begin with. Businesses have to make sure that the company name, address and contact information (complete with city, state, zip) are on every page of the Web site. Once a site is optimized correctly, start tackling localized search by maximizing presence on the mapping services like Google Maps, Yahoo Local and MSN Live Local. Sign up for Google Local Business center. Google sends out a postcard with a unique pin to the address of a business to confirm that it really is there. The registration can be completed online to be listed in their index. Businesses must make sure this information stays current by updating the account when information changes (fax number, address, phone number, etc.)

Businesses can also use AdSense with geo-targeting and create a Google Local Business ad. Geo-targeted ads are served next to Google Maps right above the Google Local Business results. Having a presence in the Paid slot, the organic local slot and a pointer on the map increases the likelihood that the link will be clicked. Another key factor in the quest to dominate localized and personalized search results is to ensure listing in local-specific search engines like Yellowpages.com, Verizon Superpages, Citysearch.com and AOL's City Guide. Most of these engines offer free and premium listings. At the very least, search the free listings to see if a business is already listed and ensure that the information is correct. Consider a premium listing to maximize visibility within that search portal. Premium listings are usually inexpensive, and as in regular search engines, the ads are placed above "natural" results. Another simple yet valuable tip is to get involved in any local online outlets.

Research shows that local searchers are more qualified and ready to buy than broad searchers. For example, a user who searches for "used mountain bikes Burlington VT" is probably a lot closer to conversion than a user who searches for "mountain bikes." Local businesses with little or no online authority can quickly outrank top brand and search competitors for their geographical area by using local search. With a projected growth rate of 80% per year over the next three years, local search may give SEO a run for its money. Big brands, who are already building multiple geo-specific versions of their Web sites (Nike Running Boston, Nike Running San Francisco, etc.) will suffer the most if they don't step up to fully optimizing for local markets. It has been said that search is the great equalizer for online businesses, but local search may just tip the scales in the favor of businesses that tap into its full potential.
Thanks, Heather Frahm, CEO and co-founder, healthcare SEM agency Catalyst.

Internet Retailer Survey - April07

According to Internet Retailer Survey April07, E-mail remains one of the best one-on-one marketing tools retailers can use to attract and retain customers, although pay-per-click advertising and social networking are gaining status in retail marketing circles. The survey finds that merchants are expanding both the size and scope of their e-mail programs. Of the 302 merchants taking part in the survey, 94.5% are building bigger opt-in lists and 64.7% are conducting more e-mail campaigns than a year ago. The report says that 65.2% will increase the size of their opt-in e-mail lists between 10.1% and 40% in 2007; and only 28.8% of merchants in the survey maintain an opt-in list of fewer than 5,000 names. The survey report says that many merchants still have flaws in their e-mail marketing programs that may result in fewer readers and customers. The survey reveals that only 40.2% of all merchants are delivering between 90.1% and 100% of their e-mail messages; and only 59.3% of respondents have acceptable e-mail delivery rates. Only 17.1% reported e-mail click-through rates of 15.1% or more.

The Internet Retailer survey finds that 47.8% of merchants list increasing web sales as their main objective, followed by 17.2% who see customer retention as the top goal and 12.7% who use e-mail to attract new shoppers, and 19.7% who want more multi-channel customers or higher tickets and conversions. While the survey indicates that retail marketing managers are working to improve the effectiveness of their campaigns, many aren't paying close enough attention to conversion rates. About 30% of respondents to the survey don't know their conversion rates from e-mails. A low sales conversion rate is a key indicator that merchants need to adjust their approach to e-mail marketing. Today only 56.6% of retailers segment their e-mail lists, which could be segmented to identify recipients by demographics such as age, sex, annual income and past purchase histories to generate more effective campaigns. The report states that e-mail generates 1% to 2.5% of sales for 18.7% of all retailers in the survey, and between 2.51% to 15% of revenue for 37.4%. According to Jordan Ayan, CEO of SubscriberMail LLC, E-mail is likely to experience continued growth as a marketing vehicle, particularly as direct marketers look at even higher postage rates. However, a bigger program won't necessarily deliver better results if a retailer just takes a one-size-fits-all approach. If only 60% of a campaign is being delivered, the other 40% is a huge missed opportunity.
Thanks Internet Retailer, April 2007

GoogClick – Why are Cable Guys Silent?

Microsoft, AT&T, Yahoo, and advertising agency holding company WPP are prodding the federal government to investigate the Google-DoubleClick deal. Time Warner has also thrown its hat in the ring on the side of the anti-trusters, although it has done so very quietly, perhaps because Google owns a billion-dollar stake in Time Warner's Internet access service/portal AOL. Comcast's position on the deal is nonexistent. Historically, all cable systems operators, and for that matter satcasters and telecos with video platforms, are extremely customer-privacy-sensitive. The government has mandated fines of $500 per day per subscriber for any customer privacy violation that comes to its attention, although the operators are permitted to mine their subscriber data to upsell services. In addition, to the detriment of their on-demand platform advertising revenue generation efforts, the cable operators have consistently informed the advertising industry that outside of Nielsen or fusion projectable ratings, they will only provide limited subscriber interactive data points, such as unique monthly views, gross monthly views, viewing duration, graphs delineating day of the week and daypart viewing, and request for interaction opt-ins. Unfortunately, the system operators have not backed down in the last four years that the 4A's Advanced TV Committee has been pressuring them to offer more data points. This is a far cry from the valuable data that online companies such as Google and DoubleClick are permitted to glean from behavioral activity and the scrutinization of Web search preferences.

So what keeps Comcast mum and the other cable systems operators barely audible on this $3.1 billion transaction? Comcast is the largest pay TV provider in the US with 23.5 million subscription households, and the second largest Internet service provider in the US with 12.1 million customers. AT&T is the number one Internet service provider in the US with 12.9 million customers, and AOL is number three with 12 million customers. Yet, why is that the cable/ISP companies are non-vocal about Google's acquisition of DoubleClick, when it could presumably lead to an online advertising monopoly? Particularly when the cable companies are investing so heavily in the development of a broadband video presence, such as Fancast, Ziddio and Comcast.net, as well as brokering deals with the likes of NBC Universal and News Corp. as a distributor of their online video content?

The only possible scenario is the possibility that if the Google and DoubleClick deal survives scrutiny, and other display ad services companies are acquired by the likes of Yahoo, Microsoft, AT&T and/or AOL, couldn't Comcast use these mergers and acquisitions as a precedent-setting platform. Specifically, Comcast could challenge the stringent TV privacy regulatory issues on mining its subscriber data, when it attempts to marry the knowledge that the company gleans from its Web activities with that of its digital cable TV viewing platform. More meaningfully, Comcast could leverage its quadruple bypass services of cable, broadband, telephony and wireless, in order to deploy more precise addressable and segmentation applications to generate substantially more revenue from advertisers and squash the competition in its area of dominant influence.
Thanks Mitch Oscar EVP, Director CaratDigital, May 2007

Mutual Relevancy & Distributed Creative Development

According to Joe Marchese, President of Archetype Media, a company that helps advertisers build brands, and social media publishers to monetize content, any platform with aspirations to provide access to brand advertising opportunities across the new media landscape must be able to efficiently achieve ‘Mutual Relevancy’. That is, emotional relevancy to the content and the viewer simultaneously. A key factor in achieving mutual relevancy in brand advertising will be the creation, adoption and mastery of ‘Distributed Creative Development.’ Mutual relevancy is showing people stuff they want to see, but only in places where the brand wants to be seen. Thus, people accept the advertising, and it is the content surrounding the brand that builds the brand’s social currency. In this scenario digital distribution of traditional media assets (newspapers, studio movies and television) can monetize at higher rates, and potentially support the entire operational structure of traditional media organizations.

Determining mutual relevancy for brand advertising is no small task. It requires categorizing the emotional context of content for each brand advertising opportunity, followed by determining the most emotionally relevant brand advertising content for the viewer. Brand advertisers’ ability to access a critical mass of emotionally relevant, image-enhancing advertising opportunities, while actually enhancing the viewer’s content consumption experience, is the point at which digital assets will monetize at higher rates. The challenge is to develop systems that can efficiently and effectively determine mutual relevancy, given the emotional and therefore, human element necessary to determine mutual relevancy for brands. Look at search and contextual, for example. Neither of these is perfectly relevant by any means, but the incremental increase in relevancy has driven astronomical growth. It won’t be hyper-complex algorithms that crack the dam on brand advertising relevancy. Rather, it will be a reevaluation of the fundamental nature of relevancy and the application of a seemingly obvious solution made possible by current technologies. Even after the code is cracked on brand advertising relevancy, the full effects won’t be felt for some time, because advertisers and agencies will first have to adopt this new system. People will continue to change at analog speeds, regardless of how fast digital can change.

Perhaps the most significant factor in actually achieving mutual relevancy is a concept called ‘Distributed Creative Development.’ Hopefully someday, GoogleClick, or Yahoo/Right Media, or any other platform can deliver mutually relevant brand advertising, so that advertisers and agencies can provide the massive amounts of advertising creative necessary to address the seemingly infinite potential combinations of contextual and personal relevancy. Today, brand advertisers face a short shelf life for emotionally relevant creative. Distributed creative development has the potential to address a number of issues. With professional agencies acting as directors of distributed creative development, the market can more efficiently allocate the best professional creative resources. The application of community voting (implicit or explicit) allows the agency to leverage the knowledge of the masses in terms of what is emotionally relevant to them, while allowing the agency to focus on how best to use this to communicate the brand message.

Distributed creative development can also mean building modular creative components wherever possible. By building modular creative that can be combined and rearranged by the system at the point of the advertising opportunity, advertisers and agencies can significantly increase their ability to relevantly serve the maximum number of advertising opportunities. By building creative that can be personalized by both content publishers and content viewers, agencies can leverage the knowledge of the masses to achieve real-time emotional relevancy. The challenge here is for agencies to design creative that can be altered and still maintain the integrity of the brand message.
Thanks Joe Marchese, President Archetype Media, May 2007

Dave Morgan on Net M&As

Google is buying DoubleClick for more than $3 billion. Experian is buying Hitwise for more than $400 million. Hachette is buying Jumpstart Automotive Media for approximately $100 million. Yahoo is buying the 80% of Right Media that it doesn't already own for $680 million. Yahoo will also be the primary sales channel and ad-serving provider for Comcast.net. According to Dave Morgan, Chairman of TACODA, Inc., a behavioral targeting advertising network, companies making big bets on the internet now want to be acquirers in the industry, and not targets. There are probably 15 companies that want to buy into the piece of M&A action, from the search portals, to the major media and content companies, to the big ecommerce companies, to the major telecommunications infrastructure companies. Unfortunately, there are not 15 targets available today. According to The Monitor Group, about 92% of gross online ad spending in the US in 2006 was captured by just four companies (68% of net ad spend). While the number of potential targets might expand a bit over the next few years, it is probably unlikely that it will grow by more than one or two. That is why we are seeing big valuations for targets like DoubleClick, Right Media and the rest. In most cases, they are being bought for more than their potential cash flow. They are actually being bought for their strategic value in securing a top position in the market.

The Google/DoubleClick deal makes it clear that infrastructure matters. Technology-centric companies like Google and Microsoft can build lots of great technology to manage online display advertising in-house, but it's hard to match the value and capabilities of commercially driven, battle-hardened technology that's already been adopted by thousands of publishers and advertisers around the globe. With DoubleClick, Google instantly acquired market-leading infrastructure. Google didn't have to distract its existing engineering team from their other market-changing projects to focus on reinventing the wheel to create the company's own display ad infrastructure. With project Panama, Yahoo has just learned how hard and long the process is to build robust in-house ad technology. With 24/7 Real Media rumored to be on the block, the message is clear that basic ad serving infrastructure matters, and that there is a scarcity of suppliers.

Even before the announcement of the Yahoo/Right Media deal, the notion of online ad "exchanges" had already become hot around the industry. It has long been a dream of many that much of the human-driven, heavily negotiated and very opaque process of media buying and selling would give way to an automated, auction-driven and open and democratic market exchange. Therefore, Right Media and DoubleClick's recently announced exchanges were well received in the market, and have been pointed to as critical drivers in the strong valuations that these companies commanded. Their "exchange" stories helped drive the sales for these companies, but Yahoo and Google may not operate them as open and democratic exchanges. This is because; both Yahoo and Google derive 99% of their revenues from the sale of advertising. They bought the exchanges primarily because Right Media and DoubleClick can provide extraordinarily efficient platforms for scaling Yahoo and Google’s networks of third-party publishers. In addition, the targets provide highly efficient, self-service access to tens of thousands of small and medium-sized advertisers.

It is not about exchanges; it is about enabling dramatically more display ad network reach for Google and Yahoo. Right Media and DoubleClick platforms add tremendous efficiency to managing massive networks, and already have hundreds and thousands of pre-built relationships. This is the main driver for these deals. The Jumpstart deal is no different. Hachette is buying Jumpstart not just to operate a neutral exchange of automobile inventory. In fact, Hachette made the purchase to efficiently aggregate much more scale in the online automotive ad vertical on both the publisher and advertiser side. The deal enables Hachette to create a proprietary ad network.

News Corp bought SDC, an online ad and offer optimization service, and Hitwise was just bought by Experian because of the value of its data and analytics. Potentially, ad exchange platforms permit "off-site" behavioral targeting by portals with massive databases of audience behaviors and registration data. It will no longer be enough to have a platform, like Right Media for example, that can make it efficient for MySpace to sell, and advertisers to buy, incremental ad units for $0.07 CPM, as they do today. Without automated exchanges, these ad avails would be left empty since no one could justify the cost of serving for only $0.07 CPM, in addition to some friction cost. The next opportunity, and certainly why News Corp. bought SDC, is to use tools and data to turn that $0.07 CPM into $0.17 CPM, and then to $0.70 CPM through techniques like yield optimization or improved targeting.
Thanks Dave Morgan, Chairman TACODA, Inc. May 2007

Yahoo! Right Media – SIG Perspective

Yahoo! is aggressively building out a branded advertising network. By acquiring Right Media, Yahoo! aims to accelerate the monetization of its non-premium inventory (such as social assets like Yahoo! Answers) at significantly higher prices. The Exchange is expected to enable Yahoo! to use behavioral targeting to achieve greater pricing for ads shown to Yahoo! users on third-party sites, without the Exchange sharing any personal information about the user. By scaling the open transparent ad exchange, Yahoo! hopes to attract significant new partners to its branded advertising network, building on the momentum it has seen with recent deals with eBay, 200+ major newspapers, Viacom, and Comcast. Yahoo! announced it would acquire Right Media for $680 million. Prior to the announcement, Yahoo! held a 20% stake in the advertising exchange acquired in October 2006 for ~$40 million, a valuation of $200 million for the company, or 3x 2007E revenue of $70 million. The acquisition of the remainder of the company will be 50% cash and 50% stock from management, RedPoint Ventures, and others. Yahoo! is valuing Right Media at $850 million, or roughly 8x 2008E revenue forecast of $110 million, and 50x 2008E estimated EBITDA of $17 million. The transaction is expected to close late Q2 or early Q3 of this year, subject to regulatory approvals.

Right Media operates the largest emerging online advertising exchange, serving banner and other branded ad formats from about 20,000 advertisers throughout the web. RMX Direct pits advertising networks against one another, awarding ad serving rights to the advertiser paying the highest cost per impression (or cost per action). The exchange is an open, transparent network for publishers and advertisers, enabling publishers to identify which advertisements (i.e., by advertiser, format, or ad size), and ad networks perform best for them. Today, Right Media’s exchange includes more than nine partner advertising networks (e.g., Right Media’s own Remix Media ad network, CPX Interactive, Bannerconnect, Adtegrity.com, Oridian, Active Response Group, Rydium, Accelerator Media, and Directa Networks). Right Media charges networks a monthly fee to access its ad inventory, in addition to taking a ~7% commission on revenue from ads run through RMX Direct. The company primarily markets undersold inventory from less trafficked parts of the web, but also includes emerging social media sites popular with coveted demographic groups. The Right Media Exchange reaches about 1,000 publishers (representing about 10,000+ individual publishers), including Fox Interactive Media (MySpace), Six Apart, Lycos, Tribune, Looksmart, and Tickle.

Right Media should hasten Yahoo!’s build-out of a branded advertising network, enabling it to access and sell more inventory to its branded advertisers. Already, the company is announcing a long-term display advertising contract with Comcast. Looking forward, Yahoo! sees synergies, as multiple network partners may sell Yahoo!’s unsold inventory. Early sales of Yahoo!’s remnant inventory on the exchange generated a 50% improvement in CPMs. At the same time, Yahoo!’s premier branded ad salesforce will have access to incremental Right Media inventory to market to its leading brand advertisers. Yahoo! Has been successful in bundling Right Media inventory with its own premium inventory to enhance its branded growth rate in the fourth quarter of 2006. Yahoo! also has a multiyear strategic partnership for online display and video advertising services with Comcast.net, which is a top 10 online site, with more than 2.5 billion page views, more than 80 million videos viewed, and 15 million unique visitors per month. In addition, Yahoo! has expanded agreements with eBay (for Yahoo/PayPal Checkout capability, as well as display and search advertising across the site); Viacom (to provide search, contextual and display advertising on 33 of its leading sites); and McClatchy (which joined the “newspaper consortium” of twelve companies and 200+ newspapers that will gain a Yahoo! search box, Yahoo! toolbar, content distribution, and Hot Jobs listings).

Advertisers are apparently very interested in a strong second choice to Google. With solid execution, Yahoo! should be well positioned to meet that demand. Moreover, competition with Google/DoubleClick could bring Microsoft back to Yahoo! and foresee a future advertising partnership there, for the graphical ad exchange, mobile advertising, and/or search back-fill. Yahoo! looks to monetize its social networking properties and leverage Right Media to benefit from behavioral targeting off of Yahoo! To date, Yahoo! has done little to monetize Yahoo! Answers, Flickr, or del.icio.us, to name a few of its popular social networking assets. Right Media acquisition is expected to bring improved revenue generated from the traffic at these sites. Behavioral targeting could also be employed leveraging the Right Media Exchange. For example, a Yahoo! autos visitor could be targeted by the Exchange when visiting a smaller, alternative website (generating a higher CPM for the site), without sharing data about the user. In this way, Right Media could serve advertising to Yahoo!’s users when they are visiting other properties, off of the Yahoo! site. Downstream, the media network can be expanded to include mobile, text, and/or video advertising.

The Right Media Exchange could soon face competition from an online advertising exchange to be launched by DoubleClick (expected to be acquired by Google by year end). Right Media puts Yahoo! In competition with DoubleClick, which is a leader in serving branded ads throughout the web on behalf of 1,500+ advertisers and agencies. Moreover, DoubleClick announced that it plans to introduce an auction-based advertising exchange. The DoubleClick Advertising Exchange service is in limited testing in the United States with about 35 advertisers and publishers, and is expected to be available globally by the end of 2007. At this juncture, it is well behind the two-year-old Right Media Exchange, which processes more than 6 billion transactions daily, according to Yahoo!
Thanks Susquehanna Financial Group, May 2007

Noto’s thoughts on Yahoo! buying Right Media

Yahoo! announced its intention to acquire the remaining 80% stake in Right Media for $680 million, implying a total market value of $850 million, more than 4x the value implied by Yahoo!’s initial $40 million investment in October 2006. The primary strategic rationale to use Right Media as a new selling channel for non-premium inventory could be driven by Yahoo!'s recent display advertising share loss. Only time will tell if it was necessary to buy instead of building the asset. The deal price has to be based on the value that the combined entity can create as opposed to Right Media’s stand-alone financial profile to be justified. The payment terms (approximately 50% cash and 50% stock) were structured to create a tax-free transaction.

Yahoo!’s acquisition of Right Media is likely aimed at helping Yahoo! to better monetize its non-premium inventory. The company has, in the past, struggled to monetize its non-premium inventory, due to difficulty of disintermediating the process from its focus on premium inventory sales. The Right Media platform will give Yahoo! a separate and liquid distribution channel for its non-premium inventory, which the company has already started to move to the Right Media marketplace, yielding ~50% increases in pricing. While the rationale for Yahoo! to have full ownership versus participating as a 3rd party seems less substantiated on the surface, the deal was driven by (1) an immediate need (i.e. time to market) to grow the non-premium business or risk continuing to lose share of display, (2) the realization that if Yahoo!'s contributed inventory is likely to drive significant growth for Right Media and thus Right Media's equity value, then Yahoo! should be the direct beneficiary of its equity value growth while avoiding the 7% transaction fee, (3) occupying a competitive position in the event that a marketplace is a strategic key to building more advertiser and publisher relationships, and (4) the need to accelerate Right Media’s scale and ability to handle more complex transactions by leveraging Yahoo!’s existing technology platform.

While Yahoo! could have internally built a similar platform to the Right Media exchange, the buy versus build decision was primarily based on the time to market advantage, with Yahoo! likely wanting to establish its market position sooner rather than later. The competitive environment is changing quickly, given the continued growth of ad networks, new inventory opportunities for advertisers (i.e. MySpace, Facebook, etc.), and Google’s recent acquisition of DoubleClick. Through this acquisition, Yahoo! is likely looking at a way to better monetize publisher inventory that is processed through the Right Media exchange via bundling that inventory with Yahoo! Inventory, and driving increased demand from advertisers (as a result of greater supply). However, potential conflicts of interest could arise if Yahoo! owns the marketplace and is also participating in transactions, i.e. Yahoo! could be perceived to have priority over other advertisers and publishers participating in the marketplace. This is an issue that Yahoo! will need to address with the other exchange users in order to maintain a vibrant marketplace.
Thanks Anthony Noto, Goldman Sachs Global Investment Research, April 2007