Winner-take-all categories: YouTube as King of the Hill
I was recently chatting with a friend and the topic of YouTube-like exits came up. In that version, it’s winner-take-all and the #1 leader gets bought for $1.6B, and everyone else is worth much less. Similarly, Skype might be an example of this since they were bought for so much, yet other folks in the category didn’t cash out as well.
Compare that to something like CRM, where back in the day, you had dozens of vendors hawking their own versions of products, and you had many different winners worth lots of money. In addition to Siebel, SAP, Oracle, Salesforce, Microsoft, etc., you also have tons of consulting firms who generate lots of money as well.
Ad networks in 2003
Now in 2003, ad networks were around, and a couple had already exited for a fair amount of cash, yet at the same time they were considered pretty undifferentiated and low-margin. Between lead generation companies, comparison shopping engines, affiliate networks, and ad networks, the entire online advertising space was just a morass of noise without a lot of technology.
It was also not clear that a player like Google wouldn’t end up with a winner-take-all outcome. The thought was, if they were able to aggregate more advertisers (200k+) than everyone else, then they should be able to pay more dollars for inventory, which would lead to them picking up more advertisers, and so on. It’s a virtuous cycle of lock-in that has driven a lot of revenue.
The big surprise (for me)
So of course, in 2003, it would have been considered fairly dumb to start a new ad network, right? You might say the same thing for social networks right now :)
But truth is, a couple interesting things happened in the remnant advertising world:
- There was a huge jump in remnant inventory led by UGC sites
- Leadgen, SEMs, and other big advertisers were running out of high-quality search inventory
- CPC didn’t turn into a silver bullet to address inefficient ad buying
So interesting enough, all three of these factors came into play, forcing advertisers to continue exploring for good inventory out in the long tail of the internet.
The first one is obvious – sites like MySpace, Facebook, YouTube, etc are all still very hard to monetize. The second one is less obvious: Because search was such a great thing for ROI-driven advertisers, they would buy it until they were bidding so much that all their margins disappeared. As a result, they’d have to start buying cheaper (and more experimental) types of inventory to find positive ROI businesses. Thus, they’d be more likely to experiment with new publishers and new types of advertising, just to see what happens. And finally, CPC is great, but there’s a lot of uncertainty in the equation. Publishers want guaranteed revenue (via a CPM), advertisers want guaranteed revenue (via a CPA), and CPC is just a mid-point solution.
Of course, all this inefficiency made it so that many different ad networks could co-exist with each other, by constantly grabbing onto new publisher ad inventory, then losing it, then grabbing it later on. The instability of all of these relationships, coupled with the willingness to experiment by all parties, made it easy for a lot of new ad networks to break into the market and get to a critical mass.
One statement that started a $10B+ buying spree
And finally, it only took one signal by Google to set off the big buying spree: Display advertising is important.
After that, Blue Lithium, Right Media, Doubleclick, 24/7, aQuantive, Tacoda, etc. were all several hundred million to several billion dollars acquisitions based on the premise that all the vendors with relationships and who have gotten traction in the market are worth a ton of money. Even though the ad network business looked like a low-margin, commodity business, along with ad serving and other types of infrastructure, it was irrelevant because it grew out of a winner-take-all business where revenue was speculative. Pretty interesting how that worked itself out…
My overall lesson from all of this is that a lot of times, people view things as "winner take all" and sometimes it is that way – but in this case:
mature industry + real revenue + adjacent space heating up
= huge outcomes for everyone
Worth looking at what else is out there with that kind of model brewing.