Andrew Chen Archives

The stats so far
I love it – the online ad market is going crazy right now. Here’s the blow-by-blow so far:

1. First, Google buys Doubleclick for $3.1B
2. Then, Right Media goes for $680MM to Yahoo
3. Even AOL gets into it, buying mobile ad network Third Screen Media
4. And today, WPP buys 24/7 Real Media for $649MM

This means that about $4.4B in transactions in the last month. Wow. That’s incredible.

Recall that AOL also owns Advertising.com for $435MM back in 2004, and Yahoo paid $1.6B for Overture back in the day. There’s a couple other big acquisitions floating around this that I’m missing.

Uh, what’s happening? And how does this fit into Web 2.0?
Unlike the YouTube or Skype deal, where all the bloggers are also the consumers, the ad marketplace is far more complex. It’s much less straightforward to understand what’s happening other than a bunch of money being exchanged between big companies.

So let’s start at the beginning with a history lesson:

Back in the day, you had 3 basic players:

• Internet publishers (Aggregate eyeballs to sell ads against)
• Advertisers and agencies (Companies that want to buy the eyeballs)
• Ad networks (that aggregated websites and advertisers)

Publishers and ad networks were pretty distinct because if you were a big publisher, you’d cut deals yourself. If you were small, then you’d go to one of the many ad networks out there that would sell the ads for you. They stayed separate and advertisers interacted with them differently.

Channel conflict, and the 145 billion dollar mistake
Let’s talk about Overture, the company that mainstreamed pay-per-click marketing. Early in their history, they decided that they were going to be an ad network and NOT a publisher. Back then, it was thought that you had to be either one or the other.

The idea is that if they operated Overture.com and got a lot of consumer traction, larger search engines wouldn’t want to work with them. So instead, they worked through their publisher channels and relegated Overture.com to a tiny piece of their strategy.

As they grew, eventually their partners realized they were writing very big checks – $500MM or more per year – to Overture, and they grew nervous. Eventually, they threatened to pull the plug on the traffic and build it in house, and one of Overture’s customers, Yahoo, bought them.

Again, the concern over the "OR" question – to be an ad network OR a publisher – has to do with channel conflict. If you competed with your clients, it’d be impossible in the long run to maintain those deals. So they chose one over the other.

Google, on the other hand, chose to be an "AND." They both operated a search engine as well as supplying ads to partner search engines, the biggest one being AOL. It turned out that this type of "co-opetition" or "frenemy" relationship was OK in the online ad world! Who would have known?

Turns out this mistake cost Overture $145B in opportunity cost – they were sold for $1.6 and Google is worth about $146.7B today. Whoops.

The jump ball that is Web 2.0
Web 2.0 is a big swath of territory, comprising millions of sites and hundreds of billions of impressions. And of course, all the features that are powering these ad impressions are given away for free. Anybody that supplies the revenue to all of these companies have tremendous leverage – thus leading to the idea of an "advertising platform."

Now that everyone in advertising knows that it’s OK to both partner and compete, it’s game on.

This means that WPP, a large brand agency that buys from publishers will also operate an ad network that pays publishers. Huh??

This means that RightMedia, a neutral ad exchange that buys and sells ad inventory across many portals, will be operated by one of their customers.

This also means that Google, which pays publishers ad revenue in exchange for real estate on their pages will also operate an enterprise software product that serves ads – which today, charges the publishers money for their services.

So net/net, you can imagine dollars flowing into the online ad ecosystem, circling around a couple times, and then coming back to the company that spent it in the first place. In this ecosystem, the notion of buyer and seller is antiquated. Instead, everyone’s just a partner that you might compete with at 9AM, but then will be your best friend at 1PM.

Totally weird, right?

Competition is good for the publisher (That’s you!)
If you’re operating a Web 2.0 site, this is all good for you. The more players there are, and the more competition you have to buy your ad inventory, the better. Although the ad market is consolidating, it is doing so in a way that many many multi-billion dollar businesses are getting involved – they won’t all buy each other, so you won’t have to worry about a total Microsoft-like consolidation happening.

In particular, I’m very excited to see WPP play into the market in such an unconventional way. By buying 24/7, they are saying that they won’t just be a brand advertising agency, and might instead look at being more of an intermediary. I’m curious how all the other big agencies will respond.

Either way, if all else fails, we can just move to virtual goods :)

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