@andrewchen

Subscribe · Featured · Recent · The Cold Start Problem 📘

Ad networks: Winner-take-all or Everyone-wins?

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.

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Views expressed in “content” (including posts, podcasts, videos) linked on this website or posted in social media and other platforms (collectively, “content distribution outlets”) are my own and are not the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. AH Capital Management is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell -- or a solicitation of an offer to buy -- any securities, and may not be used or relied upon in evaluating the merits of any investment.

The content should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts provided here are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, I have not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. The content speaks only as of the date indicated.

Under no circumstances should any posts or other information provided on this website -- or on associated content distribution outlets -- be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by a16z personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an a16z-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles -- which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters. There can be no assurances that a16z’s investment objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by a16z involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by a16z is available at https://a16z.com/investments/. Excluded from this list are investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets. Past results of Andreessen Horowitz’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Please see https://a16z.com/disclosures for additional important information.