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Vertical ad networks: What are they, and why did Cox just buy Adify for $300MM?

Adify exits for $300MM exit
Some of you may have read about the acquisition of Adify by Cox for $300MM. It’s been covered in PaidContent, Silicon Alley Insider, and scores of other places. You gotta love the online ad industry – if this had been a consumer internet exit, it’d create intense buzz throughout the blogosphere, but since it’s a boring B2B infrastructure play, it likely bores most people.

Anyway, I wanted to jot down a couple notes about how the industry fits together below – by the end, hopefully you’ll get what Adify’s business as a "vertical ad network infrastructure" company is all about.

What is a vertical ad network, and why would you start one?
The vertical ad network business is like the startup recipe du jour of New York. I’ve been pinged many times over by folks who are looking to start one, companies pitching them. Basically, these networks are appealing if you fall into the falling description:

Ad sales dude: You can sell ad impressions better than you can generate pageviews

Compare this to the typical Silicon Valley entrepreneur, who suffers from the opposite problem:

Web 2.0 dude: You can generate pageviews, but have no idea how to monetize them

So if you’re in ad sales, and you can monetize but can’t generate pageviews, what do you do? Well, you have several choices:

  • You can work for an online publisher (like ESPN/NYT/etc)
  • You can work for a rep firm or ad network (like FM, Ad.com)
  • You can work as an outside sales rep for a publisher
  • etc.

Now the last one starts to get you into vertical ad network territory.

Starting a vertical ad network

Let’s say that you start by representing the ad inventory of a sports site, and you do a good job pitching ad agencies that represent Nike, etc. To become more relevant, and to lift all boats, you want to get MORE ad impressions, so that you can provide more reach. So you go sign up another sports site, and another, until you have a huge aggregation of the biggest sports publishers out there. At that point, you probably have a big team to do things like run your ad server, optimize the campaigns, and you might be an exclusive provider of ads to some of the sites you’ve signed up. And thus, you’re a vertical ad network.

The biggest issue is channel conflict, which you can easily avoid. The problem is that a site like ESPN would never want to join an ad network, because they sell their inventory at premium CPMs that few would be able to approach. As a result, the only way to make this work is to form a vertical ad network with long/mid-tail publishers that don’t have direct sales teams.

So in summary:

Vertical ad networks = Ad sales guys + Lots of mid/long-tail publishers in a vertical area

Basically, like all ad things, it’s a type of arbitrage based around access to relationships and skillset, which converts <$1CPM ad inventory into something many times that. Then furthermore, the dynamics that encourage this market:

  • Ad sales guys often suck at creating new pageviews, but can monetize them
  • Web guys often suck at selling impressions, but can make websites
  • Brand ad agencies reward REACH – so a bunch of small guys together is better than by themselves
  • A good ride for the economy in the last few years has increased brand spend online (which will continue)

What’s a vertical ad network infrastructure company?
Now that you know what a vertical ad network is, then it’s easy to define a vertical ad network infrastructure company. Basically, if you want to set up a vertical ad network, first you need some sales guys, but you also need a bunch of software that lets you do stuff like:

  • Managing what publishers are in your network
  • Billing and payments
  • Campaign management
  • Ad serving
  • Setting pricing and outlining inventory
  • Creating an automated marketplace
  • etc.

So if you’re 3 salesguys out of a financial services publisher, for example, you don’t have to build the above – instead, just sign up for a license, and you can start selling from there.

I think where this fits into Cox is that they are ultimately a huge Old Media company – cable, media properties, newspapers, etc. They are seeing their ad revenues erode over time as the eyeballs move online, and their audiences aren’t sticking to their online properties either. But as an organization, they know how to sell to advertisers, and this acquisition makes them able to leverage their skillset across many different verticals and domains online.

How do vertical ad networks fit into Web 2.0 and UGC?
It’s important to note that vertical ad networks have a huge role to
play in the eco-system of Web 2.0, because they are one of the only
ways UGC content is being monetized well. Essentially, as consumers
move to social sites, the skillset to package, sell, and manage the ad
inventory for brand advertisers has been "outsourced" to these vertical
ad networks – the guys that start the websites just aren’t typically
strong in this area. As a result, this process allows brand advertisers
to talk to intermediaries that understand their concerns and help them
make the jump into buying UGC inventory.

Just look at the list of clients that Adify has, many of whom are based on UGC ad inventory.

In short, this entire space of vertical ad networks is created by the inefficiency in brand ad sales, which is likely to just continue. Let’s hope that it becomes a sustainable way for smaller publishers to monetize their inventory, rather than just dumping their ads into remnant ad networks.

As a quick plug – there are not many folks in this space other than Adify, but I share an office with AdRoll, another company that’s doing vertical ad network infrastructure. I’d encourage you to check them out, since my guess is that this area is about to heat up a lot more.

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