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Ad Networks Are Transforming Online Advertising


Networks that buy space on lots of tiny sites are changing the business—and putting pressure on ad rates

Forget the lingering hopes that online advertising would remain a beacon of stability in this economy. In recent weeks major Web publishers, from Yahoo! (YHOO) to New York Times Co. (NYT) , have reported that revenues from their mainstay pictorial display ads are down. The poor economy isn't their only problem either. It's simply speeding up a shift in online advertising that's challenging the Net's leading destinations like never before.

The chief culprits: middlemen called advertising networks. They serve as brokers between advertisers and Web publishers, connecting sites that want to sell ad space with advertisers and agencies that want to reach potential customers. The networks stitch together ad space from many small Web sites as well as from the less visited pages of large sites that otherwise go unsold. Through the networks, advertisers can reach audiences comparable in size to those at the largest Web sites. And they often do so at a fraction of the cost of ads on major sites' most prominent pages. As a result, the networks, which range from publicly held ValueClick and Time Warner's (TWX) Advertising.com to hundreds of obscure outfits, are grabbing a greater share of online advertising dollars.

Ad networks aren't new, but in a rough economy in which every dollar counts, advertisers are flocking to them. Several industry sources estimate that, out of the $8 billion advertisers spent on display ads last year, 70% went directly to Web sites and 30% to ad networks. This year, based on spending shifts in the past month or so, they project the mix could move to 50-50.

The cost savings for advertisers can be enormous. ESPN, for instance, might charge $40 to reach 1,000 people online who are interested in sports, but an ad network could reach a similar audience for less. In many cases advertisers don't pay networks unless someone clicks on the ad, giving them an effective rate of as little as $2 per 1,000 people. The networks also deal with hundreds of Web sites, so they can deliver large numbers of specific audiences that most individual Web sites can't. Finally, some networks use tracking technologies to target highly valued groups such as gadget hounds or enthusiastic home cooks, so they can send relevant ads to those people no matter what Web site they're visiting. "Moving from site-targeting to people-targeting is the central dynamic of the industry," says Matt Spiegel, chief executive officer of ad giant Omnicom Media's (OMC) digital group.

Ad networks do have their limitations. Many won't tell advertisers precisely where their ads are appearing, because the Web sites they work with want to avoid driving down the rates of their main pages. And some of the ads show up on pages where most people are not in clicking or buying mode, such as social networking and Web e-mail sites. Still, the trade-off is worthwhile to many advertisers. "You're kind of spraying and praying," says Wenda Harris Millard, co-CEO and president of media at Martha Stewart Living Omnimedia (MSO). "But ad networks are cheap."

In essence, the networks offer a way for Web publishers to get ads onto more of their pages even as the number of those pages keeps growing. It's similar to the way outlet malls sprung up in the past two decades to help retailers deal with excess inventory, noted Randall Rothenberg, president and CEO of the trade group Interactive Advertising Bureau. But the lower ad network rates are hurting many popular Web sites that had been able to charge high display ad rates based on their sizable audiences. Experts say display ad rates on premium sites are down about 20% so far this year.

A FEW BOYCOTTS

Some ad networks are suffering too. Competition among the 300-plus networks has intensified with the economic downturn, and their ad rates have fallen by as much as 50%. Jennie Baird has seen the decline firsthand. The entrepreneur had been hoping that revenues from two ad networks would support her nine-month-old Baby Name Wizard site, which helps parents choose names. But with ad rates on women's sites down from as high as $20 per 1,000 views in 2008 to $12 at best now, she can't even afford to take a salary.

Mainstream media companies are wrestling with strategies to deal with the rise of ad networks. Some are rebelling against them, worried that they're turning ad slots into commodities—"pork bellies," as Martha Stewart's Millard put it last year. A few media companies, such as ESPN and Turner Broadcasting System, have stopped using most networks. But there's no large-scale boycott so far.

Instead, some companies, such as Yahoo and Martha Stewart Living, are starting their own networks. They hope to offer ad space on both their own and similar sites to attract bigger buys from advertisers. "We can buy for marketers all across the Web," says Joanne Bradford, Yahoo's senior vice-president for U.S. revenue and market development. Nobody knows if this new model for online media will work. But the economy is hastening the demise of the old one.

Hof is BusinessWeek's Silicon Valley bureau chief.

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