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See what's happening in the digital space that will bring about relevant micro-targeting and more precise measurement.
Much has been written about the many transactions taking place in the online industry: Google's $3 billion acquisition of DoubleClick, more than $2 billion spent last year on ad networks and exchanges, $6B by Microsoft to acquire aQuantive and VCs continuing to invest at a rapid rate in the ad networks "du jour" and new technologies.
While the term "consolidation" has been bandied about with each new transaction announcement, there has been little insight into the context of why these deals are taking place and what they mean for the industry. Two meta-trends are colliding in the online space, and they will forever change how advertising is purchased and delivered on the web. The companies that will survive and thrive in this environment are the ones that are building an integrated, scalable digital media platform.
Before diving into the implications, let's briefly recap the two trends. The first trend is the fragmentation of audiences. With the proliferation of smaller sites on the web creating rich content that caters to niche interests, users are spending more of their time in these environments.
The second trend is even more profound: platform-driven online media companies increasingly have richer information on their audiences and are better able to segment them. This allows for the ability to target specific audiences, provide enhanced insights on which audiences are resonating with an advertiser's offering, and the ability to automatically optimize and shift a campaign to audience segments that achieve an advertiser's objectives.
While each of these trends has received a lot of separate attention over the past year, analyzed together, it becomes apparent that a profound shift is taking place as online finally approaches the original vision for web advertising -- relevant micro-targeting and more precise measurement.
The major players in the online space are all, in different ways, building the same business model to lock-in substantial and sustainable spending from advertisers. Whether through acquisition or organic development, the successful large digital media company of the future will have put in place four common building blocks, each of which supports the others:
1. An integrated technology platform
The emphasis is on "integrated" because leading-edge ad serving technology is emerging for consistently figuring out the best way to monetize a publisher's inventory from the anonymous user data on the web. In essence, the platform is optimizing ad selection in the milliseconds that it takes for a web page to load based on contextual data, audience segments and sophisticated predictive models. This technology is the "black box" of the industry and its impact is profound. Consider the lift in performance (and the impact on revenue) that even as little as a $0.20 or $0.30 improvement in effective CPM can have when spread across billions of ad impressions served every month by a major media company -- it is substantial. This is the key point of differentiation of an integrated platform.
2. Reach and user data
In order to build anonymous rich user profiles of consumer behavior and also provide advertisers with relevant content environments for their ads, it is essential to see users across a large number of sites, collect anonymous general information about them, and supplement it with census and other general demographic and psychographic data. In addition, network ad servers have an advantage because they access a different level of data -- aggregate publisher-side data on hundreds of sites. These many sources of data can then be translated into meaningful targeting options for advertisers that match the purchase funnel for the product or service, and are delivered with less waste than traditional campaigns.
3. A full suite of products
Media buyers today are faced with two daunting challenges: a bewildering array of complex choices and an increasing awareness that these choices are interrelated (example: the impact that search has on display). Media buyers increasingly are gravitating towards providers that can solve multiple problems with a variety of products: CPM, CPA, CPC, contextual, behavioral, branding, video and other rich media. With a single buy, successful digital media companies are able to offer advertisers a set of visible, high quality, niche content sites and the ability to target specific audience profiles and behavior, delivered through a variety of different formats. The buyer also gets a holistic view of his entire campaign and can optimize across targeting and ad products through every part of the customer purchase funnel.
4. A robust service offering
When you speak with online media buyers, you hear that service is a substantial differentiator -- and it does not just mean responsiveness. Given the complexity outlined above, "a great service offering" also includes enhanced analytics and insights with actionable recommendations for future marketing programs, vertical industry expertise, innovative targeting programs, custom ad placement opportunities that go beyond the standard banner, and effectiveness research to validate the buy. For large brands and performance advertisers alike, the service offering is a fundamental component. It is also arguably the most complex piece to build, but companies that succeed in this vein establish a substantial advantage -- that of a "trusted partner" for online media buying. This translates to larger and longer term budgets from advertisers and repeat business.
It is easy to see how each of these building blocks is inextricably linked and builds on the strengths of the others. Taken together, they become a formidable combination that delivers excellent value for advertisers and substantial revenue for the large digital media provider.
The evolution of Platform A is an example of this new digital media strategy, albeit through acquisition as opposed to organic growth (a strategy that clearly presents an integration challenge). Consider the competencies that Platform A brings together: the AOL portal and sites as a point of departure for reaching a large number of unique users, Advertising.com for additional reach and black-box performance technology, Tacoda for behavioral targeting, Quigo for contextual text ads and Third Screen Media for mobile. If AOL succeeds in executing an integrated offering like each of the pieces described above, it will become a formidable partner for advertisers. The strategic moves of MSN, Google, Yahoo and the major ad networks like Exponential can also be viewed in a similar light -- bringing together all the pieces of an integrated solution for advertisers.
Viewed through this lens, we already are seeing the first major impact of consolidation -- namely a split in the way online ad dollars are flowing. At the top, there is an increasing concentration of spending in the very largest online media companies and ad networks. Equally, small companies that are innovating with a niche audience or emerging technology are also receiving spending, as experienced digital advertisers continue to look for new ways to engage their audience and achieve their goals.
So, which companies are going to find life more difficult in this consolidating world? We are already seeing the signs. Increasing pressure is coming to bear on companies in the middle of the market that lack a differentiated offering for advertisers. Ultimately, scale differentiation demands building each of the four building blocks I have described above. Companies that are assembling only one or two of these pieces will either be consumed in the consolidation, or relegated to an increasingly small portion of the media spending pie. This is what consolidation means for the market -- and it portends several interesting years ahead as our industry continues to transform into the mainstream of advertising spending.