DMO Global's CEO chronicles the turbulent history of major ad servers and the debate between CPA and CPC pricing.
Recently I attended the latest ad:tech show in New York City at the Hilton Hotel. This was my first opportunity to attend an ad:tech in several years. Since the Spring of 2002, I had taken time off from the online advertising industry when I left the board of ValueClick following the consummation of the merger between Mediaplex and ValueClick, which occurred in late October 2001. I had founded Mediaplex in the mid-1990's and watched it grow from six employees working out of a conference room in a small office to a public company with over 400 employees located in seven offices worldwide offering numerous technology-enabled products and services. But that was the tenor of the times: grow, grow and grow even faster.
The rise and fall of first generation ad technology companies
Notwithstanding the significant growth of online ad spending in the late 1990s, the players in the industry were still scrambling for market share and soon began to offer adverting technology products at nearly give-away prices. As a result, prices began to fall faster than the rate of growth of the venture/institutional capital invested into the industry. Thus, when the capital raising faucet of the late 1990's turned off in March of 2000, only the strongest of online ad companies were able to survive, and that was only after each of them had completed a series of M&A transactions that (i) greatly expanded their product offerings into a full suite of ad services and (ii) helped them to accumulate additional capital from their targets (consider the M&A deals of DoubleClick, Aquantive, ValueClick from 2000 to 2005).
Yet, while the first generation of online ad companies were beginning to give away their products, an even more interesting dynamic was taking place at the same time: the online ad space was becoming a level playing field. In the 1990s, vast sums of money were being invested in these early internet ad companies such as adForce, adKnowledge, AvenueA, Engage Technologies, Mediaplex, DoubleClick, ValueClick and many others. Unlike the ecommerce companies of the mid-1990s (such as Amazon.com, eBay, e-Toys and others), the venture money invested in these online adverting technology companies was used primarily to create ground-breaking online ad technologies, and not for marketing campaigns designed to garner market share or augment user bases. Ironically, by 2001, as the ad community suffered through a considerable recession, these technology companies were struggling to maintain their growth rates of the late 1990s, and began to commoditize their product offerings, thereby turning their ad technologies -- such as ad serving, outbound email delivery and lead generation -- into commoditized businesses.
Second generation ad technology companies are born
Out of this fundamental shift in playing field dynamics came a whole new group of companies that became known as the "cockroach" companies. As compared with their fully funded predecessors, these second generation ad companies founded in the early 21st century were forced to survive without a war chest of funds. Rather, most of these companies were self funded by their founders and needed to become profitable almost from their date of incorporation.
From 2001 to the present, first generation online ad companies were no longer willing or able to invest considerable sums of money into newer and more sophisticated technologies. The industry leaders, such as DCLK (DoubleClick), VCLK (Value Click) and AQNT (Aquantive), which were public companies and had been throttled by the Street's frustration with their inability to show a "path to profitability," watched their respective stock prices drastically reduced by 90 percent or more. In response, these leaders cut back on their marketing and R&D spending altogether in an effort to get profitable quickly to satisfy the Street, leaving them with only their existing and maturing technology-enabled services to offer to clients. Ad clients seemed almost relieved with this cutback given that the ad environment in general had also changed substantially in the interim: the 2002-03 economy was suffering from an advertising recession, taking a much needed breather from the wanton spending of the late 1990's.
A competitive advantage for second generation ad technology companies
By this time the product and service offerings of the technology leaders were no longer new and exciting; far from it, these products were now into their second decade of use with little or no value improvement, a death knell for a software or technology company. And in addition, most ad clients were less interested in working with only one product/service provider; exclusive deals were harder and harder to come by. The world was evolving into one of cooperation and competition. Thus, the more nimble, privately held second generation ad companies that had access to the commoditized technologies of their trail-blazing ancestors were actually enjoying a competitive advantage. They could: (i) license the industry leaders' technologies where appropriate, (ii) improve on them by leveraging cheaper hardware, open source software, and more cost-effective offshore programming facilities in India, Russia, China and Eastern Europe and (iii) combine the resulting technology-enabled products with equally efficient client service offerings through a well-trained service team. Now, factor in the CPA revolution.
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