The ad network's general manager sits down with our exec editor to talk about the state of the industry, the merger with Fastclick, the human capital problem and more.

Brad Berens: So, it was September when you guys announced that you were acquiring Fastclick. How has it been going?

David Yovanno: Fast and furious! Within six short months we completely integrated the Fastclick business with the ValueClick Media business. This is key for us and our clients. It has yielded more economies of scale and efficiencies internally, but more importantly, it has increased opportunities for more scale and performance for both our advertiser and publisher clients. At the same time, we have also expanded our lead generation offerings through the use of the technology from our Webclients division.

We can now really make a strong statement about a tier one position in display advertising, as well as lead generation.

For a point of reference, our closest competitors would be Advertising.com with regard to display advertising, and Q Interactive with regard to lead generation. I believe we are a unique company providing both services with such significant scale. We are right along side companies like Yahoo! with regard to our reach and advertising volume; but, doing it in a slightly different way. We are an independent ad network that has essentially established representation partnerships with the rest of the internet -- if you will -- beyond just the top few hundred sites online, to offer advertisers a tremendous complement to reach tens of millions of additional unique people that they cannot access working just with a portal or the most popular top vertical content sites.

Differentiating among ad networks

Berens: Let's take a detour away from ValueClick Media for a minute and talk about the renaissance of ad networks that has been going on. After the dotcom bubble popped, I think that ad networks got a bad name to a lot of people, so much so that many of them, when they are pitching us stories, or trying to find out more about iMedia, refer to themselves as rep firms. They go to elaborate lengths to avoid the two words "ad" and "networks" put together.

Yovanno: Right.

Berens: And, I am wondering, a) why you think that happened in the first place; and b) why you think that there seems to be such an extraordinary renaissance in the ad network space, right now?

Yovanno: I think the entire online ad industry got a bad name after the dotcom bubble popped, not just ad networks. The ad network renaissance you mention has happened because some believe there are relatively low barriers to entry… for anyone who wants to get into the business of buying and selling online ad inventory. The difference to me is what value is created for the advertisers and publishers in this process. There's some confusion about what a true ad network is. So, it might be helpful, Brad, just to talk about the different models that I see out there that aren't quite ad networks, but can be perceived to be.

Berens: I would like that.

Yovanno: There are what I would consider your traditional rep firms, like Winstar Interactive or what was Phase2Media. These firms are strictly outsourced sales companies that are going to sell on behalf of a publisher. A distinction for this model is that rep firms, typically, do not have their own technology. They typically use the publisher's technology, the publisher's brand, sometime their existing collateral, et cetera, and operate as their sales and marketing arm.

Their margins are typically lower than other network models, comparable to what a company's typical sales and marketing costs are as a percentage of revenue. And they are usually selling on behalf of the sites they represent, including calling a prospect and stating that they are calling from "XYZ website."

A second model I identify sometimes gives the ad network model a bad name, and are most often referred to as a broker-- a business that primarily only trades inventory. They are buying low and selling high without adding much value in the middle, including technology.

Most brokers are not completely upfront or transparent in terms of where campaigns run. Or, they may promise one thing and deliver another. I think there is a collection of these types of companies out there that are generating revenue in the five million to 10 million dollars range a year. When you see 20 networks show up at ad:tech, you can be sure a number of them aren't much more than what I would consider a broker.

The third common network model I identify is an arbitrage model. This is what I see DRIVEpm, and Advertising.com doing, where they purchase inventory on a fixed rate basis. This model primarily targets the top sites on the internet for buying efficiency. They negotiate the lowest possible price and attempt to yield as much value as possible from it. Much of the inventory is remnant inventory from portals and other high traffic areas of the top sites.

An example would be bidding on the MSN "Performance Plus" inventory or the Yahoo "Tier Two" sections which typically include lower value free email, blogs, community sections, et cetera, and then, very simply arbitraging. They also typically sell cost-per-action based programs to their advertisers, use their own optimization technology, data and expertise to seek the most value on the upside for what they can earn from the acquired inventory.

And then, the final model I see is most similar to our model, which is what I would consider a true ad network model, where publishers agree to have all or a portion of their inventory represented as part of a marketplace. We set agreements with our publishers to represent their inventory and pay them a fixed revenue share of what we are able to sell the inventory for.

Besides ValueClick Media, Tribal Fusion and Burst are the more popular ad networks who operate this model. Rather than attempting to buy inventory at the lowest price possible, our relationship with publishers is different in that we provide the many ad serving and ad management tools publishers demand to earn the most from their available ad impressions, and they also benefit on the upside the better we are at selling their inventory. It puts the right incentives in place for quality content, site disclosure, performance, et cetera, and also fosters a long-term, stable relationship.

Berens: What is the difference for the advertiser between your kind of model (the ValueClick Media model, Tribal Fusion, Burst) and the other models that you are talking about? What is the impact, in your mind?

Yovanno: Advertisers are after two things primarily: 1) scale and 2) performance. So, regardless of what type of ad network you are, just know that most advertisers are looking for both performance and scale.

When I look at the differences, I would say the arbitrage model vendors typically cannot disclose the sites that are within their network because there is almost always channel conflict with the top sites on the internet. These top sites have very established sales teams and a brand in their own right that they don't want undermined by an arbitrage ad network's sales efforts. So, that is typically one limitation with the arbitrage model.

However, advertisers that are working with arbitrage networks are typically more focused on performance than transparency. This is the same case with brokers: you are going to find limited disclosure about where a campaign runs. 

On the other hand, with a representation firm, you absolutely get full disclosure. The advertiser knows exactly where things are running. So, I do not really see a difference between Winstar and working with an individual site. To me, it is the same thing. It is the same to call Zagat.com or Winstar.

Berens: Although, it will save you time because, you know, you only have to call Winstar once.

Yovanno: Correct, but there is not a huge selection within the Winstar network, if you will. So, when I talk about performance and scale, the big difference is about who has critical mass? Who has got that collection of unique users; lots of sites to choose from; good technology in which to manage a campaign, whether it is brand or direct marketing results that they are after, who brings the most scale and performance?

The trade-off is fewer sites to chose from, a smaller marketplace of unique users, sophisticated optimization technology to manage direct response or brand metrics, et cetera.

Most brand-conscious advertisers today are looking for a degree of transparency. It is not good enough anymore to say, "I am an established company, trust me, you won't run on poor inventory." You have got to show them where their campaigns run. So, I would expect that over time the broker model and the arbitrage model will either have to adapt to this requirement or not fare well. Of course, a representation firm will; however, they will almost always lack the ability to manage a large spend because of the trade-offs mentioned earlier regarding scale.

So, with all these models available, it really comes down to what the advertiser's objective is. If I am a brand-conscious marketer, the content my brand is associated with is important to me. I am either going to work with an individual site, or a firm that represents a few individual sites, and I am going to put together a sponsorship deal, integrated content advertising or some other pure branding execution. If I am that same brand-conscious advertiser, and I am after scale and performance I am going to work with a reputable ad network as well as a major portal who offer transparency. ValueClick Media has the expertise and the critical mass needed for scaling a campaign as well as quality publishers and technology to provide the transparency that is required today.

Berens: And, you disclose which sites your people are on…

Yovanno: We do. Not all clients require it, but, we absolutely do.

Next: Ad networks and branding; plus, is there an inventory crisis?