Network Margins and Advertiser ROI

  |  July 26, 2010   |  Comments

Don't confuse cost (what you pay) and value (what you get).

Ad networks play a critical role in delivering monumentally effective advertising.

Every day, I see smart and successful ad networks like Brand.net, Collective, and Media6Degrees delivering outstanding results with innovative technologies, quality service, and deep analysis that their clients deserve. (Disclosure: These are all clients of my company.) Ad networks were the early adopters of real-time bidding (a game-changer in display ad buying) and have developed cool concepts such as social targeting (e.g., if I buy an iPhone, marketers can rightfully assume my "friends" will too). Significantly, ad networks are the biggest users of the ad exchanges and their revolutionary auction-based marketplaces.

Despite these innovative approaches, unfortunately, ad networks still have gotten a bad rap because many in our industry have been focusing on the wrong things.

Much of the negative perception about ad networks stems from assumptions that they make high margins. Why is this bad? Think about grocery shopping. Did Whole Foods grow the squash and bananas behind the store in its own little urban farm? Of course not - it buys from rural farmers and charges margins on those products. I don't have a relationship with the farmer in Honduras and don't really have time to fly there for my daily banana, so I don't worry about the margin Whole Foods has earned. It should be a pleasure to help good vendors make the margins they need to reinvest in their business.

In the online advertising world, some agencies fixate on cost rather than value, even at the expense of advertiser ROI (define). What really matters most is that advertisers see results that justify the margin they're paying - just like I expect a heckuva good banana from Whole Foods. Why focus on margins if there's measurable performance lift as a result?

Speaking as a long-time disciple of online advertising, my interest is in seeing the most vibrant display ecosystem possible. One that's driven by new ideas and technology, and where the businesses that provide advertiser value receive the margins and profits they've earned. And from my vantage point, ad networks are innovating at a tremendous pace, and bringing to market some of today's best solutions for driving advertiser ROI.

So let's concentrate on whether or not companies are delivering advertiser ROI. If they're not delivering value, their margins will go away on their own. Let's give ad networks credit for the results they provide, and let's reward innovators with healthy margins as compensation for their risk. Why shouldn't Advertising.com recoup its massive investment in developing proprietary algorithms or Media6Degrees for its powerful social marketing strategy? Do we really want to forfeit all this value?

My advice to any agency that's focusing on how to disintermediate a third party rather than solely on producing superior results: go back to basics and concentrate on what matters - your clients achieving their objectives. Let's celebrate the valuable innovations that sophisticated ad networks are bringing to our industry, and focus on capitalizing on the opportunities they're creating, rather than fixating on their well-earned margins.

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ABOUT THE AUTHOR

Brian O'Kelley

Brian O'Kelley is the CEO and co-founder of AppNexus, an advanced ad platform specializing in real-time advertising. Widely considered a visionary in the field of online media, Brian created the first successful ad exchange as CTO of Right Media (acquired by Yahoo for $850 million in July 2007). Prior to Right Media, Brian was CEO of Netamorphosis, an early social networking and e-commerce site for events and venues. Brian was also an early innovator in real-time personalization and real-time ad optimization at LogicSpan, a consulting and technology integration firm, and later co-founded Cetova, a Web-based reporting and analytics platform for enterprise financial systems.

While earning a computer science degree at Princeton University, Brian started a Web design firm, building an open-source e-commerce engine used by more than 100 companies. Brian is an active partner at Grape Arbor, an angel investor group. Since its founding in 2006, Grape Arbor LLC has made investments into more than a dozen technology companies.

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