Agencies Break Away From Ad Networks

Chances are you’ve heard about agency-side, a.k.a. “demand-side,” ad networks. What you may not have heard is how quickly agency holding companies are diverting their ad network budgets to these in-house audience buying units.

The major holding companies, along with some large independents, are now supplementing their clients’ media plans with targeted inventory bought directly on exchanges. Those efforts, nascent this year, are expected to accelerate in coming months. By next year, some agency execs say, more than half of their ad network investment will stay in the family.

In 2010, Publicis’s Vivaki digital media unit intends to bring 50 percent of its ad network spend in-house to its Vivaki Nerve Center audience buying center, senior Vivaki exec Nick Beil told ClickZ.

Also next year, IPG’s Mediabrands hopes to funnel a majority of network spending to its own ad network outfit, called Cadreon. Quentin George, CEO of Mediabrands, says 20 to 25 percent of most clients’ media spending goes to online ad networks. By redirecting more than half that money to Cadreon, Mediabrands would do away with the considerable mark-ups that ad networks charge the agency and its clients. The company is off to a good start, having increased its active campaigns from 60 in June to roughly 100 this month.

A third major player, Razorfish, also expects to redirect a big chunk of its ad network budgets to its in-house ad buying unit. That unit, called ATOM (Audience Targeting and Optimized Media) Systems, was incubated last winter and launched in May. “I see [ad network spending] going down significantly,” said Matt Greitzer, head of ATOM Systems at Razorfish. These initiatives exist side-by-side with similar offerings from Havas Digital, WPP, and others. Most, if not all of these operations, emerged in the last six to 12 months.

“All of the large agency companies came to the same conclusion at the same time,” said Greitzer.

That conclusion, in brief: They could cut out the middlemen and dredge bulk display inventory straight from Right Media, Google’s DoubleClick Exchange, and other exchange platforms. Like ad networks, they started sifting and targeting that inventory by applying client and third-party data. And like an ad network, they built or acquired technologies allowing them to make decisions on an impression-by-impression basis.

They also believe they can do things an ad network can’t. Said Greitzer, “We can provide an additional service layer the ad networks aren’t equipped to deliver.”

Various factors contributed to their awakening, including better technology chops at many agencies, better reach on ad exchanges, and the ready availability of data.

But despite the promise of demand-side ad networks, agencies can’t unilaterally shift money in-house on a client’s behalf. They must first convince clients and account teams, and prove the concept with results.

Vivaki has tested in-house exchange platforms with five clients, including American Express and GM. It’s also working directly with some large publishers who are reluctant to use exchanges, but want to sell remnant inventory at higher rates when Publicis clients will pay.

“We spent six months educating the account teams that this isn’t about lining Vivaki’s pockets,” said Nick Beil, CEO of Vivaki search agency Performics.

Avoiding the Mistakes of the Search Era

As they build their in-house ad networks, agencies are motivated by more than the desire to save a buck on CPM rates. They may also be haunted by the past.

In particular, holding companies are eager to avoid the mistakes they made in search — when they dragged their feet building up in-house capabilities and technologies. As a result they lost a great deal of business to upstart search agencies and were forced to enter that space through acquisitions.

“If agencies don’t respond and continue to invest in ad networks, then they’re going to wake up and say, ‘Shit, we’ve got to buy a company,'” said Beil. “They’re spending a ton of money with ad networks. When you break down what that is, they’re outsourcing media buying to ad networks.”

Will Ad Networks Go Away?

In an era when agencies can buy bulk inventory straight from ad exchanges, is there still a need for third-party ad networks? The short answer is yes.

Greitzer expects the number of ad networks that Razorfish partners with to shrink by roughly 20 percent in the coming year, from 100 to perhaps 80. While that decline is far from apocalyptic, Greitzer notes the percentage of agency display ad spending those ad networks can count on will shrink more sharply.

While the ad nets that remain will almost certainly be smaller businesses, Greitzer and others still see a bright future for niche networks or any other ad seller with access to exclusive data or inventory.

“I think there’s potential for folks that are aggregating super niche sites. That’s probably the last thing that gets usurped by agencies,” Greitzer said.

Said Mediabrands’ Quentin George, “I’m interested in buying audiences, whoever might aggregate them. If you have the right combination of data and inventory that delivers an audience at an attractive price, you’re going to get my business.”

Others will survive by straddling the line between publisher and ad network. AOL is the prime example of a company that can compel agency buyers to use its ad network by holding inventory back from ad exchanges. Others — such as ESPN and Martha Stewart Living Omnimedia — are also using their premium sites as a teaser for their ad network products. Many vertical ad networks are also well protected.

Additionally, many ad networks will continue to be supported by large direct marketers — companies like Netflix, Orbitz, and Bank of America — that use them for affiliate marketing and lead generation.

“I don’t think they’re going to evaporate,” said Beil. “We’re a small part of their business. They are pretty well diversified.”