Does Microsoft Need an Ad Network?

The online media merger and acquisition frenzy may gain more velocity, with an imminent Microsoft acquisition of 24/7 Real Media the buzz of investing and marketing blogs.

That would follow last week’s Yahoo-RightMedia deal and the Google-DoubleClick announcement a couple weeks earlier.

We must start thinking about the implications of the RightMedia merger on search marketers, who increasingly see auction-based keyword/concept-targeted media as “search,” including contextual and behaviorally targeted advertising.

Many in the industry were surprised the RightMedia deal happened so quickly, before the planned synergies had been fully tested and exploited. Clearly, the early working relationship and performance to date convinced Yahoo that waiting would only result in a higher price tag. Perhaps the recent Google-DoubleClick deal also spurred the agreement.

Now everyone, particularly Wall Street, is asking: having lost the DoubleClick deal, does Microsoft have to buy an ad network or a company that includes an ad network, such as 24/7 or ValueClick?

Microsoft doesn’t need to acquire a network — unless it wants speed of growth more than control. Of course, plenty of cash and impatience are sufficient reasons for Microsoft to pull the trigger.

The Yahoo-RightMedia Integration

Yahoo’s integration of RightMedia should allow us to take advantage of RightMedia’s Direct Media Exchange, which allows agencies to tap publishers and networks in an auction model. The auction currently runs on a dynamic CPM (DCPM) basis, which my media team describes as similar to the max bid concept in PPC (define) search.

Many marketers still set target CPCs (or even CPAs (define)) within the system, which will attempt to hit those targets as it learns what kind of inventory works for you. Since most of you won’t open a RightMedia account but wait until something shows up in the Yahoo Direct Traffic Center (DTC), how might Yahoo take advantage of the inventory while retaining the CPC-based pricing search marketers know and love?

The key to leveraging RightMedia exchange inventory will be to add a keyword/contextual or search-behavior targeting option to the system. When appropriate inventory becomes available, your ad can be shown (possibly a text ad or as a Flash ad, built by Yahoo using your copy). Yahoo also needs to figure out the effective CPM your ad yields and put that into the RightMedia system. This becomes the CPM the system should use to determine whether you get the ad impression or if it goes to a higher bidder in the network.

I prefer a system that uses behavioral retargeting of searchers on a keyword-by-keyword basis or at least at the ad group level. Internet users spend much more time surfing than searching, and my clients would love to maintain the CPC pricing model and get their message to searchers hours, days, or even weeks later. However the integration is performed, the future of the combined Yahoo-RightMedia network looks quite interesting.

But Does Microsoft Need an Ad Network?

Microsoft, on the other hand, initially seems to be left out in the cold with no ad network to tap. This might lead analysts to think the firm must buy one or more of these organizations: 24/7, ValueClick, Casale Media, Tribal Fusion, AdBrite, Blue Lithium, or any number of smaller networks. Microsoft’s interest in 24/7 would presumably be in the Open AdStream (OAS) publisher ad server, which is analogous to the DART for Publishers technology that helped DoubleClick fetch a whopping $3.1 billion.

But Microsoft already has a killer publisher ad server, which, due to the amount of inventory, may be more sophisticated than the OAS product. Publishers, unlike search providers, almost always use more than one ad network as backfill for unsold inventory. This means the percentage of inventory an ad network gets from the publisher is based on the yield the publisher received (CPM).

AdSense had no track record with publishers in the early days, so Google’s media buyers would buy inventory outright instead of offering a revenue share. Once it has the advertiser base flushed out a bit, if Microsoft wants to establish publisher relationships, it just needs to guarantee publishers a high yield and prime the pump with some cash. After that, the network’s success would be determined by its ability to deliver the highest yield to the publisher.

To deliver high yield, any network needs great targeting technology built into its ad server. Given a large advertiser base, the smarter the server, the better it can target ads to a visitor on any Web page.

Though Microsoft may be getting impatient, many think the company is waiting to reach critical mass on the advertiser front and put in place some cool new targeting technologies. Then it may invest by temporarily subsidizing some publishers’ yields or acquiring publishers outright. Of course, the build-versus-acquire strategies aren’t mutually exclusive, and when you have $25 billion in cash and a steady stock price, you have a lot of options.

One thing is clear: the lines between search marketing and other online media are blurring more every month. If you don’t keep up with the new targeting, segmentation, and media delivery options, your competition will eat your lunch while you obsess over keyword positions.

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