What do fourth generation ad networks look like?

There has been a proliferation of online ad networks over the last decade. There are three distinct generations of ad networks, and they have each excelled at a different part of the value chain:

First Generation: Controlling Inventory

The first generation of ad networks were built on their ability to aggregate and control inventory from a wide array of websites. They did a terrific job of building publisher relationships to be able to bundle together wide reach (even within a channel) and offer this as an efficient way for advertisers to buy ads. In some cases, this first generation of ad networks integrating themselves directly into their publisher sites by supplying their ad server or other elements of their advertising infrastructure. Most of the biggest ad networks are good at doing this.

Second Generation: More data

The next generation of ad networks came up with the innovation of third party cookies. They dropped pixels on their publishers pages in order to be able to track users across all of the sites in their network, and to start to target advertising based on recognizing a user when they showed up on different sites.

Third Generation: Better Targeting Algorithms

The third generation of ad networks pioneered behavioral targeting. Not only were they able to recognize a user across their network, but they could begin to predict which users had a greater propensity to click on a particular ad based on their past web surfing behavior.

Together, these three elements represent three of the four core competences of ad networks:

Aggregating Inventory
Aggregating Data
Targeting
Sales

We’re starting to see a few changes in the market that are going to serious affect the relative importance of these factors. Firstly, the ad exchanges (Right media, doubleclick exchange etc) are rapidly commoditizing access to inventory. Networks with publisher relationships as a core competence may find that this is less of a competitive advantage going forward.

Secondly, a new generation of startups including Lookery, BlueKai and others are commoditizing data. Ad networks and advertisers can now buy fairly detailed demographic and behavioral data on users, and simply watch for those users to turn up on media that they control. They can even buy cheap impressions from the ad exchanges and enhance this with the data that they bought.

This places additional emphasis on the two other core competences of ad networks, targeting and sales.

Performance ad networks who have targeting as their core competence are going to be safe for a while. Performance advertisers don’t care how your “black box” targeting algorithm works, as long as you’re able to hit their CPA targets.

However, this is less true for brand advertisers. A “black box” approach to targeting brand advertising (unless there is a performance component to their campaign that they can measure) simply isn’t going to work. Advertisers won’t just trust your algorithm. As a result, the targeting that they are looking for is typically not algorithmically complex, but simply a repurposing of demographic or behavioral data (e.g. women 18-35, auto intenders). For brand ad networks, algorithms are not going to be a differentiator.

That leaves sales. It is somewhat obvious, but sales must always be the core competence of the fourth genearation of an ad networks.

Would love to hear readers thoughts.