Ad networks and behavioral targeting; who benefits the most?

Today’s WSJ has an excellent article on behavioral targeting. It details Pepsi’s launch of Aquafina Alive,their new low cal vitamin enhanced water. The campaign was backed by an online campaign through Tacoda and targeted to people who had previously visited “healthy lifestyles” websites.

The result? Pepsi recorded a threefold increase in the number of people clicking on its Aquafina Alive ads compared with previous campaigns. “We’ve never been able to get to this level of granularity,” says John Vail, director of the interactive marketing group at Pepsi-Cola North America.

Brand advertisers like Pepsi (you’re not buying the water online after all!) having this sort of success is a strong indicator of the growing importance of ad networks.

Last week the FTC announced that they would investigate Microsoft‘s acquisition of aQuantive and Yahoo‘s acquisition of Right Media, adding them to their ongoing investigation of Google‘s acquisition of Doubleclick. Although the American Association of Advertising Agencies and the Association of National Advertisers asked for antitrust review, I think that they have little to fear and much to benefit.

First, let me give some context on ad sales. As I guy who has “carried a bag” myself, I believe that sales cycles are directly proportional to the complexity of the sales message, and RPMs inversely proportional.

A simple sales message results in a short sales cycle and high RPMs. Take automotive advertising; imagine you’re selling online advertising to Toyota.

Autoblog has the next easiest sales proposition. Autoblog has amassed an audience of auto enthusiasts. While they may not all be in-market car buyers, they have a natural affinity to cars, and selling ads against this vertically targeted audience is a relatively simple proposition with relatively high RPMs.

The Washington Post sells its demographic. It argues that its readership skews higher income and hence is more likely to buy a Lexus. Its a pitch that has worked in print and on TV for years, and works online as well, although not quite as well. Sales cycles will be reasonable, and RPMs lower than for Autoblog.

Many large sites or networks sell reach. The pitch goes something like “Lots of people visit us, and some of them might want to buy a car, right?” Its a tougher sale, and even when successful, it generally results in CPC campaigns that mitigate the advertiser’s risk, often resulting in low effective RPMs.

So what does this mean for the networks and the “fattening long tail”? As I’ve posted about in the past, I’m a fan of “synthetic channels“, or vertically targeted ad networks, that can take advantage of the first two of these categories of sales.

But many sites generate pageviews that are unable to take advantage of these sales pitches. They are untargeted, and as such, are likely to be soldat a deep discount as “run of site” or “remnant” inventory, if they are sold at all.

This is where ad networks who apply behavioral targeting can really have a big impact. eMarketer predicts that behavioral targeting will increase by 7x over the next four years.

A large network can anonymously track a user as they move around the internet, recognizing them to be the same person when they show up at different sites across the network. They then use this data to target ads more effectively on “lower value” sites, thereby increasing the value of the ad inventory. So for example, a user who had previously visited Autoblog gets a Lexus ad when they show up on a MySpace page, even though the Myspace page has nothing to do with cars. This has become standard procedure at many of the big networks.

As we saw from the Aquafina example, behavioral targeting works for advertisers.

The key question is how does the incremental value (the increased CPM between the Lexus ad and a “run of network” ad) get split between the three constituents in the relationship; Autoblog, MySpace and the network. This is partly the outcome of supply and demand. Because of the massive surplus of “broad reach” inventory online, the bulk of the value goes to the network and Autoblog.

The network gains disproportionate value from having Autoblog in its network because it can now make a lot of its “broad reach” inventory more valuable. However, in a world with multiple networks, a site that ads “behavioral information” to a network can take that data advantage with it to any other network.

So sites with the opportunity for endemic advertisers have an advantage, not just as standalone sites, but also as members of ad networks.

Its not the advertisers that need to worry about consolidation of ad networks, but sites with content that can be used for behavioral targeting.

I’d love to hear what readers think on this issue.