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What do fourth generation ad networks look like? February 25, 2009

Posted by jeremyliew in ad networks, advertising.
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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.

Comments»

1. brent - February 25, 2009

As an Platform-A employee, I would have mentioned this at some point along the way, but in a world of infinite impressions and infinite data, the person the advertiser loves the most is the person with the best algorithms. Performance matters.

Shameless plug: http://www.BidplaceSB.com!!!!

2. Cogblog » Blog Archive » 4th Generation Ad Networks: Were they actually 1.1? - February 25, 2009

[…] Liew has a nice post on 4th generation ad networks.  Go read it, I commented, but I wanted to expound on my comment a […]

3. Andrew Chen (CoNotes) - February 25, 2009

My guess is that the next generation of ad networks bring their capabilities across several media types (web, mobile, tv). With the creation of several cross-media properties and the digitization of all media, I think advertisers would be able to start tracking users across several media formats and properties. This becomes very powerful data that will enable creative behavioral, location-based, and time-sensitive targeting capabilities.

4. Andrew Chen (CoNotes) - February 25, 2009

If the next generation ad networks follow the trend of consumer media usage, they will integrate advertising over the various digitized media platforms (web, mobile, tv). As companies start to spread successfully over from web to mobile/tv to web/tv to mobile, ad networks will grow to serve users across these media. The data generated from these cross-media properties and ad networks will be powerful. The data will enable behavior targeting not just across web-browsing patterns, but across geographic locations and time-based patterns.

5. cem sertoglu - February 25, 2009

I’d add the social dimension. Making use of the social graph API’s, like FB Connect, assessing the audience’s level of influence, would bring valuable insight to the data analysis effort.

6. James Lim - February 26, 2009

would you please elaborate more on ‘sales’ competence?

7. Andy Cocker - February 26, 2009

Another great article Jeremy, very concisely and simply explained. I agree with your 4th generation view, although i think it misses the potential role for ‘new breed’ media agencies within the 4th gen ‘eco-system’. Media exchanges (and emerging technologies that sit on top of them) are making it easier than ever for smart media agencies to assume the role of ‘intelligent’ ad network for their clients. It’s true that behavioural and 3rd party data sets layered on top of inventory improves efficiency, but no data set is a powerful as an advertisers own. Agencies generally have access to this advertiser data, and the smart ones will have the opportunity to leverage it intelligently to cherry pick valuable impressions across the media exchanges, with minimal wastage. This is exactly the approach that Infectious Media in London is taking. I think in the coming months, we will start to see the emergence of more of these more ‘new breed’ media agencies; part intelligent network, part media agency.

8. George - February 26, 2009

4th gen actually does what 3rd gen claimed to do🙂

I think 3rd gen was focused on heuristically optimizing a variety of metrics that were just proxies for revenue, and sometimes the proxies were so lossy that they weren’t even directionally indicative

4th gen will be about *really* optimizing *real* revenue metrics with all the attendant algorithms to handle attribution and optimization of weak conversion signals, plus incorporation of valuable learned insights/patterns from marketers.

9. Daily Digest for 2009-02-26 | Onlimedia.com - February 27, 2009

[…] Shared a link on Google Reader. What do fourth generation ad networks look like? […]

10. Joe Fredericks - February 27, 2009

Interesting post, Jeremy. Thanks.

I think your supposition that ad exchanges represent the commoditization of inventory lacks a long term view.

Sure, right now it’s about remnant inventory… but the exchange model allows for a transparency and efficiency that technology continues to enable and will only improve. Both adverts and publishers are demanding more insight to either improve ROI or yield, respectively.

Through the tools and technology of the exchange (which you see in basic forms of targeting, analyticsm and yield management today), buyers and sellers of online media will increasingly use the open platform of the exchange model to buy and sell remnant and, eventually premium inventory. Why premium? Technology will unlock the true value of premium for advertisers that only the exchange can provide (benefit for advertisers) – and potentially any remnant can become premium with the insight of technology on the transparent exchange (benefit for publishers).

Consequently, I believe your point about sales will be slightly adjusted in the future. For 4th generation ad networks, they will become the “super ad traders” on the exchange and use their technology and expertise to buy and sell online media more efficiently than ever before – whether for clients or for their own book.

11. spanky - February 27, 2009

Nice summary of generations. What about gimmick generations? – with the latest being view-based conversions vs. click-based. Adbrite and etology are pioneering this area, and aren’t very clear when explaining conversions in their systems. And there have been a whole slew of others over the years…

12. Scott Rafer - February 27, 2009

I’m largely with George, obviously. It’s not been clear that the behavioral algorithmic uplift scales to exceed algorithmic cost. Otherwise, the algorithm guys would own some reasonable fraction of the DRM world, and they don’t.

13. Scott Rafer - February 28, 2009

@JoeFred As one of the potential 4th gen companies (I’m CEO Lookery), I don’t agree. I think the attempt to end-run the advertisers is going to fail. The successful (i.e. long term profitable) companies from here on out are flat-fee IT services vendors who facilitate local maxima on the price distribution, not marketplaces who seek global maxima and attempt to participate in that spread.

14. joe from flixster - March 2, 2009

Here is what i am seeing…

1. With good enough data – even brand advertising becomes measurable. Imagine a world where Toyota can run a brand campaign all over the web – then track the people they touched and see how much more likely they are to visit toyota’s site (or a toyota product on another site) anytime for the next month. If you can measure it – you can optimize it. Especially in a down economy, I’m looking for brand advertisers to start getting much more data driven using real-brand-measurement metrics they just couldn’t get 4 years ago. (This theory is known among geeks as the “Facebook Connect is the new third party cookie” theory)

2. I think we’re starting to see the age of the microbrewery in ad networks. Selling high CPM ads requires a level of trust and a perception of quality that a huge ad network is never going to have by simple fact of its size. But on the other hand, a vertically (industry) or horizontally (demographic) focused network that intentionally stays smaller and only accepts “premium” sites is an effective way to sell the “medium tail” against the biggest portal sites.

3. I still think the internet is dying for a killer ad unit. I’m not sure that really answers the question about ad networks here – but i think it is the single biggest obstacle impeding the oft-forecasted flood of brand dollars into digital. Most digital marketers i talk to openly admit that their is nothing in their arsenal that can create end-user awareness anywhere near the order of magnitude of a 30-second TV commercial. Maybe there is just no answer to that problem on the internet without pissing off all your users… but if that is the case, look for a very long goodnight to the TV ad budget hegemony. Or maybe we just haven’t come up with the right unit yet.

15. Seth Yates » What do fourth generation ad networks look like? - March 2, 2009

[…] What do fourth generation ad networks look like?: […]

16. Thakur Sahib - March 30, 2009

I Think behavior is over hyped, If we can find the intent of the user, it will do. Also to find the intent in today social networking world will not be difficult. This is also for only lead based campaign.
For Brand, i think all the Algo stuff, just don’t work. there is no need for BT. i think if advertisers give score to quality of inventory, it will work well.
I Think the fourth generation of ad networks, would be more simpler and effective, taking use of Social n/w and the messages user post.
To Know Intent Targeting. http://www.thakursahib.com/2009/03/intent-targeting/

17. niche retailer - April 5, 2009

As a retailer who is loathe to spend once penny on an advertisement, i can tell you what i want:

performance w/ a split in the risk @ the publishers’ end. if they think their insights into their customers are so good, and the network thinks that its retargeting algorithms are so good — put your money where your mouth is and share in the risk. make it all pay for performance. i’ll give you a cut of my revenues/margin but i am not going to shell out a ton of cash when i need it to keep my hard goods inventory up to date. i cannot afford to just carve off a large chunk of cash for speculative investments in brand awareness. what i want is to see that the publishers see themselves more as affiliates than advertisers. i want that same level of confidence and focus on the bottom line. sales sales sales.

after all, that is what the ad business is really all about, isn’t it? if manufacturers and specialty retailers can turn their inventory, why are we going to buy up yours? i see publishers as needing to prove that each impression is worth something tangible and be wiling to eat the loss or share the loss with me.

there are already a ton of affiliates that do that each day and billions are spent in this model. so it clearly words. and google has the strangle hold on the cpc world. so where does the leave, general interest publishers? branding playgrounds? no thanks.

you show me the 80/20 CPA deal w/ the right metrics and retargeting partners and i will show you a nice portion of sales. let’s partner up and stop pre buying ‘impression inventory.’

18. niche retailer - April 5, 2009

Or perhaps put another way, the 4th generation ad net is not about ads at all.

It’s called affiliate marketing 2.0.

19. More ad networks or less? « Lightspeed Venture Partners Blog - April 6, 2009

[…] networks or less? Most pundits are predicting less. However, I believe that there will be more. The fourth generation of ad networks are living in an environment where access to inventory is getting commoditized (through ad […]

20. Jeremy - April 22, 2009

There is a growing position that quality of content (not just safety but a standardization of what constitutes quality) will have an increasing influence in advertiser buying decisions. Taken together with all the existing metrics (behavioral, contextual, etc) there is a growing arbitrage opportunity in further parsing the content and guiding buyers to low cost, high value sites rather than high priced branded sites.

21. Should New Media companies emphasize “new” or “media”? « Lightspeed Venture Partners Blog - June 29, 2009

[…] more in this vein read two prior posts;  on the preeminent importance for sales excellence in ad networks, and on the three ways to build an online media business to $50m in […]

22. Where will the next ad network breakthrough come from? « Lightspeed Venture Partners Blog - September 24, 2009

[…] Posted by jeremyliew in ad networks, advertising. trackback I’ve noted in the past that the four core competences of ad networks are: Aggregating Inventory Aggregating Data Targeting […]

23. AdNetworker | Blog | The Fourth Generation Ad Network Is Product Oriented - March 17, 2010

[…] Director at Lightspeed Venture Partners) wrote a post on February 25, 2009 asking what the fourth generation ad networks will look like.  In his post he described the evolution of ad networks into three generations, which […]


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