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Where will the next ad network breakthrough come from? September 24, 2009

Posted by jeremyliew in ad networks, advertising.

I’ve noted in the past that the four core competences of ad networks are:

Aggregating Inventory
Aggregating Data

Better targeting has historically been one core area of competition for ad networks, especially those focused on direct response advertising. However, as Anand Rajaraman (co-founder of Kosmix, a Lightspeed portfolio company) points out, more data usually beats better algorithms. Andrew Chen recently noted that after three years of work, Netflix awarded its $1m prize to a combined team of experts for an algorithm that only improved targeting by 10.5%:

This means if you combine dozens of the best machine learning people in the world, some of the cleanest datasets, you get a measly 10.5% increase. Compare this to starting a new ad network where you end up with noisy datasets, lots of crappy traffic, and a small team looking at the problem – that’s not an easy path to disruptive change. In general, 10% is not a big enough number to counteract the other economic drivers in the ad market, which revolves around better deal terms, a larger selection of advertisers, better ad inventory, etc.

Note that this observation comes from a guy who was a co-founder of Revenue Science’s Ad Network business!

While I agree with Andrew in principle, I think that even a 10% edge in targeting can be enough to build a competitive advantage in the direct response world. Because competition for publishers is fierce, and publishers switch ad networks frequently in search of higher RPMs, a slight edge in targeting can lead to a slight edge in publisher payouts which can lead to an overwhelming win in volume.

Andrew thinks that breakout ad network performance will come from two of the other key competency areas:

I think disruptive change will come not from algorithms, but rather two other areas:

* Better ad inventory: New websites and mechanics emerge all the time, and who knows what happens when you put ads on them? It was clear, until they tried it, that with the right ads search can be >30% clickthrough rates or more, which is unheard of.
* Better data: The other big opportunity is in using specialized data to drive your algorithms – rather than basing everything off of domains, cookies, and ad impressions like everyone else, there may be ways to extend the targeting to unique datasets that no one has access to. This is what’s happening in the world of retargeting.

These are good thoughts, and well worth exploring. Better ad inventory can be difficult to defend in an age of exchanges like Right Media and the Doubleclick ad exchange. However, in some areas such as mobile, video, in-game advertising and client driven inventory, it is still possible.

Data is also improving. But because it is also becoming more of a commodity, the real question will be whether this data can be proprietary. If the proposed FTC rules on third party cookies for behavioral targeting take effect, it could give some of the big web properties access to their own proprietary targeting data that will give them advantages over third party networks. Taking offline data and using that for online targeting is also another possibility.

In the brand advertising world, I think that sales will be a real differentiator. The big brand budgets are just starting to move online. CPG, one of the core categories for brand advertising, is starting to shift online this year in a meaningful way. But brand advertisers need to be sold to the way that they want to buy. Not all online sales teams know how to do that. Facebook’s recent partnership with Nielsen to show brand lift means that now only four online media companies have the ability to show the impact of a campaigns effectiveness on brand metrics (Yahoo, AOL, Facebook and Brand.net). I expect more companies to start reporting these sorts of brand lift metrics as a matter of course if they want to take their share of brand advertising dollars as they move online.

Which new startups do you think have a breakthrough in any one of these areas of core competence?


1. jules polonetsky - September 24, 2009

Jeremy – there are no proposed FTC rules on 3rd party cookies. The Commission urges sites to tell users that the ads they see are behaviorally targeted, and to do so somewhere visible (not just in a privacy policy). For example they want to see sites labeling ads “interested based ads” or “why this ad” or a notice saying ” we tailor our ads to match your interests, click for more info”. Not that different than what eBay and Google do today, but with a somewhat more engaging description – i.e. Customized ad for you by Google. At futureofprivacy.org we are consumer testing some friendly “personalization” icons that we think sites will be able to use.
And Congress appears to be allowing opt-out as well, if users can see their profiles (as Google, Blue Kai, and others already allow).
You want to know what to really worry about ? Contact me!

2. Hugh J. Sloan III - September 24, 2009

Is anyone focusing on the metadata? Should someone be able to actually deliver on the promise of the semantic web and make both the rollout and economics of ontologies work , both Andrew and Jeremy will be right. You can get drunk at a bar and pick-up a hobo and pretend that she is Bar Refaeli for only so long before it gets pretty expensive and even then she may not be able to recite the Banach-Tarski paradox without slurring a few words.

3. Mark Stoneham - September 25, 2009

Better data is certainly an important element but if you want dramatic improvement then fix what’s broken rather than marginally improve what already works. The big holes today are that online ads earn far less than offline, and display earns far less than search (because it’s hard to measure).

The underlying promise of online advertising has always been direct relationships with consumers. To build large numbers of individual direct links needs efficient and transparent ad networks (which we have), but the real key is high quality data used more effectively. And for the process to be sustainable, the data needs to be sourced and used more ethically than it is today.

The second part of direct relationships – the relationship bit – is currently a joke. Marketers need to stop chasing consumers around the web and figure out how to create a meaningful value exchange.

Fixing online advertising is not just up to the ad networks but they’ll play an important role in making the transactions more efficient than in offline. They may also be part of improving the performance measurement of display ads, which is essential to drawing more brand budget online.

At the moment, I’m seeing lots of work on new algorithms and lots of smoke and mirrors around ad targeting. I’m not sure the real problems are being addressed.

4. Liew On Brand Dollars And Metrics; Advertising Week Optimism; Newspaper As Non-Profits; - September 25, 2009

[…] On the Lightspeed Venture Partners blog, Jeremy Liew argues that a saavy seller who can speak to brand metrics will help win and sustain business for ad networks in the future. Liew writes, "CPG, one of the core categories for brand advertising, is starting to shift online this year in a meaningful way. But brand advertisers need to be sold to the way that they want to buy. Not all online sales teams know how to do that." He adds that only Yahoo, AOL, Facebook and Brand.net are doing it effectively today. Read his post. […]

5. Jay Gould - September 25, 2009

I agree with Chen that 10.5% increase is not pushing the needle far enough for a true competitive advantage. I also agree with his comments, “Compare this to starting a new ad network where you end up with noisy datasets, lots of crappy traffic, and a small team looking at the problem” … “In general, 10% is not a big enough number to counteract the other economic drivers in the ad market”.

So I’m confused that you don’t fully agree with regards to the competitive advantage. You said, “publishers switch ad networks frequently in search of higher RPMs”.

Today ad networks can be built remotely comprised of sales executives across the country in various regions, so can’t they simply compete by offering better “deal terms” with the more analytical data driven teams that provide better algorithms to show the 10% increase?

In time competing on “deal terms” becomes increasingly more difficult to do as the algorithms get better, but for now, there doesn’t seem to be much of a competitive advantage?

6. Yoav Arnstein - September 27, 2009

The disruptive change using better data you refer to (retargeting per your mention) is 1st party data. It equates also the sales figures. I definitely believe that 1st party solutions are the only meaningful way for advertisers to leverage more valuable data in the short term.

As to brand effectiveness – yes, digital can create a better connection between spend and sales but is still limited since it is an offline purchase. Brand studies are still based on cookies and panels with all the inaccuracies involved. For brands, i feel we should focus on reduce waste and help them hit the exposure strategy. It is a great first step.

7. Ad Network Differentiating Factors | Shift Market - September 28, 2009

[…] Where will the next ad network breakthrough come from? « Lightspeed Venture Partners Blog […]

8. Sean P. Fenlon - September 29, 2009

Jeremy you might want to take a look at what TARGUSinfo is doing with their AdAdvisor product. Not a startup company per se, but a startup business unit:


I’m sure everyone remembers the Privacy hot water DoubleClick got into back in 2001 with the purchase of Abacus with the intention of merging offline consumer PII data with online advertising. Well, Dave Helmreich and Paul McLenaghan figured out a way to do this and remain compliant with all privacy concerns by acting as a third party and keeping the PII private. An advertiser could conceivably use ANY ad network in conjunction with this service. Also, since it’s offline data, the play supports Anand Rajaraman’s premise that more data wins (especially data from a net new “dimension” e.g. his IMDB example). My understanding is that they’re already reaching 30-40% of Internet users and growing quickly.

9. Pankaj - October 6, 2009

Great Job Done

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