To many media industry observers these days, the notion of a major publisher joining or starting an online ad network seems to feel like an over-hyped trend that’s long since jumped the shark. But the potential value found in vertical ad nets is so great, those who reflexively avoid them are making a huge mistake, argues Lehman Brothers analyst Doug Anmuth in his Internet Inside Weekly report (pdf only, not online). The main take away from Anmuth’s report: As online ad budgets rise and more brand-oriented campaigns migrate to the web, the need for higher-value, premium ad inventory, particularly for traditional brands which have greater sensitivity about the placement and context in which their ads appear, is likely to grow. So far, Anmuth points out, in terms of billings, verticals started to grow again last year, climbing to a 39 percent share from 37 percent in 2007; but still below the 47 percent share the category had in 2004. In comparison, search’s share of billings last year was 31 percent, followed by portals with 19 percent and general ad nets with 11 percent. Anmuth expects verticals to continue their upward swing.
Much of the suspicion around ad networks tends to stem from confusion between “run of site networks” that sell remnant (“unsold”) ad inventory, which is mostly concerned with the greatest reach at the best price, and vertical nets, which are more narrowly focused around sites with similar content subjects and quality. Vertical ad nets, such as Martha’s Place, which was set up by Martha Stewart Living Omnimedia (NYSE: MSO), or other set up by fashion focused publisher Glam Media, also promise prominent placement; though prices tend to be higher compared to remnant ad nets like the ones offered by Advertising.com or Google (NSDQ: GOOG) AdSense, since those sellers, for argument’s sake, do not necessarily guarantee placement on a site’s front page.
— Vertical value: “While we believe the average effective CPM publishers generate through run of site ad networks is likely less than $1, we believe vertical ad networks can offer publishers much higher CPMs based on the premium advertisers are likely to pay for the quality of content and added inventory to the network.”
— Portals’ challenge: Yahoo (NSDQ: YHOO), MSN, and AOL (NYSE: TWX) have succeeded in cornering the market on mass reach. But they plan on expanding their offerings with behavioral targeting. Being able to offer more precision to marketers will enhance their value, advertisers are still likely to be concerned about the setting and placement of where ads appear. Since the ads, sometimes referred to derisively as “pray and spray” are sent across thousands of sites, advertisers never really know where they end up and what sort of content they end up next to. The challenge of managing those concerns will likely remain.
— Remaining fears: ESPN’s (NYSE: DIS) experiment with ad nets – in which it was a participant, not the chief operator – recently ended its ad experiment and WashingtonPost.Newsweek Interactive recently closed its Blogroll ad net to new sites. In ESPN’s case, the change of heart toward ad nets was due to its feeling that the use of ad nets diminishes the value of their brand and content by spreading it so widely, ultimately threatening existing relationships with advertisers. Anmuth acknowledges that this is a potential “con” to the “pros” of ad nets. Anmuth: “Currently we believe the average revenue split across vertical ad networks is less than 50 percent, with higher quality sites and those sites that give the vertical network more control over the inventory potentially receiving guaranteed CPMs. Although vertical networks sell the entire network