Rocket Fuel’s Frankel: Don’t Count Out Ad Nets

The short answer that is quotable is, “Yes, ad networks are really dying.” But that’s not the real story, and the truth, as always, is more complicated. Digital advertising is going through a period of tremendous change. Not too shocking, as it’s a young industry, and has never been very settled — just when you think you understand it, everything flips upside down. I can remember not too long ago when search engines ran banner ads and Google didn’t exist. So, what’s happening to ad networks? They aren’t actually dying — they’re changing. And that change is a response to a changing market, changing technology, changing customer perceptions and requirements. My guess is that companies that call themselves ad networks will do more revenue in 2012 than in any previous year. If that’s death, it’s a pretty good one from a business sense. Change in the industry is being driven by new mechanisms for publishers to sell their inventory. Historically, publishers sold inventory with their own sales teams, or with one or two networks. But now publishers can use exchanges to sell to dozens or hundreds of buyers. Who wouldn’t want hundreds of buyers all bidding on your product? Marketplaces are indeed wonderful things. But that doesn’t mean ad networks are dead. They just have to adapt to this new world. If they do, they can prosper. The ad networks of the future have to find more unique selling propositions, more ways to differentiate niche cases that marketplaces can’t address, custom solutions that marketers love, etc. The ad networks that can grow and change will thrive. Those that can’t, though, are in trouble. I think that ad networks will basically evolve into two kinds of companies. They will either become marketing-services companies that are experts in turning web inventory into highly customized solutions for sophisticated marketers. Or they will become technology companies that are experts in making sense of the madness of billions of ad impressions and billions of bits of data about consumers, and turning that understanding into value for marketers. A better way to understand this period of change is to see that ad networks have to evolve. And like any period of rapid evolution, those that don’t change fast enough will go extinct. But there are plenty of smart, customer-focused, thoughtful, inventive people at ad networks that are heading south before the glaciers come grinding through their sunny valleys.

Real-time bidding is a powerful tool indeed, and we have barely scratched the surface of what it can do for marketers. We believe that exchange-based inventory and RTB is leading to a technology space race for the best algorithms to create value from this emerging ecosystem. Right now we have a sizable lead in this area. The positives of RTB are fantastic. Scale — easy access to massive amounts of media. The ability to uniquely value every impression on the Web. But the flaws are serious. That same titanic scale can also drown you. More than one company will fail because their platforms cannot keep up with the flow. And the ability to evaluate every impression is also a curse. What we see is that most bids by other companies on the exchanges are actually not real time at all but hard coded at set prices. Some companies will lose their shirts when their experiments with automated bidding run out of control. Inventory quality is another interesting issue. Right now I see this as a FUD tactic raised by traditional publishers as they start to see their businesses erode to RTB buyers. In the long term, I expect the exchanges themselves to police this better. Right now they make only small efforts to assure quality, so this does create openings for companies like ours to differentiate. But once you do that the possibilities are endless for RTB. One of the myths of RTB is that it’s only good for low-end direct response. We’ve found the opposite to be true. We’ve delivered unheard-of value for advertisers with RTB for products as diverse as shampoo, cake mix and luxury sports cars.

It’s not going to get less crowded. The cost of starting a company in this ecosystem are actually very low. And digital advertising is growing faster than most other industry segments, certainly faster than other segments of advertising. So that will attract entrepreneurs and venture capital. Having said that, there will be winners in this new ecosystem, and they will likely consolidate smaller/unsuccessful players. If my space race analogy holds true — and indeed we’re betting our company on it — then a small number of players with vastly better technology will separate from the pack and get very large. But because the price of entry is low there will always be room for innovation. I think this is a fantastic thing for the business over all. If I were a buyer, I’d be really psyched about how many companies are fighting to bring me cool ideas. But then I’d get very organized and structured about testing, so folks don’t waste my time.

There’s no secret formula for making everyone happy in this area. Overall most consumers prefer better targeted advertising over random ads and prefer free content over paid content. Every bit of consumer research agrees with this. Consumers will trade their privacy for very small incentives. Put these factors together, and I think that there will be a high tolerance in the long term for targeted advertising. But as an industry, we need to get really good at protecting consumers’ privacy and data and explaining our value and methods openly and simply. I actually think we’re pretty good at that now, but the privacy watchdogs are pushing the industry. I think that’s healthy. Right now targeted digital advertising is a large and fast-growing industry, with much of the intellectual capital being developed in the United States. We’re creating great, high-paying jobs and driving growth in the industries that take advantage of us. I find it hard to believe that the government would risk disrupting this kind of hyper-modern, high-value industry given the macro-economic situation we find ourselves in.

First, ad technology in a vacuum is always interesting but never as valuable as ad tech that thoughtfully addresses real customer problems and needs. Second, there’s always more data to poke at to try to make advertising work better, more than a person or spreadsheet can ever keep up with. Ad tech is always years behind the data flow. Third, some people in the industry are afraid of their jobs getting automated. But no matter how much automation and technology we build, we always need smart, dedicated people to manage the systems and to continue to develop them. Information-age smarts is never replaced by machines.