The Economic Importance of Ad Networks: “Market Makers,” Not Parasites

by on October 1, 2009 · 7 comments

Middlemen have been criticized as unnecessary for centuries, but as Mike Munger (Chairman of the Duke Political Science department and my undergrad mentor) explains, they are actually “market makers,” rather than parasites (or listen to his appearance on Russ Robert’s excellent EconTalk podcast). Warren Lee explains why ad networks—the middlemen who sell publishers’ (website operators) empty ad inventory to advertisers—serve such a critical role in making “Free!” possible for consumers by sustaining especially the Long Tail of online publishers:

  • Online usage continues to increase and, according to a recent Forrester survey, has reached an average of 12 hours per week. That provides advertisers and agencies with strong incentives to move more of their ad spending online.
  • The number of online sites and publishers continues to increase rapidly, which makes it increasingly difficult for advertisers and agencies to decide which sites to work with. Ad networks can help sort through this bewildering number of sites and target those that are most relevant and appropriate for their clients.
  • Online viewership/time spent continues to fragment, so advertisers and agencies can’t just work with the largest portals — even those sites are losing their primacy with the surge in popularity of other sites such as Facebook and Twitter — and top vertical sites to achieve its campaign goals. With agencies today struggling with tighter margins and needing to do more with less, many find it easier to work with a few ad networks than a number of individual sites.
  • Most online publishers still find it difficult and lack the expertise to find, qualify, hire and manage ad-sales executives, which is a reason why many smaller and midsize online publishers turn to ad networks to help handle this activity.
  • Through sophisticated analytics and advanced targeting/optimizations, some ad networks can deliver attractive audience demographics at scale. This aligns with the intended goal of most advertisers’ media plans. As long as the content is proven to be “brand safe,” the exact category of the content often is secondary to demographic profile for many advertisers.
  • Price — ad networks can offer advertisers more cost-efficient pricing than direct publishers can afford to charge. While large publishers justly sell their premium brands at high rates driven by scarcity of inventory, networks can aggregate smaller, less popular sites (with very similar audience characteristics) that do not command the same price premium but can deliver scale. Many agencies/advertisers will continue to prioritize reach and price efficiency equal to or greater than premium-content adjacency.

  • AdvertiseSpace

    “ad networks can offer advertisers more cost-efficient pricing than direct publishers can afford to charge.”

    What? Direct publishers can charge whatever they want! They own the site, it is their ad inventory, so how can an ad network, who takes an average of 50% off the top themselves charge a more cost effective price!

  • AdvertiseSpace

    “ad networks can offer advertisers more cost-efficient pricing than direct publishers can afford to charge.”

    What? Direct publishers can charge whatever they want! They own the site, it is their ad inventory, so how can an ad network, who takes an average of 50% off the top themselves charge a more cost effective price!

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