Vertical ad networks have become all the rage over the past few months. The acquisition of Jumpstart Automotive, the pending financing round for Glam Media and the launch of network after network on the Adify platform have all contributed to rampant investment activity in the vertical ad network market. Within the past two weeks, there have been announcements for new vertical ad networks from Martha Stewart Living Omnimedia (home and lifestyle), Reader’s Digest (food) and BiggerBoat.com (entertainment). But the announcement that signaled the peak of the vertical ad network bubble for me came yesterday from NBC and P&G. If Pets.com was the peak of the e-commerce bubble, does a pets-focused vertical ad network signal the peak of the vertical ad network bubble?      

Historically, vertical ad networks have succeeded against traditional, broad ad networks because they aggregated a defined, highly desirable audience that could be purchased by advertisers through a single source. The focus of the networks allowed them to truly understand the audiences of their publishers and generate higher CPMs. Advertisers were provided with ease of administration and creative guidance for developing highly engaging ads. All of this worked well for the ad networks when there was a single one in each of a few high value verticals and when the only alternatives for publishers were either incurring direct selling costs or turning to a broad ad network. But the recent proliferation of vertical ad networks, and various ad networks in general, may have changed the dynamics of the business for the worse.

When it comes to changing ad networks, the switching costs for publishers have always been close to zero. In a market in which publishers have many ad networks to choose from, the ad inventory simply goes to the network that delivers the highest effective CPM (or provides the highest revenue guarantee). Furthermore, because ad networks don’t control the inventory that they sell, what is there today could be gone tomorrow. When a publisher reaches a certain volume of page views and unique visitors, it’s typically more economical for the publisher to begin selling ads directly. Over time, the ad network is allocated a smaller, less attractive portion of the publisher’s inventory. Further, advertisers look to buy media at scale. Publisher and inventory churn makes it increasingly difficult for a network to build and maintain the critical mass needed to attract campaign dollars from advertisers. In my view, it’s difficult for ad networks to build defensible, sustainable businesses if they don’t address these issues and do more than just aggregate audiences.   

I think that there are several potential strategies for creating a lasting, high-value vertical ad network: proprietary distribution, proprietary targeting, a portfolio of products and exceptional service. Proprietary distribution means either owning a significant portion of the network’s inventory or having exclusive access to it for a lengthy period of time. Google is so successful financially because much of its ad inventory, and hence revenue, is generated by Google.com and because advertisers can’t go anywhere else to buy that prized inventory. Proprietary targeting provides advertisers with a unique ability to select specific members or groups within the target audience for receipt of their ad content. When this targeting proves effective, advertisers are willing to pay significantly higher CPMs, which in turn generates more value for publishers. Advertising.com was acquired by AOL because it had developed a novel methodology for identifying which site visitors would be most receptive to the message of a particular advertiser. A portfolio of products allows a network to deepen the relationships with publishers. Publishers are then faced with having to forego value beyond monetization when considering whether to switch to another network. Web analytics, ad serving, content syndication and site search are all examples of services that publishers need, that they value and that could be provided by networks. Lastly, and potentially most importantly, exceptional service matters greatly in what is inherently a people-driven business. Decisions in the advertising business are often made based on established relationships, personalities and perceived commitment. No ad network can survive over the long term without dedicating itself to putting the customer, whether advertiser or publisher, first.

In today’s market, it isn’t enough to attempt to aggregate an attractive audience when your competitors are competing heavily for scale and dollars. My guess is that the majority of vertical ad networks that have launched in the past 12 months will fall by the wayside within the next 18 months because they haven’t established any true, sustainable differentiation. What are your best guesses for which companies will be the Pets.com, eToys and Webvan of the ad network category?