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Prediction: The display advertising network bubble is about to burst

June 28th, 2010 · 3 Comments

In the past few weeks, I learned directly and indirectly that several highly successful ad sales guys quitted their display ad sales jobs and switched to different niches of online advertising.

These are sales guys who accounted for 20-40% of their employers’ annual revenue. They were not laid off. In fact, most of them just got promoted recently.

Why did they quit? If you ask them, they probably won’t tell you the real reason. After all, it’s hard to trust what came out of the mouths of ad sales people. 🙂

I have a few observations.

Good sales people instinctively smell where the money are. They’re moving to different niches (e.g. mobile advertising, social media such as Facebook and Twitter, gaming, etc.) because they think there are more money to be made there. On the other hand, they feel the upside for them in display ads is becoming increasingly limited.

Currently, there are several hundred of display advertising networks. It’s simply not sustainable. For the last couple of years, some of those companies have grown nicely because display ads were still fairly new to many traditional advertisers. Those advertisers want to give display ads a try.

So, in the past three years, just about every advertiser in the world have tried display ad once, which means they have worked with at least one ad network.

This is why you hear stories about a display ad start-up has grown its revenue by 50%, 100%, or even 200% in one year – they were able to talk to a lot of advertisers because almost every advertiser wants to give display ad a try.

But, what’s next? Those display ad companies have talked to every possible advertiser in the universe in the past years. They’ve run out of new advertisers to talk to. They must retain their existing customers, and get more money out of them.

It’s NOT easy. The problem is that it’s very hard to measure the performance for display ads. Unlike paid search, display ads is very much like a "black hole” in term of having visibility into campaign performance and ROI.

What’s going to happen? Here are my thoughts:

  1. It’s unlikely the three big players (Google, Microsoft, Yahoo!) will make any major acquisition of large display ad networks. The big three have already had enough inventory and advertisers base. I don’t see much value for these companies to acquire another display ad network. However, strange things do happen. I wouldn’t be surprised if Steve Ballmer and Microsoft make another dumb move to acquire a display ad network. The same applies to AOL. 🙂
  2. Small, niche networks with real technology could be acquired at a fairly good price. There are a few ad networks with solid optimization technology. They will be acquired by one of the big players.
  3. There will be a lot of consolidations in the industry.
  4. Most ad networks will become ad agencies. If you look at below the surface, most ad networks are ad agencies in disguise.
  5. Depending on the economy and valuation, some large ad networks might be acquired by large ad agencies. It’s hard for ad agency to acquire technology companies because of valuation. Large, publicly traded ad agencies have low multiples. It’s very expensive for them to acquire technology companies with high multiples. However, if ad networks get desperate to sell, then large ad agencies will be able to buy them at lower valuation, which will make more sense for the ad agency’s shareholders. 

Excellent resources:

Tags: Company Analysis

3 responses so far ↓

  • 1 TedHoward // Jun 29, 2010 at 4:25 am

    MSNBC just got rid of the traditional banner ad, same day as your post. Coincidence?
    http://www.techflash.com/seattle/2010/06/msnbcc

  • 2 GeekMBA360 // Jun 29, 2010 at 5:32 am

    Interesting! I didn't know about MSNBC's plan at all, but I think it's about time for both publishers and advertisers to realize the bubble/hype associated with display ads. I applaud MSNBC's bold move.

  • 3 fashion blog // Jan 10, 2011 at 5:53 am

    Thanks for taking the time to discuss this,would you mind updating your blog with additional information? It is extremely helpful for me.

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