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An Industry With Too Much Inventory

Posted by Nick O'Neill on June 10th, 2008 10:12 AM

Yesterday, I spent the afternoon and evening speaking with a number of developers, advertising platform executives and social network executives. Our discussion frequently revolved around strategies for providing better advertising solutions on the social web. The conversation has been pretty much the same for the past year.

There is a continued increase in inventory and there is an increasing number of advertising companies looking to tackle the problem of monetizing that inventory. Just today I wrote about a D.C. based comapny, Gratis Internet, entering the space as well. One thing is certain: Silicon Valley does a great job of creating new technologies that generate more inventory. Unfortunately that’s not what we need.

There are a few companies that are succeeding at attracting large brands to fill that inventory. Even those companies aren’t satisfied though because their venture capitalists that backed them are looking for a scalable business to exit at a high multiple. Building an agency isn’t a scalable business even though it’s successful at generating cash flow.

So where do we go from here? My guess is that most of these companies are going to build ad networks that provide advertisers with the ability to purchase directly in an automated fashion similar to Google AdWords. That’s as simple as it gets. While there are companies that are struggling to redefine scalable advertising models, many of them find themselves becoming pigeon-holed into the agency model.

Unfortunately there are no easy solutions but somebody is going to need to figure it out sometime soon before the venture funding runs out! Do you foresee any other scalable business models that will help these companies justify their valuations in a limitless sea of inventory?

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This entry was posted on Tuesday, June 10th, 2008 at 10:12 am and is filed under Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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    I was actually thinking about this on the way to work today, with respect to Facebook applications. We see lots of in-Facebook ad networks popping up (Zynga and SGN are two obvious ones), but a lot of their advertising is for other applications or services unrelated to the application (buy car insurance - get 10,000 poker chips).

    It's the social network that's supposed to provide demographic data for targeted advertising. The applications in these network provide little benefit with regards to advertising inventory that can be targeted by large brands (who advertises on the Zombies application?) and few of them have business models that are generating revenue outside of advertising.

    Won't there be a saturation point where other applications will stop paying for installs? Are advertiser's CPMs/CPCs/CPAs any better in these networks than they would be through AdWords? How will ad networks sustain themselves in a market saturated with inventory that (generally) adds little benefit on top of the social network within which those adds are being served?
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    Very true. My take is that new advertising media usually follows the pattern of first attracting some brand advertisers (agencies always like to sell "big ideas" to their clients), but in many cases the big bucks and the scalable model arrives when direct marketeers (which still bring the vast majority of online ad dollars) find a way to make the new media ROI positive.

    As Nick said, there is no easy solutions but to work hard to be the first to find the way to combine "social" and "ads" in a way that will work for non brand advertisers. After that you just need to protect this magic model from being copied by Google and you are done :)

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