When you span the ad network landscape, something about Blue Lithium stands out. Their CEO Gurbaksh Chahal publicly (and rightfully) denigrated Google’s lack of traction in display advertising. But beneath the bravado is a bevy of things that make analysts excited about the company’s prospects as things heat up in online advertising once again. When Doubleclick hints at filing to go public once again, or selling out to MSFT, Google or AOL, naturally many look at publicly traded ad networks like Valueclick and 24/7 Realmedia as likely takeover candidates, but a few also keep tabs on Tribal Fusion and Blue Lithium, two of the largest privately held ad networks.
Of the two companies, each has taken an interesting approach to maximize their potential. In the case of Blue Lithium, I have always been impressed with their progressive and proactive approach to trying out new things. A few years ago, one of my contacts there reached out to me to help them promote a new online education web property. It was interesting to see a network diving into the world of publishing, but it was a natural one, particularly for Blue Lithium, who studies click streams to better understand the intention of users on the Web.
Identity Crisis?
Of course, the notion that an ad network would double up as a publisher is a thorny one. How so? Well, for purposes of illustration, it could be argued that there should be a line drawn - a Chinese wall of sorts - between a network and a publisher. When Blue Lithium approaches a publisher, it does so with the intent of representing (albeit blindly) the publisher’s unsold ad inventory. BL - or any network for that matter - would try to find advertisers to absorp the unsold, remnant traffic. Some sites are sold out and find themselves in the luxurious situation of not having to work with ad networks. These are the exception. Even the most sought after properties have excess inventory. The largest ones have unsold inventory by way of their sheer size. Yahoo!, for example, bought 20% of Right Media in order to raise its eCPM, the rate it charges advertisers for its inventory.
How Ad Networks Work?
Under general conditions, an ad network has a pretty obvious incentive to get more inventory from a publisher and sell it to advertisers. Unlike premium advertisers who pay high CPMs, an ad network will make a little bit of money per unit but offer scale. Tribal Fusion, for example, boasts about serving 18 billion impressions per month. Say it sells ad impressions for $1 CPM to marketers, that means 18,000,000,000 x $1 CPM / 1000 = $18M per month. Say it pays 33% in commissions, ad serving, administration etc., and pays out $0.33 to publishers, it is left with $0.33 eCPM as profit. Over 18 billion impressions per month, that’s $6M in monthly profit, or $72M per year. I doubt these numbers are 100% accurate, but they should illustrate the nature of the beast.
Of course, anyone who has worked with or for ad networks will tell you that it’s hard for ad networks to sell out all the inventory, as such, much inventory goes unsold. Ad networks use some of that unsold inventory for public service announcements (PSAs). But even then, there is so much inventory online, that the lure of doing something with that inventory is obvious.
Especially, if your underlying technology allows you to optimize every single banner to target users effectively. In other words, an ad network can, and technically should, manage every single banner impression so that they can optimize the revenue they make for publishers with the value they can create for themselves.
What Would Lucifer Think?
Of course, a devil’s advocate would raise some issues. Enter yours truly.
Allow me to say right off the bat that I do not think the following is unethical. I just think that online, players wear different hats and the market is evolving so quickly, that some things make us go “hmm?”
Previously to launching WatchMojo.com (display, video, listings ads) and MetaMojo.com (search ads), I served as VP of ad sales for a mid-sized online publisher with 5M uniques and 250M ad imps per month. We were fortunate to sell some $250K per month in ad sales, with about 30% coming from large clients, 60% from small clients, and 10% from ad networks. Of course, in terms of contribution by inventory, ad networks had as much as 20% of our unsold, remnant traffic. The point here was we were fully aware that ad networks would not pay the bills, but it was a way to optimize our eCPM and avoid having unsold inventory.
To connect the dots: when I launched WatchMojo.com, my preference was to avoid running ad networks because, well, not only do they not pay the bills, but seeing ads of the “press the fart button” variety actually hurt your brand quite a bit (file under shocking).
But as a site grows in audience, naturally, small, medium and large-sized advertisers approach you with inquiries. As a publisher, you are caught facing a double-edged sword: if you have absolutely no ads, something seems off to a would-be client. If alternatively there are only “press the fart button” banners, then they do not want their brands alongside that.
For that reason, I chose to accept network ads from Blue Lithium. Blue Lithium, I have found, seem to stick to high quality advertisers that want reach but would not work with small sites. I have no qualms admitting to all of this, not because it helps me directly as a publisher at WatchMojo.com, but because it’s good advice (I hope) that new publishers need to know and can use. All to say, when you see a MSFT ad on the site, for example, it’s most probably a network buy. We as a site make very little off that ad, in the $0.75 range. I say range because on some ads we make $0.50 on others we’ll make $5. Clearly, depending on 1001 variables, you average out invariably to something in a low range.
For more on how networks work and how you can juggle a bunch to optimize your eCPM, click here for our analysis on what YouTube could have been making in the pre-Google days with its traffic.
A Social Butterfly Amongst Social Networking Sites?
We’re getting off track now, so getting back on it. This past week we saw ads for a new social network, Mingle Now. Let me say that running ad networks is also good because it tends to be a lead generator. Sure, sometimes an advertiser might not want to advertise on your site because they get on your site by way of the back door, but any serious advertiser will want a direct relationship with a publisher because that can lead to better placement, integrated features etc.
Mingle Now also caught my attention, because unlike a MSFT, it was specifically the kind of advertiser who would, should and could be a direct advertiser. I did some digging, and realized that Mingle Now was actually, lo and behold, a Blue Lithium product.
As an analyst, this is savvy marketing and salesmanship. Blue Lithium has access to millions of users, it is also running millions of sold and unsold banner impressions, it can effectively both serve its publishing clients (in this case WatchMojo.com), its actual advertising clients (the MSFT’s, for example) as well as itself, by way of creating value through new products.
What is Mingle Now, Anyway?
Mingle Now is a social network. Much like how there are 200 YouTube clones, there are hundreds of social networks. Not all will succeed, but many will. MySpace’s parent Intermix was acquired for $580M by News Corp.’s Fox Interactive Media unit. We considered it the best web M&A of all time. Since the acquisition, it has gone on to triple in size.
In other words, while Blue Lithium is working hard to build its core unit into the best darn ad network out there, it has a keen interest in making Mingle Now the best darn social network out there.
The Legend of MySpace
It should be noted, here and now, that MySpace blew Friendster away for two reasons. Friendster indeed had a head start, and had the A-list board/backers. But what Friendster did not have was the support of independent music artists, AND a network to leverage. MySpace was spawned out of eUniverse, aka Intermix. In other words, MySpace could eventually explode on the wider world wide web, but initially it was marketed to users in the eUniverse/Intermix ecosystem, giving it a shot in the arm.
Of course, eUniverse/Intermix was not an ad network per se. When it wanted to expand its reach, it would have to go out and acquire traffic. In Blue Lithium’s case, by virtue of being an ad network, it has an unfair advantage in the sense that it gets through publishers’ walls at a discount, and then it can selectively pick out which user it wants to target and which one it does not want to target.
So, what’s the big deal?
Many would argue, and a big part of me is in this group, that Blue Lithium is free to do what it pleases to do. Certainly, its lawyers have included somewhere deep in the Terms of Service that it can do just that. Of course, this would indeed be no big deal if Blue Lithium actually paid for the ad inventory it was using to promote Mingle Now.
When I asked Blue Lithium to yank off the Mingle Now ads, I found out that in fact, Blue Lithium was using default, house ads to promote the service.
Sacre Bleu!
At this point, something was off. Clearly, there is a conflict of interest. Is there?
I fired off an email to my contacts at Blue Lithium, because while I think what they are doing is clever, I could see it looking unethical, and not wanting to give that impression, the very least I could do was give them the chance to address it before going to print.
What’s it? Well, “it” is two things:
1 - Does Blue Lithium cross any lines by being both an ad network and a publisher/marketer?
2 - Is it ethical for Blue Lithium to use default tags to promote its own service/product?
Dakota Sullivan, Blue Lithium’s CMO, a gent with whom I’ve exchanged numerous thoughts with in the past, was kind enough to get back to me promptly: “The largest ad network in the world—Advertising.com—is owned by AOL, one of the largest publishers on the planet. There are other ad networks that own sites and other sites that own ad networks. In this area we are by no means unique.”
In that capacity, Mr. Sullivan is certainly right. Be it in offline or online media, the line between an ad network and a publisher - or producer - is blurry. Of course, one wonders if Advertising.com would have won as much business over its initial years as a unit of AOL.com as it did as an independent company, but that is not really all that interesting in this discussion in that a network will only succeed if they deliver, regardless of whether or not they are independent or part of a greater company.
Regarding defaults, “You can provide us with your own house ad and we will run that as a default for your site instead of MingleNow. All publishers on our network have the right and some pursue it. Defaults are a red flag with publishers, so we do our very best to limit the number of defaults to an absolute minimum. When we run a default it’s only because we’ve gone through every single paying ad we have and don’t have one that will work. With defaults we need to run something that works globally. Thus, MingleNow ads serve as our house ad.”
Hmm, methought. That sounds fair, but you know what’s a greater red flag than house ads? Unsold ads, and a low eCPM… so I had to ask:
“When you reach out to a publisher, the mandate is to sell ads. But if Mingle Now is ‘one of the fastest growing niche social networks’ and you run those in house ads, then does that not put you in a conflict of interest? In other words, on the one hand you want to sell ads for the publisher but on the flip side you have a desire to build a lucrative social network. I’d have less problem if you did so by paying for inventory, but by using house ads, you simply have a vested interest NOT to sell out a publisher’s inventory, no?”
Blue Lithium’s Answer?
“You raise a good point. The fact is, our ad network and the publisher relationships that underlie it are priority one for BlueLithium. If we were able to reduce defaults to zero, we would do so. MingleNow’s growth is not tied to advertising but to local market club photography in 20 cities around the country, co-marketing with partners and viral marketing.”
Again, this reassures me, but then again, I ran an analysis - using very limited public numbers - pegging Blue Lithium’s value as somewhere in the $250M to $400M range (the fluctuation is due mainly to variations in the prices of publicly held ad networks, such as 24/7 Realmedia).
Yet, we have seen MySpace go from $0 to $580M in a few years, with the value tripling (News Corp. boss Rupert Murdoch boasted that MySpace was worth $6B, suggesting that the parts within his empire are worth more separately than they are together). In other words, while the PR angle that “the fact is, our ad network and the publisher relationships that underlie it are priority one for BlueLithium” sounds great in theory, in practice, I am not sure I would feel that way if I were Blue Lithium’s management team. I would say: “why content ourselves with a tiny fraction of the pie when we could use our reach and technology and go for the jugular?”
What might make this even more questionable, frankly, is that Mingle Now has managed to sign up marquee advertisers like Anheuser Busch, something that one would presume they should be doing on behalf of their publisher clients, no?
What does this all say or suggest?
For one, once again, as a publisher, you should never count on ad networks to make you money. Ad networks make ad networks money.
Second, as I wrote earlier in Google Running Porn Ads in AdSense - Again, publishers are suckers.
The ad meltdown of 2001-02 freaked publishers and made us into small minded, low expectation you know what’s. Shellshocked, we threw in the towel and let the trojan horses (ad networks, including but not limited to Google Ad Sense, Blue Lithium, Tribal Fusion, etc.) enter our websites and we now wonder why they boast rich valuations while publishers look for ways to generate sustainable revenues. Furthermore, ad networks have turned to a technology-only approach to optimize everything, meaning that relationships between marketers and publishers are at the risk of being commoditized.
That’s not good or bad, it is what it is.
But I’ll tell you what, we at WatchMojo.com are on the verge of relaunching our entire site with a new redesign and on a new CMS. And trust me, when that day comes in the next month, nary an ad network - including those peddlers of porn, Google’s AdSense - will you see on the site. Of course, we’re fortunate that we are finally starting to sign advertisers, slowly but surely… but the simple fact of the matter is that regardless of that, ad networks do not really add all that much to a site’s bottom line, but they sure do take a lot away.
As I said, as an analyst and investor, Blue Lithium is priming to be one helluva company. But as a publisher, I think that all ad networks - and ad rep firms - leave a lot to be desired.
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