Are vertical ad nets another one-night stand or true love?

Like stacks of increasingly desperate match.com profiles, the list of available and eager vertical ad networks grows every day. In the last year alone, Viacom, CBS, Federated Media, The Gay Ad Network, HotChalk, Forbes, Martha Stewart, CBS, IDG's TechNetwork, SOAPnet and many others have formed media and ad networks out of smaller sites around increasingly narrow content categories.

January's hot category quickly became April's running joke as many insiders lamented, "Another day, another ad network." But market values tell another story: Glam Media and Federated Media are valued at $500 million and $200 million respectively. Are we seeing a familiar vc-fueled Web fad here or a real paradigm shift to businesses that add value to the ecosystem?

Going Long

Learn to love the long tail, say proponents of the vertical network model, because that is where the eyeballs and the ad money now flow. As search becomes the Web's interface, savvier surfers type ever more granular queries ("spinal pain") into Google and bypass the major content brands and portals, hitting "spineuniverse.com" and "spine-health.com," not WebMD or even Yahoo Health. The old media destination model of aggregating eyeballs around centralized content is fragmenting quickly. "We have a complete change of ecosystem," says Peyman Nilforoush, co-founder and CEO of NetShelter Technology Media, whose tech network of 150 sites claims to approach CNET in traffic. "It starts in a search engine or blog or Facebook and it always ends up in the most relevant content," he says.

While research on vertical ad spending is sparse, early indicators suggest money is starting to follow these eyeballs to the edges of the Web.
Avenue A | Razorfish saw 39 percent of its billings go to vertical content and ad networks in 2007, up from 37 percent in 2006. Verticals like NetShelter and Travel Ad Network typically claim doubling and tripling revenues in the past year. "There is a shifting of dollars," says Cree Lawson, CEO of Travel Ad Network, which aggregates more than 50 sites, like LonelyPlanet and BookingWiz, into a network that comScore ranks third in the travel category, ahead of Travelocity and Yahoo Travel.

More than re-aggregating dispersed eyeballs, however, these vertical nets claim that the real value lies in the niches, where the core constituencies live and visitors are more engaged in the topic and hopefully the advertising. For instance, even the massive (9 billion impressions) gamer network Intergi claims above-average CTRs of .5 percent, with a recent campaign hitting 1.7 percent. Sure, some of the networked content may be bathrobed bloggers, but Scott Swanson, vice president and general manager of Glam Media Publisher Network, argues, "We try to reach people at the highest engagement level." One of the hottest aggregators of niche content, Glam networks 500 sites, and, contends Swanson, it is more valuable real estate than iVillage or marthastewart.com. "They don't have the influencers. Our relationship is deeper," he says.

The best vertical ad networks give the niche sites visibility and a sales force and offer media buyers focused audiences, better control over placement, better service and domain expertise. Without Jumpstart Automotive Media aggregating smaller auto sites for him, Shane Kay, vice president and digital negotiations manager for Ford Motor Company, says, "We wouldn't consider six out of 10 in the upfront consideration. It is not about us hitting the long tail, but it is about hitting our target audience."

Crowd-Pleasing

Horizontal ad networks like ad.com and ValueClick always offered targeted "channels" within their massive reach, but both publishers and buyers continue to complain about lapses in service and transparency in the horizontal model. "[They] made a claim they can be all things to all people, and they have done a reasonably good job," says Jocelyn Griffing, senior vice president and director of online media at icon International, who works in the pharmaceutical segment. "But the problem starts to become there is not enough care and feeding and specializing. They don't always understand the needs of the advertiser." Regulatory constraints in the pharma sector require tighter control over the context in which her clients' ads appear, so she finds a vertical network like Good Health Advertising more transparent. "I can feel comfortable where I am going to be," she says. "We can guarantee placements. We offer 100 percent transparency." Clients can cherry-pick sites to optimize performance and specify ad positioning.

Domain expertise is the main value ad verticals say they bring to the table, and established companies like the 8-year-old Jumpstart Automotive Media network have a unique view into the marketplace.

"We can see what a large dealer group is doing in the Southeast," says CEO Mitch Lowe. "We can see how the message is moving from brands to dealers and help shape campaigns."

A vertical network can find affinities and market patterns a horizontal might miss. A ski ad on a cruise site in the first quarter works because the network knows this audience wants to get away and is as likely to hit the slopes as the open sea. "That may seem counterintuitive to a bigger network," says Travel Ad Network's Lawson.

And on the whole, most media buyers we consulted agreed that a solid vertical ad business serves them well. "What we really look for is the technology. What truly is helping us out is layering on demographics, behavioral targeting, retargeting," says Ford's Kay.

Baby, I Got Your Money

In theory, the vertical models make sense and seem to work well for the established players and their buyers. But can it work when literally hundreds of players clutter the market with various definitions of "vertical" and "network"? Collective Media's recent survey found 62 percent of Fortune 1,000 marketers feel there are too many ad networks, and three-quarters only work with one or two. Is it even possible for advertising to fund all of this inventory and for the networks themselves to pass along enough cash to the publishers?

"I get calls weekly now," says Tyler Townsend, digital media manager for YPartnership. "You have to cut through the conversation and ask, 'What is your unique proposition?' "

Can these newbies turn on a dime and optimize campaigns in order to drive down cost-per-
action? For that they need smaller groups of responsive publishers. But then, do they have the scale to target more than one thing and layer behaviors, demographics and day parts?

But therein lies the challenge for the mushrooming category: finding distinctions amid the clutter. When Travel Ad Network's Lawson started his company five years ago, he dubbed the model "niche-casting," and he assembled up to 50 sites in order to give them a sales force and higher CPMs than the general networks offered. Today, with multiple offerings in many categories, how can they differentiate themselves? "The conundrum of the vertical ad network is that if you really believe you can add value by being an expert in your vertical, then you believe each vertical ad network should be different," he says. Categories with very long tails, like travel, may need more of a network model, while auto, with far fewer sites, favors a rep firm approach. "The amount of fragmentation in a vertical determines the structure best suited to the vertical," Lawson says.

But a lot of it will come down to sheer scale and who can push enough revenue downstream to support the content. Is there really enough money in the ecosystem to finance so many niche players in so many verticals? The sustainability of long-tail content economics has not been proven entirely yet. Publishers generally are re-examining the ad network model. ESPN announced recently it would stop selling remnant inventory through networks because the process tarnished the brand and undermined overall ad pricing. Similarly, Martha Stewart Living Omnimedia's media director Wenda Harris Millard famously warned against commoditizing online advertising into a "pork bellies" market through exchanges and remnant networks. Silicon Alley Insider analyst Hank Williams specifically took the new verticals to task as possible "pyramid schemes" where the network operator and perhaps a few marquee publishers at the top get the lion's share of revenue, with little going to that long tail. Jumpstart CEO Lowe admits that the model is not for every vertical. "To do ad operations correctly, you need to be a $25 million-plus business," he says. "There needs to be enough inventory and the right CPMs." Like many in the industry he predicts there will be a necessary shakeout and consolidation, because most categories only can support one or two major players. And as the larger networks suffer criticism over lack of transparency or performance for publishers, the new models have to distinguish themselves from the old. "Verticals have to make the case for themselves as a solution, not a part of the problem," says Robert Kadar, CEO of Good Health Advertising.

Depends on What You Mean by Vertical

In the context of an ad network, "vertical" is being crafted in many ways, further confusing the relative worth of the newer network ventures.

For some projects, it is a tight collection of 20 sites that are carefully managed and enhanced by the network manager. But others, like Forbes.com and MSNBC, boast hundreds of sites. Some networks are just glorified rep firms, Griffing says, and others are lead generators, while others are exchanges and massive nets that broker inventory. "Regardless of how you define it, there are so many networks I don't think anyone knows what a network is anymore," she says.

Policing the content or even guaranteeing placements across such vast aggregation becomes an issue for some buyers. The gamer network Intergi, for instance, serves 9 billion impressions over 500 properties. In this case, the vertical itself has split into 20 "channels" serving different game consoles and demos. At Glam, some of the process needs to be automated. Swanson says that while the company is not "blindly adding sites ... we do believe in the long tail and the mid-tail. We have a technology that audits sites for quality and for ad placement." But when it comes to vast aggregations of content, says JupiterResearch analyst Emily Riley, simply being more transparent than a general ad network doesn't assure quality. "Advertisers must be wary of the content that lurks below the flagship Web sites and be sure there is still value on those secondary sites," she says.

Whatever the problems with oversaturation and achieving scale, the vertical ad network model maps well against the flow of both eyeballs to the niches and money to more targeted strategies with demonstrable roi. In a down economy, clients have been moving their budgets into media that has clear impact. "Now it is all about motivating consumers to an action," says Townsend, and the hope is that such activity tends to happen closer to the passion points that niche media touch. For Ford campaigns online, Kay agrees. "We are taking dollars that could have been for branding now for more targeted placements."

Ultimately, most observers believe only one or two networks will survive in any given category because buyers need to narrow their consideration sets. Townsend sees few contenders against the Travel Ad Network in his category, for instance, and Kay relies mainly on Jumpstart to find the longer tail for his Ford brands. Griffing urges the fledglings in the market to keep their pricing reasonable and to work on execution and publisher development. "Work with sites to do investment, which is a bitch for an ad network," she says. "But it will pay off because that impression will be more valuable. Most ad networks will not take the time to do that."

The shakeout will inevitably come, but perhaps only after these scores (even hundreds) of new vertical nets come to market. Only then will we see the degree of overlap among them, the amount of bandwidth buyers will have for them, and if there really is enough revenue around to support the content. And the market in reaggregating eyeballs can only verticalize so much and so finely before it starts replicating the problem rather than offering the solution. "If the networks grow as fragmented as the media they represent, then there is no value to offer," warns Lawson. "You are just fragmenting the aggregators."