Lehman Research Looks to the Future of Online Advertising
In its latest equity research report, the investment bank Lehman Brothers has identified “what is becoming an increasingly important component of the online advertising value chain – vertical advertising networks.”
The independently-commissioned report, written by Lehman Brothers Senior Research Analyst Douglas Anmuth, views vertical ad networks as “a natural evolution driven by the fragmentation of the Internet”. The change, according to Anmuth, is being motivated by growing advertiser demand for specific audiences rather than mass reach. Because advertisers are willing to pay a premium to reach these specific audiences, Anmuth predicts that vertical ad networks “are well positioned to take a larger share of the online advertising market.”
Supporting this prediction are recent statistical trends. Anmuth notes that, during 2007, the vertical category grew by 43% to reach a 39% share of overall advertiser billings. Contrastingly, the portal category’s growth was negative, slipping 5% to end at a 19% share of overall advertiser billings.
Why are portals losing market share to verticals? The reason has to do with media fragmentation, and the challenge that it presents for advertisers.
Website visitors’ level of engagement with online content tends to be stronger when they are visiting smaller “long tail” sites and blogs, rather than when they are visiting large portals. This is evidenced in the below graph from eMarketer, which uses interaction rate (the total number of unique interactions per impression divided by the total ad impressions) to measure engagement.
This higher engagement is likely due to the specificity and uniqueness of content that long tail sites provide: only they meet the insatiable hunger for niche content that characterizes the Web’s most passionate users.
The challenge for advertisers lies with the sheer number of long tail sites, and the difficulty in reaching their widely-dispersed visitors. As noted in the Lehman Brothers study, advertisers are increasingly recognizing that vertical ad networks provide a convenient means to reach these highly-engaged individuals. The value of verticals is especially compelling for traditional brand advertisers, who, notes Douglas Anmuth, “have a greater sensitivity about the placement and context in which their ads appear”.
The Lehman Brothers study also describes the emergence of “white label” network management solutions:
These “white label” solutions make it easier for a leading category publisher, such as Forbes in finance, or Martha Stewart in home and living, to launch a vertical ad network without significantly investing in technology. They also enable the main publishers to focus on the advertising relationships without having to build and maintain the technology to handle the ad-serving, yield management, and the analytic tools. Forbes and Martha’s Circle are using Adify’s vertical ad network solution for their vertical networks.
Anmuth’s recognition of Adify as the leading white label provider in the vertical space is furthered by the fact that over 100 vertical ad networks currently run on the Adify platform. The Lehman Brothers study bodes well for advertisers, networks and publishers who have aligned their strategies with this emerging trend.