We understand why startups are creating a new ad network every day: Investors are willing to fund them. But why are big media companies starting ad networks? Aren’t they busy selling ads for their own websites?
In the old days, when traditional media was strong and growing, being in the media business was a good thing. It was enough. Media properties had their own sales forces, and while there were ad networks (they were called rep firms) they really weren’t seen as strategic. Big media companies didn’t sell ads for small ones. But small ones, if they were lucky, could survive by selling their own.
But today, while anyone can start a Web media property, the likelihood that it will be profitable selling advertising is very very small. Everyone intuitively understands this, which is why everyone wants to be higher in the food chain.
Ad networks are the answer of the day. They are also basically pyramid schemes. Not that they’re illegal, like true pyramid schemes. But the key characteristic of a pyramid is that if you are the first guy in at the top of the food chain, you win. Being an ad network is like being at the top of the pyramid. No one else makes money but you and perhaps a few of your associates. Everyone else is just really a salesman for your network, and most generate a pittance for themselves.
The epitome of this is Google’s AdSense and AdWords platform. Google sells ads for an enormous number of websites, most of which make very little money. But for Google it’s all in the volume. The media companies are now trying the same thing: They’d rather be the guy selling the ad inventory than the guy making the ad inventory.
Alas, this won’t end well. Because the real problem is no matter how you slice it, there are just not enough advertisers to support all the stuff that we are putting on the web right now. Too much supply and not enough demand is just not a good thing — no matter where you are in the food chain. Unless you’re Google.
SAI Contributor Hank Williams is a New York-based entrepreneur. He recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet, where this post was originally published.
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