Ad Serving on the Digital Frontier

Abhishek Uppal, Piper Jaffray Investment Banking; Reference to The User Revolution)

Trends In Ad Serving Sector:
Move Toward Integrated Platform
Video Ad Serving Gaining Traction
New Interactive Forms Of Ad Serving
Optimization Technologies Increasingly Important

Move toward Integrated Platform
Advertisers and publishers are increasingly looking at tools that can provide a single platform across their various online marketing efforts. For the advertiser, this may include an integrated platform for display ads, search engine marketing, and Web analytics. For example, Atlas found that an advertiser can achieve improved search conversions if the consumer is exposed to a display ad. A key driver of the move to an integrated platform for advertisers is the desire for an advertiser to attribute a conversion to the correct marketing method and understand which marketing method or combination is driving a specific result. Similarly, publishers want to be able to integrate analytics, yield management, and behavioural targeting into one platform.

Video Ad Serving Gaining Traction
With the increasing penetration of broadband in the United States, video downloads and streaming video consumption are mainstream. According to comScore, 64% of U.S. Internet users watched video streams in August 2008. While video downloads increased significantly over the last year, video advertising appears very promising, and we believe video ads will represent a significant amount of display advertising in the years to come. Many agencies and advertisers expect 2010 to be a breakout year for video advertising.

New Interactive Forms of Ad Serving
We are at the beginning phase of ad delivery to alternative channels, including on-demand TV, cell phones, portable media devices, or in-game advertising. These devices and channels could be the next big wave of interactive advertising along with video, and it will be critical for technology companies to have solutions available when these channels begin to show increased adoption. aQuantive invested in an On Demand ad serving solution, but do not expect this to generate significant revenues anytime soon.

Optimization Technologies
Advertisers and publishers are placing increasing emphasis on optimization technologies. For the advertiser, optimization technologies offer the potential for higher conversion rates and ROI. For the publishers, increased optimization can drive higher CPM rates and, thus, revenues. A basic form of optimization is creative optimization, where the advertiser tests and optimizes different creative ads to see which ad or set of ads generates the best results.

Ad Serving Market Size
The global online ad serving market was approximately $350 million in 2008, representing approximately 30% year-over-year growth, with approximately 50% from the advertiser side and 50% from the publisher side.

Market Players
DoubleClick and 24/7 Real Media on the publisher side, and DoubleClick and Atlas (owned by aQuantive) on the advertiser side, dominate the ad serving market. Other key players include Falk (owned by DoubleClick), Mediaplex (owned by ValueClick), and Accipiter (recently acquired by aQuantive). Key video ad serving players include Eyeblaster, Pointroll, and Motif/Klipmart (owned by DoubleClick).

How Ad Serving Works
Ad Serving refers to the technology that places ads on Websites. Ad serving technology vendors provide the software (license or hosted), which enables an advertiser/agency to place ads, and enables the Web publisher to receive ads. Additionally, many ad serving companies also provide advertising tools to help publishers and advertisers automate the advertising process.

Publisher Side Ad Serving
For the Website or publisher, ad serving technology is essentially a rules-based system that attempts to optimize the ads that run across the Website in order to maximize revenues for the publisher. These rules could include time of day, the location of the user, whether the user is a new or previous customer, as well as more complex analysis including behavioural analysis and conversion tracking. Ad serving technologies for publishers typically include inventory management/forecasting, targeting capabilities, and reporting and analysis tools.

Advertiser Side Ad Serving
For advertisers, ad serving tools enable the advertisers to 1) plan the campaign; 2) execute the campaign (deliver the ads); and 3) analyze the results and optimize the campaign. Ad serving tools for advertisers typically include planning, trafficking, ad serving, tracking, reporting, and analytics. aQuantive¡¯s Atlas Suite of solutions provides campaign planning, media buying, creative management, message delivery, and data collection, as well as analysis and optimization across a variety of inventory formats (Web media, rich media, search, Website).

Pricing
Pricing for ad serving can vary widely depending on a number of factors including the volumes delivered and the robustness of the ad serving platform (i.e., amount of analytics, forecasting tools). The basic display ad pricing is in the $0.05-$0.15 range, and pricing for rich media ad serving is in the $1-$2 range. While prices will likely continue to decline, pricing declines have moderated, and in fact a higher mix of rich media ad serving is likely increasing the overall CPM rates.