In general I really enjoy reading blogs written by venture capitalists. (probably just an occupational hazard) The two blogs I started reading with great intensity were Brad Feld and Fred Wilson. To this day, they remain the first sources I check everyday.

Lately Bijan Sabet’s blog has emerged as a contender for my favorite as well. (Not that the ‘favorite blog’ matters to anyone but me Anyway, yesterday he had a post that was very interesting - apparently he received a business plan that was a website created entirely in Wordpress.

I seriously doubt Matt Mullenweg ever anticipated this as a use case when he started working on wordpres. Yet, to me the variety of sites now using the content engine to drive their site is a great example of designing an excellent product for one simple problem (blogging.) Then getting out of the way so that users can solve their own problems with it.

This is the first in a series of posts I’m doing on the basics of online advertising. In this post, I’m focusing on online ad networks.

An ad network is an organizations which partners with other websites to sell inventory for them. They are leveraged by small websites who can’t yet justify hiring an sales force and larger publishers to augment the ads their salesforce sold directly.

Problem Ad Networks Solve

Advertising networks solve problems for both small websites that don’t yet have a salesforce and larger publishers who do. At a high-level, the problem being solved is the same for both groups: ad inventory is extremely perishable. If the inventory is not sold when the impression occurs, then the revenue is lost forever. For small websites the networks allow sites to begin monetizing their audience and web impressions long before the audience and number of impressions would be interesting to an advertiser directly. For larger publishers who already have a sales force and direct relationships with advertisers they allow publishers to deal with any perishable impressions which occur that they don’t currenly have an ad sold for. This can be due to a spike in traffic to the site (such as when a story reaches the homepage of Digg or Slashdot) or because of normal fluctuations in the ads sold.

How to Pick a Ad Network

If you are considering working with an ad network, there are a number of factors to consider including:

• Do you meet the qualifications to work with the network?
• Percentage of revenue the different options will share with your site
• How effective you perceive believe their ads will be

Do you meet the networks qualifications?

Like any type of partnership, both sides have to be interested in working together. Each of the ad networks has different criteria that a site must achieve before they will work with a site. These are typically based upon metrics about your site such as the number of page views and unique visitors your site receives in a month.

On a related point, you should also make sure that you don’t violate the terms and conditions of the network. For example, some networks don’t let you work with other networks at the same time.

Percentage of Revenue Shared

Interestingly, when a site is first starting out they are typically forced to take terms that are approximately a 50/50 revenue split. In one case, Google’s standard terms don’t even disclose what the revenue share is. From the Google AdSense FAQ:

Q: How much will I earn through this program?

…This means that advertisers pay either when users click on ads, or when the advertiser’s ad is shown on your site. You’ll receive a portion of the amount paid for either activity on your website. Although we don’t disclose the exact revenue share, our goal is to enable publishers to make as much or more than they could with other advertising networks…

However, as a site begins to generate significant revenue through the ad network you are able to apply leverage to get a much better deal. Obviously, when a publisher get’s large enough they can cut more advantageous deals, such as the AOL and Google alliance. However, for perspective both Google and Yahoo require significant traffic before being open to anything other than the standard deal. For example, the Yahoo! Strategic Partner Solutions requirements are:

If your site generates more than two million searches or 20 million page views monthly, you may be eligible for a customized program featuring a full range of Yahoo! products along with dedicated account management.

How Effective Do You Believe Their Ads Will Be

While the negotiations often quickly focus on the revenue share, it is important to keep in mind that you are sharing total revenue generated. To state the obvious, if one ad network can generate significantly more total revenue but shares a smaller percentage of that revenue, it may still end up generating more revenue for you.

Sometimes this is difficult to determine, because the advertisements may be sold more on a cost-per-some action basis rather than a pure cost-per-impression basis. For example, Google Adsense ads typically sold on a cost-per-click basis. In other words, the advertiser doesn’t pay unless a site visitor clicks on the ad. However, even in this case, it is possible to calculate an average CPM simply by multiplying the average Click-Through-Rate and the average Cost-Per-Click multiplied by 1000 (to get cost per thousand impressions.)

Process to Integrate Ads into Site

Integrating an ad network with your site can be done a number of different ways. For most small sites that don’t yet have an ad server and individuals selling ads directly for them, it is very easy to integrate. This typically just involves copying and pasting a small block of code into your site template.

At a later point, if a site is also selling ads directly, then the network will need to integrate with the site’s ad server. This is also typically straight-forward, but it should be pointed out with DoubleClick being acquired by Google it will be interesting to see how straight-forward it is to pull other networks ads into the DoubleClick server. DoubleClick’s DFP is the largest of the online ad servers.

Conclusion

Advertising networks serve a valuable function in the online publishing ecosystem. As more and more start-ups are founded with a business model of ‘monetizing eyeballs through advertising’ and more established publishers continue to focus on their online revenue, networks should only continue to gain significance.

I’ll continue this series soon, covering other topics around the basics of online advertising.

I was at the Web 2.0 Expo last week and wrote a post for Read/WriteWeb where I covered one of the panels on Open Source Business Models.

In many ways, this just is a continuation of my thoughts on how an open ethos can reinvent an industry.

I’ll be at the the web 2.0 expo next week in San Francisco. Please let me know if you’d like to get together.

You can reach me at 412.401.0037 (cell) or contact me via email at profitablesignals@gmail.com

About a week ago, I wrote a quick post for Read/WriteWeb analyzing the DoubleClick announcement of building an Ad Exchange and predicted a Yahoo/Microsoft/Google battle in the advertising exchange space.

While writing this up, I found myself looking for a good set of reference material to point to explaining how ad networks work and contrast that with an ad exchange. Unfortunately, I really couldn’t find any good online material. Therefore, I’m going to do a series of posts explaining (from my experience) how online advertising works.

As a starting point, some of the topics I’d like to cover include:

• Online Ad Networks
• Online Ad Servers
• Online Ad Targeting
• CPM vs CPC

Please give feedback on other topics you’d like to see me cover.

When I was at the SXSW BBQ, the sponsor of our event was AMD and specifically a great guy, Chris Aarons. His official title is something like “communications manager.” However, Chris describes his roll at AMD as the “Director of Coin Operated Marketing.”

It is an interesting way to describe all the digital & social media marketing that goes on today, because it highlights a business benefit instead of the tactical approach. I’ve been using this terminology with people who aren’t part of our industry since SXSW and it’s actually worked with great success.

What other terms have you found to work well to describe this space?

I mentioned a few months ago some research I’ve been collaborating with the Newspaper Association of America (NAA) focusing on “RSS Next and Best Practices for Newspapers.” They released the second phase of my research, which includes survey responses from 71 newspaper executives regarding their current and anticipated use of RSS within their publications. The survey found:

Newspaper digital media executives’ primary objective in syndicating content via RSS is to extend and grow their audience. That conclusion is based on a fall 2006 survey of 71 executives (out of 718 solicited). Other major conclusions:

• Most newspapers began syndicating their content via RSS over the last few years, but aren’t yet actively tracking the behavior of their RSS subscribers.
• Only a few newspapers consider their operations profi table right now. However, early adopters are beginning to explore including advertisements and sponsorships as additional sources of revenue.

The entire second-phase report with a breakdown of the responses is available here.

Note this is the second part of a two-part series. The first part is right here. In my first (very long) post, I reviewed a quick definition of an open ethos and looked at a few industries that had been reinvented. Now moving on to the second part, I’ll start by pointing out a few generalizations and then cover some industries that I believe are especially vulnerable to reinvention.

A few General Traits of an Open Ethos Organization

From reading and thinking about it (remember these are think out-loud posts), the traits all center around how an organization can be open or accessible to their customers. Specifically, here are things that should be obvious about the organization and it’s product …

• Transparent
• Extensible
• Accessible
• Thought Leader

Transparent

A user can understand exactly how the organization’s product or service works, in as much detail as they want. Obviously, for some levels of detail a user will need to have a sufficient level of expertise. For example, in regards to open source software a user may need to have a knowledge of the programming language the application was written in - but they can review the entire source. Another example of transparency, is the ability to audit the changes to a wiki page.

Extensible

The product of an organization can be copied and built upon at any point. Again, the easiest example is open source projects that build on other project such as Nutch being built on top of Lucene. Another good example, is companies opening their APIs to other services for new applications.

Accessible

While most organizations have merit based levels of access, the key concept is that anyone can interact with the organization and provide input. This is done a number of ways including: great customer support, easy access to roadmaps and schedules, and easy methods to provide feedback.

Thought Leader

This may be the least obvious, but it seems like for the other characteristics to work out resulting in order and not anarchy - there must be brand associated with the organization (whether the brand of the leader or the organization itself) that is trusted as a thought leader. In many cases, I think the brand and individual are indistinguishable (Linux and Linus Torvalds or Wikipedia and Jimmy Wales).

Vulnerable Industries

With that backdrop, here are some industries that seem vulnerable to me.

• Online Advertising
• Science
• Mobile Phone Industry
• Music Distribution
• Others ??? (let me know in the comments if there are others that jump to mind) …

Online Advertising

Most of the advertising networks take forty-plus percent of the revenue from advertisers. Historically, this made sense when there were sales and business development activities necessary to build these networks. However, for a lot of the “long-tail” the self-service model has reduced the amount of effort necessary for both recruiting advertisers and publishers. Yet, Google & Yahoo have proven the self-service model works for online advertising.

In addition to networks, I also think the ad serving space is very vulnerable. Interestingly, there has been a lot of conversation online recently about Double Click being acquired by Microsoft or Google. In my opinion, this is a really bad idea! The ad serving market needs to be reinvented by a competitor with an open ethos. If I were either Google or Microsoft, I’d wait for the other company to acquire Double-Click and then release a completely open and free advertising server.

Science

There is a really interesting paper reviewing the concept of the open source being applied to Biotechnology space. This seems very credible, but admittedly I don’t know a lot about the space that well.

Mobile Phone Industry

The mobile phone industry is dominated by just a few carriers who work hard to restrict access to their devices. Yet, customers want the ability to extend their phones in new and creative ways. In many ways, I think the explosion of buzz around Twitter is really just a symptom of users finally beginning to discover services for their mobile phone.

Music Distribution

Didn’t you see TechMeme … Apple & EMI have solved world hunger! In all seriousness, the music industry seems like it will certainly be reinvented in the next year.

Your Turn

What other industries are vulnerable to being reinvented?