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Building Ad Networks

November 23, 2012

From AdZerk CEO James Avery

In 2007 I bought a fledgling ad network called The Lounge from the founder of that network. It had 10 publishers (including myself) and was only about 3-4 months old. I didn’t really know what I was getting myself into – but over the next 3 years I grew it from 10 publishers to over 4000 publishers and grew revenue many times over. In 2010 I sold The Lounge to The Code Project for over 20x what I paid for it. In 2008 I founded Ruby Row which today is still the premier ruby developer focused ad network and consistently turns a profit. While running both networks I developed the code that would lay the foundation for Adzerk – an ad platform built to run ad networks and wring the most profit out of running an ad network.

In this series I am going to cover everything I learned while running those networks. In this first part we are going to cover the motivation behind starting an ad network, the economics of running an ad network, and what the various choices you will have to make. In future parts to this series we will cover how to recruit your first publishers and managing publisher relationships, managing ad sales and how to best work with advertisers and your sales team. Then finally we will look at the process of valuing and selling an ad network.

Why start an ad network?

Ad networks provide a very valuable service to both publishers and advertisers. When running an ad network you are working for publishers to help them make more money from the hard work they have put into the content and tools they have created. You are also working for advertisers by giving them a venue to reach their target customer and to grow their business. This duality defines an ad network better than anything else – you are pulled in both directions as you try to delivery the maximum revenue to publishers while delivering the best value and results to advertisers.

Running an ad network can be a very rewarding business though, I love the publishers that make up the Ruby Row network. They write incredible articles and blog posts and I get to help make sure they are rewarded for that hard work. It really pays off when we have an advertiser whose product I believe in and I get to not only delivery money to the publishers but also know that it is helping a company that has created an awesome product.

Starting an ad network requires very little startup costs, and can be run as a bootstrapped long-term business or as a VC-funded company headed for an IPO. Let’s take a look at some of the successful ad networks out there today.

Ruby Row

I started Ruby Row back in 2008. It required no capital to get started, has been profitable from day 1, and continues to make money every month. Ruby Row is an example of a bootstrapped network that can consistently bring in revenue and continue to grow. Ruby Row will never be big enough to have multiple employees, take investment, or go public. This is one model for an ad network – a business that can supplement your other income and be run as a profitable company year after year.

The Deck

The Deck is the network that inspired dozens of other networks, including Ruby Row, Fusion AdsCarbon Ads, and many others.
The Deck is one of a number of businesses that Coudal Partners runs and is complementary to their other businesses as it gives them the perfect venue for promoting their other businesses (jewleboxing, fieldnotes, and layer tennis). Of course I can’t help but think their estimated monthly revenue of 250k+ a month is reason enough to run the network. You can read great interview with Jim Coudal about the motivation behind The Deckhere.

Indie Click

Indie Click was founded all the way back in 1996 when most of were just learning about the web and they have grown to a network of over 200 publisher and reaching over 50M unique viewers a month and billions of ad impressions a month. Indie Click in particular is very interesting to look at since they recently sold to Demand Media for $14 million dollars. Not a huge valuation that is going to thrill VCs – but for a bootstrapped company that has been profitably run for years it’s a great exit for the founders.

Federated Media

FM has raised over 50M in VC and represents some of the best sites on the web and billions of impressions a month. They aren’t alone in this mega network category, you have Glam Media and many others. This is an entirely different class of network and we won’t spend too much time on them in this series.

How does an ad network work?

Ad networks are a classic aggregator business. Ad networks don’t produce what they are selling (even though its not odd for a network to own some of the properties they represent). The job of an ad network is to aggregate advertising inventory and sell that inventory to advertisers. There are a number of methodologies to aggregating this inventory and this is what best defines the types of ad networks out there.

General Ad Network

These are the original ad networks. Advertising.com, 24/7 Real Media, AdSense, ValueClick. They aggregate publishers of just about any size and type. These networks then sell campaigns a couple of ways. The first is the standard Run of Network buy which means that a publisher will pay X cpm to run ads that can appear on any site. The only campaigns still run this way are the cheapest of the cheap campaigns (think dancing people selling you mortgage rates). Most campaigns target specific users on these networks using a number of methods. The first is behavioral targeting, you visited a site about buying cars so you must be interested in buying a car. The second is contextual targeting, made popular by adsense, which looks at the current page you are on and finds a relevant ad based on the content of that page. New ways of targeting users crop up every year – the latest trend is retargeting which lets companies target users who were previously on their site.

Vertical Ad Network

Vertical ad networks focus on a particular business vertical. Ruby Row, The Deck, IndieClick are all examples of vertical ad networks. These networks aggregate sites that have a similar focus – Ruby development in the case of Ruby Row, Web Design and Development in the case of The Deck, and the indie music scene when it comes to indieclick.

There are absolutely massive vertical ad networks like Glam Media (that focuses on fashion) and very small networks like Ruby Row and Land8 (focused on green building development).

Vertical ad networks are compelling because even though the ability to target users behaviorally gets better every year – there is still massive brand value in appearing on relevant sites that target your customer. You might be able to target ads to a Fly Fisherman while he reads the sports section of his local newspapers web-site – but that ad will never have the same value as when it appears on his favorite fly fishing blog.

Data/Performance Network

This group of network is a relatively new category and includes company like Halogen and arguably companies like adRoll and other retargeting companies. Many of these networks have a mix of publishers that they directly aggregate mixed with inventory that they buy off of the exchanges. They sell campaigns based purely on targeting of users through advanced techniques like retargeting and in many cases proprietary formulas that they can prove deliver value for advertisers.

How much can you make?

This is a tough question – so to answer it I have developed a simple ad network calculator. This calculator lets you set the number of impressions, how you pay publishers, how you will handle sales, and then see what you could bring in revenue and profit wise. Let’s say you have 25 million impressions a month and sell them for an average of $5 CPM. If you sold 100% of your inventory you would bring in $25,000 a month in revenue. If you paid your publishers based on a revenue share of 50%, your sales cost was 10%, and you paid 5c CPM for ad serving then you would add $9,000 to your bottom line.

Please take a chance to play with the calculator and give us your feedback – we really hope it is helpful.

What should I focus on?

There isn’t room in the market for a general ad network anymore – just like other startups you need to choose a differentiator that will make your network different.You could build a vertical ad network – you don’t have to be the first vertical ad network in the space (competition is good) but be ready for fierce competition with any other verticals in the same space. If you decide to go this route the best advice I can give you is to pick a vertical that you are passionate about and immersed in (it also helps if you run a site in the space).

Or you can come up with a key technology to differentiate what you do. You could focus on just a certain style of video ad, or pay-per-click ad, a new way to target users, or you could come up with a new creative type that promises to offer better results.

In the next post in this series I will dig into the various ways to find publishers, managing the publishers relationship, and starting an ad network with no publishers at all!

Read Part 2

Read Part 3

– Zorilla City

8/2011

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