The window is closing

In the ad network category, Avenue A | Razorfish’s spending continued to be consolidated with the biggest players, a trend that has been growing over the past two years. Our billings with ad networks grew 34% year over year, with nearly all of this increase in spending directed toward the top five networks. The top five saw an increase of more than 50% over 2006, while total billings for all other networks were flat. The top five ad networks, by spend, represented 49% of all Avenue A | Razorfish ad network billings in 2005. That jumped to 63% in 2006 and now to
71% in 2007.

Additionally, improved targeting solutions are allowing top networks to command higher CPMs; prices increased by 18% from 2006 on the top five ad networks.

Obviously the strong growth of ad networks caused the top online media players to take notice in 2007, with most making significant acquisitions: Yahoo! bought Right Media and Blue Lithium, Microsoft acquired DrivePM as part of its buyout of Avenue A | Razorfish parent aQuantive, and AOL purchased Tacoda and Quigo. These acquisitions are likely to lead to further concentration of budgets flowing to top-tier ad networks.

The question arises as to whether ad network acquisitions will continue into 2008. This was addressed in our 2008 Digital Outlook Report:

With spending on ad networks increasingly concentrated with the largest players, it will become increasingly difficult for small ad networks to break through. Ad network efficiency is largely a matter of matching the right advertiser to the right placement, and the likelihood of being able to do so increases as a network increases its ad inventory and number of advertisers. This means the largest players should be able to best monetize ad space for publishers (and provide the most relevant inventory for advertisers). The bigger and more efficient the large networks get, the more ad dollars will be directed to them. It will become more difficult for second-tier players to earn ad budgets, and therefore less necessary for the larger players to acquire them.

For the most part, the big players have the assets they need to compete. I don’t expect the same M&A activity in this space that we saw in 2007. The window isn’t yet closed, but there’s a creaking sound that is growing louder.