Ad Networks: The New Pyramid Scheme

It has come to our attention that these days, *everyone* is starting an ad network – a service to sell ads on behalf of a collection of websites. By everyone, we mean, primarily media companies who have websites they are already selling ads on.

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. Certainly, big media companies did not set up divisions to sell for small new startups. Most importantly, big media companies made lots of money on their own properties, and though it was a tough business, a decent, relatively small magazine could find sufficient advertising to support itself.

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 indeed analogous to a modern day pyramid scheme. Not that I am saying they are doing anything illegal, which true pyramid schemes are. 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; most generating a monthly pittance.

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. They don’t need for *anybody* else to make money. The media companies are deciding that if you want to make money, being the guy selling the ads seems like a better bet than being the guy trying to generate the page views to support the ads.

Of course now with everyone starting an ad network, the increased competition will certainly reduce and perhaps eliminate the profitability of the ad networks. 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.

In short, too much supply and not enough demand is just not a good thing – no matter where you are in the food chain. Oh yeah, that doesn’t count for Google.