2010 is likely to go down as the Year of the Audience in online display advertising as marketers, looking for better returns from their investments in a challenging economy, are turning to search advertising’s strengths to help reach specific individuals across the internet. Search is the largest, and continues to be the fastest growing, segment of the $20 billion online advertising market in the U.S. because it brings advertisers results.

The move toward delivering ad impressions on a unique visitor basis across disparate websites is an effort to improve the results of display advertising campaigns by leveraging what makes search advertising so effective- matching web users’ displayed interests and intentions with an advertiser’s defined audience.

This trend in data-driven ad targeting, which is expected to be the primary growth driver for display advertising going forward, has given birth to a number of new intermediaries in the online display advertising ecosystem:
As one can see, depending on an advertiser’s needs and requirements, there are many components to delivering ad impressions to targeted audiences. The new companies that have launched to fulfill the roles of these new intermediaries, especially around data, are capturing most of the additional value being created in the ecosystem. With so many new entrants competing for a piece of the display advertising pie who are the winners going to be?

Before answering this question, it’s worth defining what data is actually being captured and how it’s being leveraged by intermediaries on behalf of advertisers. When someone performs a search query through a search box on a browser or through a website the URL associated with the results page will contain the keywords used in the search request.

When the searcher clicks on any link on the results page, this URL string is passed to the destination website along with the user. While the keyword data is being captured by the web publisher, social tool services, such as commenting and sharing services, can also gain access to this data if their service requires JavaScript implemented on the web page. Marketers, through various demand side intermediaries can reach this searcher by having the intermediary place a cookie on that individual’s computer once they land on the publisher’s site to identify that person when they visit a different website where the advertiser has the ability to serve a banner ad based on the interest the user has shown through their search activity.

Here’s an example of how it would work. Johnny searches for “cell phone” on Google.com and clicks on a link on the result page that sends him to Engadget.com, where a cookie is placed on Johnny’s computer by Invite Media on behalf of AT&T’s agency. When Johnny visits Yahoo.com, a website through which the agency has the ability to buy inventory via Invite Media, he sees an ad from AT&T for a cell phone.

Because audience targeting revolves around intent-oriented data, the intermediaries that have arisen within the ecosystem to fill various data needs are going to experience the greatest consolidation as some of the services being provided morph into one another or become more standardized across other demand side intermediaries. Anticipating and addressing the needs of this evolving marketplace will be the only way for companies to survive and prosper.

Stand-alone data selling is not a viable business.

While selling intent-oriented data to online display advertising intermediaries can be a low-effort revenue stream, it’s an ancillary business even for the largest data providers. As more web publishers and social tool providers begin to offer advertisers access to user search data, that data starts to become commoditized as advertisers and their intermediaries have more partners to choose from to create their audiences. Automation around identifying data from appropriate partners and delivering audiences for campaigns will only hasten the commoditization of keyword data. Google on the other hand, by keeping its search-related data proprietary rather than selling it to third-parties, has been able to determine the value of its data through the development of AdWords. Companies that sell their data to third-parties are allowing these parties to determine the value of the data to their own detriment.

Data exchanges must evolve or die.

Being a broker between data suppliers and intermediaries is a short-term business model. Because the whole notion of using intent data to target users is in its infancy, data exchanges have become an easy starting point for advertisers to find data to test display campaigns against. The problem is that as other intermediaries within the ecosystem get more experience and smarter about audience targeting, they will seek out direct relationships with the largest and most effective data providers, thus bypassing data exchanges all together. For data exchanges to survive they need to evolve to provide value-added services to their clients such as those being offered by Demand Side Platforms (DSPs) and Social Data Targeting companies.

Adding social data points will prove to be valuable.

While keyword data has the potential to become commoditized as previously explained, data culled from users commenting on articles and sharing links into Facebook and Twitter provides unique additional value to display advertisers. Continuing with the “cell phone” search example, if Johnny ends up on a web page after searching for “cell phone” and then shares a link to a positive article about the iPhone, the additional information associated with the link being shared (iPhone versus just cell phone) helps better define Johnny’s interest and provides a stronger signal of his purchase intent. Even though social data can provide a higher degree of confidence related to search intent, the data itself is not as structured as search data. As a result, being able to package the information effectively and make it actionable will be the key to success.

But can social data targeting companies find the holy grail?

A number of companies are exploring how to leverage social data, in combination with search data in many cases, to provide better conversion and larger audiences for targeted campaigns. While the approaches to finding the best algorithm might differ (Media6 Degrees looks for network neighbors while 33Across creates influencer social graphs and Lotame categorizes user activity on social networks), any sign of superior, and repeatable, results will quickly drive acquisitions of these companies by one of the GYMs (Google, Yahoo or Microsoft) to be leveraged internally or by their respective ad exchanges. DSPs looking to expand and enhance their platform offering could also be an acquirer, but would need to do so before valuations get to high.

Demand-side platforms’ dilemma.

The proliferation of DSPs is not without warrant as they hold the promise of tying together disparate ad exchanges and ad networks, as well as data providers, into a single interface to enable real-time bidding of online display inventory for targeting purposes by media buyers. The key to how this market evolves will depend on which companies will be the first to be acquired and which ones decide to make a go of it alone. The two most natural types of acquirers, GYMs and agency holding companies, each face their own potential challenges in purchasing one of the players in this space.

Agencies would benefit the most from owning one of these platforms, but are unlikely to pay the full or potential value that the venture-backers of these companies are looking for because any revenue being generated from competing agencies on these platforms would disappear upon acquisition by another agency. Even though Google is a likely acquirer at some point this year, they, along with Microsoft and Yahoo, risk alienating clients and partners of potential acquisition targets by bringing the neutrality provided by the DSP platform into question. Preferential treatment of intermediary services from the GYMs, such as ad exchanges that are integrated into the DSP, would destroy the platform’s business and partnerships. Companies such as AppNexus, Invite Media and MediaMath have the early client adoption and capitalization (i.e. they haven’t raised too much money) necessary to be likely acquisition candidates.

Because DSPs are already enabling data to be combined with inventory acquisition on their platforms, one or two of these companies have the potential to incorporate the capabilities of Data Exchanges as well as Social Data Targeting companies (the latter through acquisition) to create a more robust offering that simplifies the demand side of the display advertising equation. With its early success and strong management team, AppNexus could be the one to create a viable, stand-alone entity.

Revenge of the supply side.

The early days of data-driven targeting has enabled advertisers to find audiences across premium websites that charge higher CPMs for ad impressions and target those same individuals across ad networks and websites with cheaper advertising inventory. This has created an opportunity for inventory yield optimization companies to help bring back some of the revenue opportunity and CPM value being lost to the demand side platforms to their clients. This is likely to include the development of supply side exchanges, as suggested by Will price, CEO of Widgetbox, brining additional value to companies such as AdMeld, Rubicon Project and Yieldex at the expense of ad networks and ad exchanges.

As competing offerings begin to look and sound the same within and across intermediaries, analytics and transparency will be the keys to building a successful business. Analytics will not only need to serve as a dashboard for campaign results, but also provide insight into which aspects did or did not perform well and potential reasons as to why. With so many parties involved in every transaction, transparency will grow in importance from a trust and verifiability perspective as well as enable insights to be drawn from each aspect of the value chain.

Beyond this, determining the winners in the online display advertising ecosystem will be somewhat dependant on Google’s actions as they have made it apparent that display advertising is the company’s next growth opportunity. Google has not been afraid to pay top-dollar to acquire the pieces they need or build these services themselves, thus driving potential acquisition targets into the arms of Microsoft or Yahoo and leaving the rest of the competition out of the game.