Will there be consolidation among the online ad networks? (FSTC, GOOG, MSFT, TWX, VCLK, YHOO)

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Includes: AABA, CNVR, FSTC, GOOG, MSFT, TWX
by: David Jackson

There's an interesting debate occuring about the online ad networks. Online Journalism Review summarized
the problems with Google's AdSense program and Yahoo's ContentMatch
program. Jason Calacanis, founder of blog network Weblogs Inc., admits that most of his ad revenue is from brand ads, but still argues that contextual ads have no downside. He then wrote:

"...there are 100-150 decently funded 3rd
party ad networks out there fighting it out for space on publishers
websites... AdBrite, Kanoodle, FastClick, Burst, Tribal Fusion, and
John’s new FM Media. These companies are all going to be part of Yahoo,
Google, or Microsoft in the next 6-24 months—or they will go out of
business. No doubt in my mind. It is too fragmented of a market to
support this many players. A publisher like us can manage five of these
relationships. Frankly, we would rather have two or three. On the other
side of the table advertisers can only deal with a dozen of these
companies as well. That spells one thing to me: massive consolidation."

Quick comment on contextual ads: AdSense accounts for a significant proportion of
Google's revenue and profits, so investors will want to understand the
pros and cons of contextual ads from the perspective of advertisers.

Quick comments on consolidation:
(1) There
are two publicly traded ad networks - Fastclick and Valueclick. (2)
Time Warner is also a player in this space, since AOL's acquisition of
Advertising.com. Also a potential consolidator? (3) While investors
usually view consolidation as positive for profitability and thus stock
prices, Calacanis' comments suggest that intense competition between
the ad networks will drive down profits until consolidation occurs. Net
negative for the publicly-traded Internet advertising stocks?

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