I was recently told that you are either an ad agency with an ad network, or an ad network with a creative-like agency.  It makes sense: the agencies want a piece of the spend they control, and ad networks want to attract more dollars by offering deeper integration.

I think there are a couple of questions to explore here.  First, is it a conflict of interest for agency holding companies like WPP to own an ad network like 24/7 Real Media, or is it a more efficient way to move dollars through the system that ultimately passes more money to publishers?

For ad networks, I think the big question is if offering deep creative services scales, or does it raise the cost so high that it squeezes all of the margin from the sale?  My feeling is only a few ad networks will be able to offer the creative services, but it’s more likely sites with sales forces, like Pandora, will make it work as a business. Most other ad networks will be better served by looking for more efficient ways of bringing in ad dollars.

I had a minute to go through Google’s earnings and check out the TAC (Traffic Acquisition Cost).  The TAC decreased one point, which is a significant trend.  However, it may be decreasing because of growth in Google Owned and Operated businesses.

Here are some key stats from Barron’s Online.

• Google sites revenue rose 4% sequentially, and 22% year over year.
• Google network revenue was up 1% sequentially and 4% year over year.
• International revenue was 50% of total revenue, down from 51% in Q3, but up from 48% a year ago.
• Paid clicks increased 18% year over year, and 10% sequentially.
• TAC at 27% was down from 28% in Q3.
• Google had 20,222 employees at December 31, up just 99 from the previous month.
• At year-end, the company had $15.85 billion in cash.

One of the most interesting things is how much Google slowed its hiring—only 99 people for the quarter.  That number has historically grown at 13%.  Another area they seem to be pulling back on hard is capital expenses.  In Q4 of 2007 they spent nearly $700 million.  In Q4 of 2008, they spent $368 million.  They may be reaping the benefits of past investments, or the last two quarters are examples of how quick they can pull in the spending reins and a sign of future growth.

For most AdSense publishers, Google doesn’t disclose how much of the AdWords revenue they keep and share.  One thing I always look for in Google’s earnings announcement is their TAC (traffic acquisition cost) as a percent of their advertising revenues.  If the TAC percentage falls, it generally means that Google is keeping more revenue.

Yesterday, there was a piece in the Wall Street Journal  that depicted two stories on search revenues.  Efficient Frontier, a paid search management firm, pegged U.S. search revenues down 8% in Q4 in 2008 over the final quarter of 2007.  Other analysts are projecting double-digit search revenue growth in the 4th quarter for Google, specifically, and eMarketer, looking at the current year, has projected double-digit growth for 2009 at 14.9%.

If Efficient Frontier is right and search ad dollars are shinking, it’s highly likely that contextual ads will shrink as well.  Compound the shrinking ad spend with Google keeping a bigger share of its ad revenue and this could be a significant reduction in earnings for publishers.

If the TAC holds, and revenue growth is up, the decrease in earnings some publishers are seeing is more likely caused by the industry they cover.  For example, if your site focuses on financial, autos, or real estate segments, these areas have been hit particularly hard in the economic downturn we’ve all been experiencing, and that’s been particularly true for advertising in them (also mentioned by Platform-A’s Mike Peralta).

So, we’ll be watching Google’s earnings this Thursday for these two key indicators.

As any publisher knows, CPMs can move up and down.  While they are increasing, publishers are content, but when they go down, it can be very unsettling for publishers.  Today, there are few deals available for publishers at guaranteed rates while the overall online ad market is seeing some strong headwinds that are severely impacting CPMs.  In this post, we are going to provide some insight to why publishers may be seeing giant swings in CPMs and what they can do about it.

It’s hard to listen to the financial news without hearing the term liquidity.  There are two definitions of liquidity.  The first one refers to the ability of turning an asset into cash.  The other type of liquidity is defined by how much an asset can be bought or sold in a market without moving the price.  The more active buyers and sellers are in the market, the more liquidity, which helps keep prices stable.  If anyone buyer or seller leaves or enters the market, the price should remain stable in a liquid market.  Right now, I think the overall ad market is experiencing a liquidity crisis.  Advertisers are leaving the market in droves, destabilizing prices.  Once a decent campaign ends, there aren’t enough buyers ready to fill the inventory as it opens up.  The growing gap between active campaigns is causing the fluctuations in price.  In the current advertising market, larger ad networks with better liquidity will offer publishers more consistent payouts, while small ad networks are more likely to have large fluctuations in pricing with spotty buys.

What can publishers do?

First, publishers should consider establishing relationships with large horizontal ad networks like Google AdSense and Advertising.com.

Second, publishers should look at the fill rates of their smaller or specialty ad networks and consider decreasing the amount of inventory they are allocating to them while at the same time tightening up the frequency caps to one to two impressions per 24 hours.

Third, publishers should examine their international traffic and make sure that they have ad networks capable of filling the inventory.

We also recommend using prudent judgment when it comes to adding ad networks to your overall mix.  It’s unlikely that adding many additional ad networks will help stabilize earnings if publishers are already filling their inventory with reasonably frequency-capped runs.  Instead, it can add to the complexity of managing inventory and have an overall negative impact on earnings.

If you have been an AdSense Publisher you have probably seen your earnings, revenue per click and click through rate  fluctuate.  In the life of an AdSense publisher, this is pretty normal.

We operate a site called HubPages that has content on a wide range of topics and significant traffic.  It’s the diversity of content that makes HubPages a good barometer for changes in AdSense. It’s pretty rare to see big fluctuations across the site, but it does happen.  When we see these, they tend to be holistic changes to AdSense that affect most publishers.

If you have a vertical site or smaller site there are a few things to look at when you see big swings in AdSense earnings.

1. Did you change your ad sizes and positioning?  The number one factor we see with influencing AdSense performance is placement.  Placement of a single ad can change the performance by upwards (and downwards) of 40%.
2.  Did you make any recent changes to your channels?  For example, did you remove a channel.  If you change channels, it’s possible to lose site targeted buys.  Site buys can increase earnings and if you lose them, so go your earnings.
3. Understanding seasonality.  For example, movie sites can see big swings during the high movie time like Summer and Christmas.  When new movies are launched, it’s possible to see a big increase while a campaign runs for the launch and a corresponding decrease when the campaign is over.
4. Traffic pattern changes. Sometimes a site’s traffic pattern can change quickly and have an enoumous impact on AdSense earnings.  If you see a big increase in natural search traffic, we’ve seen that have a positive affect on CTRs and CPMs.  If you get a spike in traffic from a source like Yahoo Buzz, then you’ll most likely see CTRs and CPMs decrease because this type of traffic is much less likely to click on ads.  To diagnose this, it’s helpful if you are using analytics on your site and can run reports that show the percentage changes.
5. Did the quality of your site change?  Sometimes a site will add a significant number of low quality pages.  One of the things we have seen is that as the quality of the content decrease, CTRs increase.  We speculate that this happens because the AdSense ad is offering more value to the user reletive to the content.  There is a threshold where AdSense content ads are so much better than the content on the page that users will click at a much higher rate.  However, AdSense is pretty good at adjusting revenue per click when this happens.  So, it’s likely that you’ll see revenues drop.  Also, increasing the quality of your sites content can have a big impact on revenue per click because more advertisers will want to be on your site and drive your advertising rates up.

If you like to measure everything as much as we do, then you may have hit your 200 AdSense Channel limit.  Good news!  AdSense has increased the limit by 300.  That’s right.  Publishers can now use 500 channels.

Here are a few ideas of things you may want to track. First categories.  If your site has entertainment, technololgy, health and other topics, use AdSense channels for each category.  This will help you figure out if you should explore other ad networks for portions of your content.  If that’s not enough, then you may want to setup channels for country codes.  Get an IP database and set channels up for each country.  Ever wonder how much you earn on clicks from India vs the UK?  Now you can do it.

Channels is one of my favorite features of AdSense.  I bet we use the next 300 in a few weeks.

Let us know what you track with channels.

I believe if you ask Google and Microsoft what the biggest challenge they have with their advertising businesses, they would say, finding a scalable way to monetize the fastest growing segment of the internet.  Social Media.

CPMs have been dismal at best in the social media space.  However, I believe over time that social networks will evolve.  The communication layer will monetize similarly to hotmail.  But, the apps will become the verticals.  Like Autos, Dating and Movies (Flixster).  Essentially, social networks will become the next generation portal.  The verticals will provide opportunities for premium CPMs to endemic advertisers.

There are many companies working to figure this out.  Today, Appsavvy raised $3.1 million to go after this vertical strategy.  Best of luck to them.

In an effort to expand its reach along the online advertising inventory tail, AOL’s Platform-A, the largest ad network according to ComScore (with 171 billion uniques in July, and 90.4% reach), will be opening up its pool of advertisers to its self-service BidPlace platform, due in the first half of 2009.

With this move, Platform-A extends its display network to a wide swathe of publishers, and runs up against Google AdSense and AdBrite, both of which have given small advertisers the ability to target campaigns on their own. BidPlace will extend the demographic, psychographic, geographic and behavioral targeting platform currently available to Platform-A advertisers to BidPlace. Like with AdSense, BidPlace advertisers will be able to predict volume and spend based on their targeting strategy.

I just got back from attending Adweek’s MIXX Conference, which took place on Monday and Tuesday in New York. MIXX brings together marketers, publishers and agencies to discuss online media.  There was good conversation and some big ideas to chew on.

The first big thing to think about.  Awareness.  If there is a message that anyone cares about, they get it so fast from blogs that spending on building awareness is outdated.  Knowing the ten people to tell is king. The days of having to broadcast your message to all media outlets is gone; you just have to reach the most influential bloggers in your space, the bloggers everyone turns to. The message, if it’s important enough to them, will be disseminated to everyone that matters.

Big idea to chew on, number two (for publishers, ad networks, and just about anyone selling online ads): TV trumps online for ease. It takes too long to buy, run and manage an online campaign compared to TV—it’s much easier to spend a large amount of money on TV.  Google gave some data on the time it takes to spend a dollar on TV vs online.  For big money to move, it needs to be easy to spend the same or more in the same amount of time.  There is a big opportunity for scale and work-flow.

Big idea number three: creative ideas are plenty, but few can execute.  More money is going to high-end production of web content.  The hope is a viral hit with organic traffic.  There’s a big opportunity in ensuring that people show up to the party once it’s built.  

Which leads to big idea number 4: a sophisticated digital strategy has dependency on many platforms.  Take launching the new American Express Green Card (a made-up example).  The agency builds a sophisticated mini site with gorgeous video, and many interactive features. Some media needs to be purchased.  Hope to get the Yahoo home page.  Shit.  It’s sold.  Let’s see if MSN home page is available.  Really?  Damn.  OK, we’ll go with AOL.   PR folks embargo a release with bloggers.  Five secret clues are dropped.  Each one deciphered yields a number.  One person decides to send an SMS message to the number.  They get back a secret URL that expires in 15 minutes.  The bomb starts ticking.  The URL drops them on a video that is all black, with one message: “It’s coming!”, with a subtle American Express hologram in the letters. Someone clicks on the video and the message turns to a single pixel.  With each click a new pixel is added, until every pixel has been clicked.  It looks like…a jumbled puzzle.  Frantically the pieces are arranged.  Yes! Bono from U2.  In his instantly-recognizable Irish accent, he says that you and five friends are invited to a private concert for the first 20,000 people that signup for the American Express Green Business Card.  Everyone is going green.  Then you get three widgets to place anywhere you want with never-before-heard songs from U2—of course, the music videos are tastfully branded with American Express Green Card.  Plus…ringtones! Oh, and you get a limited edition Bono iPhone that plays video.  Sweet.  You show up to the concert and they want you to record the show to spread to all your friends.  But wait.  Steve Jobs walks out on the stage.  He pulls the iPhone from his pocket and types in the 5 numbers. There’s a live streaming feature that the code unlocks as well.  All your friends can go to the Apple site and watch the concert live as well.   And they can get the American Express Green Card which comes with a dollar donated to green causes for every dollar you spend on green products for your business at some of the coolest environmental retailers.  Ah, yes!  But the really cool part is the card is green.  Made from all recycled parts.  It never expires—so you don’t have to get a new card (that’s wasteful).  And your bills are all paperless.  A Facebook green community is launched that helps small businesses do their part.  Brought to you by you know who.  American Express sponsor Green Content Ideas on HubPages that pumps the Facebook app full of useful content.  Your smile widens. You get 2 million people to the website.  15 million people see the music vids.  Your database of SMS addresses has nearly 1 million. Solid gold.  20,000 people signup for the American Express Green Card in under a  minute.  Apple sells a bazillion new iPhones.  Live mobile video streaming takes off.  And the world is a better place.

The formula is simple, and yet complex.  Integrate a website, video, widgets, mobile, social apps and content into an immersive experience.  Collect emails, mobile numbers. Give as many exclusive items away as possible.  Creativity is easy.  Execution is priceless.

This last week several publishers were reporting that their AdSense channels weren’t reporting accurate data.  Google was a little quiet about it, but today on the AdSense blog, they said that all is well again.  We’ve experimented with channels a lot, so we understand how important this data is to publishers.  Glad it’s fixed.