The Rubicon Project helps publishers make more money from their display advertising inventory by optimising their use of ad networks. Founded two years ago, the company already has more than 1,500 premium customers, optimises more than 40 billion ads each month and reaches more than 500 million unique internet users.

The company’s International Vice-President, Jay Stevens, (formerly MySpace’s VP of European operations), shared his thoughts about trends in display advertising, the growth of ad networks and what this means for publishers.

What types of advertisers are currently spending the most on ad networks? 

The fact that two out of every five pounds being spent on online display goes to advertising networks says a lot about the impending growth of the industry for third party sales channels of online inventory.

However, it’s becoming more obvious that brand advertisers are increasingly moving money toward display as an effective way to reach customers by audience segment and still hit a CPA target. As traditionally happens in recessionary periods, marketing budgets move from brand to more direct response and performance-based campaigns where the ROI is quantifiable.

In fact, some recent research from Nielsen Online actually saw the number of display campaigns growing by 11% in Q2 2009 against the same quarter last year, growth they attributed to the increased use of networks, cost per acquisition buys, and channel shift from TV to online.

The revenue streams which demonstrate strong ROI for the advertiser are easily the most robust: CPA and CPC-based buys, even brand buys with a CTR (click-through rate) target are popular during recessionary times and this is no different – as demonstrated by the growth of search spend starting in 2001.

What do you consider to be the most important challenges or threats facing the ad networks sector today, and why?

Ironically, publishers turning in the alternate direction and limiting, or entirely turning off third party sales channels, is perhaps the biggest threat to the sector. Not unlike the initial reactions from the studios to the invention of the VCR, online publishers are increasingly worried about the dilution of the value of their media and limiting the amount of channels that have access to their inventory.

However, this is the wrong approach. Increasing the number of demand sources is the most effective way to ensure that publishers get the most value for every impression delivered. It’s only now that managing the multiple channels properly is becoming a reality.

Another important threat not to be underestimated is legislation. Used properly, anonymous user data (profile and behavioural) is a critical component to adding value to online advertising. While some firms are clearly pushing the envelope with what’s acceptable, uninformed decisions by policy makers based on fear could significantly hamper the entire industry’s ability to innovate and expand, perhaps even causing it to retrench.

It’s been suggested that legislation is the biggest threat facing the sector today, not just for the ad networks, but for publishers as well. The ability to better-target adverts to specific audiences is the only real means of avoiding further rate card erosion.

It’s the responsibility of all of us in the digital media industry to better educate politicians on how we as an industry use and manage data so that potentially fatal policies are not made unilaterally and in a vacuum, both on a national and regional level.

What other market trends relating to online advertising are important?

Globally, we’re going to see an even greater supply of inventory and maximising the value of every impression is going to be of paramount importance. The converging trends of broadband saturation and the adoption of netbooks is going to bring millions of laggards online and continue to flood the market with available inventory.

This trend is going to force publishers to do a better job of understanding and selling their audience to deliver on the promise of serving the right impression, to the right person, at the right time. And the use of data is a foundational ingredient to making this happen.

As an aide, video is perhaps the most compelling new emergence in the market. As broadband becomes even more pervasive globally, (the UK is far ahead of most already), we’re going to see a lot of development in this area in particular.

How do you see the competitive landscape for this market evolving?

Contrary to popular belief, ad networks have not consolidated, in fact there are more than ever, and they will continue to grow, especially as publishers begin to create their own networks themselves and with the rise of vertically focused ad nets.

I really believe that there will be further fragmentation in the market, especially as publishers begin to build their own networks. Other vertical networks will also emerge, as we’ve seen developing in the US.

Technology like the Rubicon Project will become critical to maintaining easy access to aggregating all the advertising network opportunities and other sources of demand.

Where are the biggest opportunities for growth within this market?

Ad networks and ad network optimisation are primed for success. The boom in online advertising spend and advertising networks becoming increasingly prevalent and relevant to handle the influx of money and segments of traffic not typically handled by sales houses.

Share of plan is moving more and more to online advertising networks. In fact last year, 44% of display budgets went to third party channels such as these performance based outlets. This is happening largely because they have been the centres for innovation and driving most of the efficiency in the marketplace.

Unfortunately, this is happening at the expense of the publishers, who have historically lacked the tools necessary to deliver added value to their inventory, and are, in many ways, still selling the same way they have been for the last decade – even though the market has changed.

Effective channel management is the next phase in our maturity as an industry.

So is it fair to say that you see the biggest potential to lie with third parties optimising poorly performing ad inventory?

Yes. As various industry studies show, more and more of global internet ad business is shifting to intermediaries. In the UK the general trend of ad networks as third party sales houses will not be going away any time soon as we’re certainly not seeing a decrease in inventory capacity and publishers’ direct teams aren’t getting closer to selling out.

Non-guaranteed inventory, also known as ‘secondary premium’, offers one of the largest growth opportunities in the online display advertising market today, an estimated $15 billion in incremental value. Today, premium inventory is sold directly and non-premium inventory is bundled, infused with more value, and then sold by ad networks, though still at rates that make every publisher cringe.

But there’s a whole class of inventory in the middle that’s currently being undervalued and undersold, secondary premium, and research suggests that it could be worth billions of dollars in incremental revenue to publishers.

This is standard display ad inventory. It can come with some placement guarantees (i.e. the first few impressions per visit, a well-crafted above-the-fold unit, or a tightly targeted audience segment), and can be sold by the site’s direct sales team or through a premium ad network, exchange or audience sales representative. Publishers should be getting higher CPMs for these placements than they typically are.

Are there any other issues that you believe will be relevant over the next 12 months?

There’s a consensus that slashed marketing budgets and an ‘oversupply’ of inventory are the two main issues dragging down publisher CPMs. But I think a lack of sales channel management (including the fact that publishers are trying to sell all their non-premium inventory on their own), is another primary factor inhibiting sales growth. And as publishers wise up to the problem, we expect to see a flight to more advanced sales channels such as audience representation and audience extension programmes.

Secondary Premium inventory will continue to emerge as a higher-valued class of advertising inventory. Publishers who develop proper sales channels will be best poised to take advantage of the opportunities and monies that the middle of the spectrum brings.

As a final point, international traffic is another area of growth where money is being left on the table for publishers, especially those with strong global brand, the BBC, the Guardian, etc. Better governance models for advertising networks and rep firms enable publishers to effectively monetise all their inventory, not just in-country traffic but international traffic as well, an oft-ignored stream of revenue that goes largely undersold.

Publishers that can harness the new online inventory opportunities advertising networks bring, and work with them effectively as a formal sales channel, will see increased revenue growth and more stability for their online ad efforts.

I’m expecting to see publishers increasingly bringing in senior team members that liaise between sales and operations to handle channel management.