• by Kory Kredit , May 9, 2008

In the movie "You've Got Mail," Joe Fox (Tom Hanks) is an executive with the fictional FoxBooks bookstore chain. Its mission is to dominate the market and make the local neighborhood bookstore -- in this case, The Shop Around the Corner, owned by Kathleen Kelly (Meg Ryan) -- obsolete.

Aside from the sappy love story (OK, who didn't smile when Joe's dog came running over the bridge in the last scene and you knew they would finally get together?), one of the side plots involved the battle between the mom-and pop-stores vs. corporate America. Depending on your perspective, there were pros and cons to both business models. (For the record, I tried to come up with an analogy from a more testosterone-driven movie like "Gladiators" or "Braveheart," but it was just too much of stretch -- even for someone in marketing who should be able to put a spin on anything).

Kathleen's Shop Around the Corner provided a personal touch, a trusted relationship and a depth of knowledge on children's books that can't be matched by the 19-year-old clerk with the logo'd polo and khaki pants over at FoxBooks. But the larger store offered a much larger selection of books, a wider variety of products, a nicer locale and really comfy chairs.

This storyline is certainly not a new one, and it plays itself out in every line of business as companies compete for market share. Whether the method is driving competitors out of business or acquiring them, the result is the same: less competition.

Over the past year, we've been watching a similar storyline playing out in the online ad network space. During that time, we have seen a number of small to medium-sized networks gobbled in the rush to gain market share and dominance in the lucrative online advertising world.

Here's a brief list of some of the more notable acquisitions:

Tacoda purchased by AOL

BlueLithium aquired by Yahoo

aQuantive swallowed up by Microsoft

DoubleClick assimilated into the mother ship (Google)

Adify under the new ownership of Cox

With the skyrocketing purchase prices and hyper-competitive nature of this industry, it would seem that the acquisition frenzy would continue into the foreseeable future. In fact, investment bank Petsky Prunier reports over 193 M&A transaction totaling $11.4 billion for the Marketing, Advertising and Digital Media Industries in the first quarter 2008 alone. To further the point, a recent article from The New York Times looks at the next wave of consolidations that may be on the horizon.

This leads us to the big question: Is all of this consolidation good for the industry - and, more specifically, for publishers?

Let's examine some of the pros and cons of ad network consolidation, as well as the rise of the ad network giants.

Pros:

With a smaller universe of networks to work with, it is easier to evaluate the competitive landscape and understand the strengths, weaknesses, capabilities and specialties of each of the larger networks.

Larger networks provide broader reach for advertisers and offer publishers access to a greater selection of advertisers.

The combined technologies/services from consolidated networks offer more one-stop solutions for publishers (i.e. the behavioral targeting technology that BlueLithium brought to Yahoo)

If the solutions and greater reach offered by large networks make it easier for advertisers to set up their campaigns, publishers ultimately benefit because they have a larger pool of advertisers to run on their sites, which can target their specific audience.

Cons:

Too few players in the ad network space can have a negative effect on the overall competitive climate of the industry.

Larger networks typically dictate the rules by which we all have to abide. Their business models are built on the efficiency of scale, not necessarily the ability to meet the needs of a wide variety of clients with unique needs and requests.

While large networks cater to the needs of larger clients, small- and medium-sized businesses can be forced into a self-service model that lacks the one-to-one customer service, and even handholding, that many of them need to be successful online.

Potential conflicts of interest exist as larger media companies acquire ad networks. If you operate a Web site for a Comcast property, for example, would you want an ad network owned by Cox to control your online advertising?

Fewer choices and decreased competition can lead to less innovation and unfavorable business terms for advertisers and publishers, particularly small and medium-sized business with little market leverage.

Regardless of which side of the fence you fall on this issue, I think we would all agree that there is obviously a need for both large and small networks to meet the wide range of needs from a vast array of publishers and advertisers. Even in this climate of consolidation, we continue to see new networks sprout up as quickly as others are gobbled up, so there seems to be no need to fear that the innovation and competition spurred by the entrepreneurial spirit is in danger of fading away... yet.

I'd like to hear from you on this subject. How do you feel about ad network consolidation? Is it good for the industry as a whole, or is it just good for the investors who are cashing in on the land rush?