Owned in part by Yahoo, the upstart wants to transform the way display ads are bought and sold online. It's a tall order
Right Media had hardly moved into its new, bigger Park Avenue office in February before Chief Executive Michael Walrath began thinking about sledgehammering down walls to make more space. Sure, the place was bigger than Right Media's old digs. But Walrath expects business to triple in 2007, and if he's right, some office walls won't last the year.
In the six months before the move, Right Media's staff swelled by around 50% as revenue surged 81%. A catalyst for that growth was Yahoo! (YHOO), the Web portal and search engine that in October bought a 20% stake in Right Media for $45 million. Suddenly, analysts, advertisers, and Internet publishers wanted to know about Right Media and the ad-auction platform it launched in 2005. "I think what Yahoo did is it sort of broadly notified the market that this was real," Walrath says.
Walrath got the chance to show how real on Mar. 1, when he held Right Media's first-ever "analyst day," playing host to some 40 analysts from New York's biggest banks and research firms. The question on many minds, Walrath concedes, was how Right Media would affect Yahoo's bottom line. But the point Walrath wanted to make: Right Media is about more than Yahoo. He reckons the startup could one day hold its own alongside not only Yahoo but Google (GOOG) and other Web media giants as well.
For now, the company is still trying to explain what it's about. Right Media specializes in display, or graphical, ads that appear at fixed locations on Web pages—in contrast to, say, the text ads that turn up alongside Web search results and have transformed Google into an online media titan. Right Media helps match display advertisers with Web-site publishers, and it hopes to do for display ads what Google has done for search ads. It's an idea Walrath began exploring while working as director of direct marketing and senior vice-president of strategy and development at DoubleClick, the maker of online-advertising and media-management tools.
Yahoo and others tap Right Media to help place ads on the swiftly multiplying number of pages generated by users, as well as any other so-called nonpremium pages, or those that lack content about a specific subject, such as finance (see BusinessWeek.com, 10/17/06, "Yahoo's Project Panama Back on Track"). But there's still a lot of potential that goes untapped, Walrath says. "We hear people say, 'What you're doing, this is reinventing-an-industry-type stuff. You guys are too young to do this,'" says Walrath, 31. "But it doesn't feel that way to us."
Right Media is trying to reinvent the way display ads are bought and sold. Online media companies, publishers, and advertisers aren't getting the best value from deals because they typically negotiate in a closed system without much information about what others are willing to pay and why. For instance, some advertisers may shy away from placing ads on News Corp.'s (NWS) MySpace for lack of information on the user-generated pages where the message may be published.
The Case for Growth
So Right Media runs an open auction system where marketers can learn more about the available space and, through participating ad-targeting companies, the Web surfers who may be viewing their ads—and then bid for that space on the fly. The greater transparency widens the pool of would-be buyers, often resulting in higher prices for the sellers and a more successfully targeted ad for the marketer, Walrath says.
Walrath made his case to a packed room that included analysts from CIBC (CM) World Markets and Forrester Research (FORR). According to CIBC, which began covering online ad services last month, ad networks and exchanges such as Right Media generated $4.3 billion in U.S. sales in 2006. It expects the industry to grow an average of 15% a year for the next four years. Fueling the growth, in part, will be increased demand for auction-based markets, CIBC analyst Paul Keung wrote in a Feb. 13 report.
As robust as that demand may be, Right Media has a long way to go before it can be compared to Google. Currently, Right Media's platform reflects only a fraction of the online display ad market—it would have to encompass a much greater slice before it's in the Google league.
To succeed, Right Media needs to convince resistant publishers and advertisers that display ads could be a commodity traded like a stock. For some, this would be a hard sell. Big publishers and advertisers may prefer selling ads and space through staff members' existing relationships. After all, it's through those relationships that they negotiate deals unavailable to the market at large.
Second, many advertisers prefer working with a smaller network of trusted companies. Dave Morgan, founder and co-chairman of behavioral targeting advertising network Tacoda, knows this well. Morgan says advertisers often only want to bid on sites that have brands they feel will lend positive associations to their products. They don't want to appear on user-generated sites or branded sites without known content, he says.
Publishers have the same reservations. They want to sell their space only to buyers that can promise an ad won't offend a site's audience. "Traditional media has a pretty significant process to vet advertising. Condé Nast isn't going to put just any ad in their book," says Morgan. "It's the same thing on the Web."
Right Media has tools that let publishers see the ad content that would go on a site, refuse certain ads or companies, and set the "rating" of allowed ads. For example, a publication could say it only wants family-appropriate ads. And advertisers can choose, down to a pretty detailed level, what sites they bid on.
However, the system isn't perfect. In the past, Right Media and other ad networks had clients that slipped spyware into ads after the original spyware-free ad had been approved. In August, the company launched a Media Guard program to better detect when unauthorized changes were made to ads and ensure ads were clean of covert coding.
Despite reasons for resistance, many think the advertising market will eventually move to an open exchange. "A day will come when we truly have a transparent marketplace," says CIBC's Keung. "The hard question is when."
Other ad networks are also vying to be the one-stop shop where users exchange display ads and online real estate. ValueClick (VCLK), one of the largest ad networks, has ad-serving tools and a network of sites offering display advertising spots that it says reaches more than two-thirds of all U.S. Internet users (see BusinessWeek.com, 11/2/06, "ValueClick Vaults Higher").
AdECN may pose an even larger threat. Like Right Media, the company is an auction-based exchange for online display advertising that allows users to bid on a cost-per-impression, per-click, and per-action basis. The company, based in California, announced a partnership with 10 online ad networks in Britain last month.
The biggest challenge, however, may come from the tech titans. This month, eBay (EBAY) began testing an ad-auction service that will allow bidding on television spots via the Internet. If it takes off, eBay might decide to expand its ad-auction reach elsewhere.
Similarly, Google could take its ad-auction platform for search results and step more aggressively into nonpremium display territory, leveraging the information it has about users and the Web to add value for advertisers. Walrath certainly sees the Google threat. "They're definitely No. 1 when we think of who our long-term competitor is," he says.
Right Media thinks it can scale those obstacles. If it does, Walrath could see Right Media serving as the exchange for other forms of advertising, such as print, radio, and television ads. However, that's all blue-sky stuff at the moment. First, Right Media has to attract more of the big online ad sellers and buyers to its network—and keep showing the growth that warrants knocking down office walls.