The partnership AOL, Yahoo and Microsoft announced last week to sell each other's "tier 2" display ad inventory could yield great benefits, but they need to pull off a complex integration of business and technology to make it work.
So while the promise of the alliance looks good on paper, making it a success will require careful execution from three companies that already are struggling to hold their ground in display advertising against Google and Facebook.
"It's one of those deals where the devil is in the details. We're now getting a lot of broad-level talk but not a lot of understanding of how this will manifest itself," said Michael Greene, a Forrester Research analyst. "I'm skeptical on whether this is a good move."
Yahoo, AOL and Microsoft will pool together display ad inventory that goes unsold by their direct sales teams and link their sales platforms so that they can offer each other's ads. The idea is to increase sales and margins for all three companies by making the process of buying and selling these tier 2 display ads simpler.
Google and Facebook have made successful inroads into the display advertising market, rattling AOL, Yahoo and Microsoft where they have historically been strong.
Yahoo led market just two years ago
EMarketer predicts that Facebook will top the U.S. display ad market in 2012 with 19.4 percent of revenue, followed by Yahoo and Google, both with around 12 percent, and Microsoft (4.8 percent) and AOL (3.9 percent) rounding out the top five.
Just two years ago, Yahoo led the field with almost 16 percent of display ad revenue, followed by Facebook with 7 percent, AOL with 6.4 percent, Microsoft with 4.6 percent and Google with 4.5 percent, according to eMarketer.
"While the effects of the partnership on ad pricing are hard to predict, it's clear that these three have a common need to boost revenue on their display ad inventory, and I think the potential upside of shoring up the market as a whole with their positioning as 'premium' offsets the risks," said Andrew Frank, a Gartner analyst, via email.
They will continue to independently and directly sell to marketers the pricier "tier 1" display ads whose placement and frequency are guaranteed.
By combining their tier 2 inventories, the companies expect to be able to automate the sale of these ads and offer marketers a better, broader ability to target specific market segments, like mothers who own dogs or football fans who live in Dallas.
Big brand advertisers have shied away from buying tier 2 ads through automated platforms because they aren't comfortable with the types of sites where their ads may run, which isn't an issue when buying guaranteed tier 1 ads.
The initiative sounds good to Nick Beil, an executive from VivaKi, a global buyer of ad space for large marketers. "We're very supportive of the fact that this is about bringing better-quality inventory into a dynamic marketplace where we can buy it through a technology platform in an automated way," he said.
Is it really "premium inventory"?
As president of VivaKi's Nerve Center, the company's research and development arm, Beil intends to link his unit's automated display-ad-trading desk, Audience On Demand, with the combined platform from AOL, Yahoo and Microsoft.
Although the three companies have consulted VivaKi about the project, Beil cautioned that success isn't guaranteed and that he still hasn't heard all the details.
"A question is the level of transparency we'll get into the inventory, which is a priority for us," he said. "We need to make sure that this is indeed premium inventory, as they say it is."
Other issues include technical integration details for a tool like VivaKi's Audience On Demand to plug into the combined AOL/Yahoo/Microsoft marketplace, and where AOL will surface its inventory, which hasn't yet been announced, he said.
Ultimately, the most important factor for success will be how well the ads perform for marketers, and that won't become clear until a quarter or so after the project goes live, Beil said.
John Montgomery, North America chief operating officer of GroupM Interaction, another large buyer of online ads for marketer clients, calls the project "a big idea."
"Execution is vital with anything like this. It's got to work better than the current solutions in order for it to pull significant business," he said.
The initiative has the potential to be operationally complex, and AOL, Yahoo and Microsoft have to make sure they make this manageable, he said.
"In these things, the devil is always in the details and how it's executed. It needs to work really well from the beginning," Montgomery said. Microsoft, Yahoo and AOL have also consulted GroupM about their project.
For Rebecca Lieb, an Altimeter Group analyst, the value for media buyers isn't clear, because they have increasingly more and more options for acquiring this type of ad inventory from "myriad" ad exchanges.
Integrated real-time bidding systems
"I'd like to see the value proposition to media buyers better explained. The benefit to the three portals is clear, but it's perhaps too one-sided once their customers are taken into consideration," she said via email.
If the alliance does release high-quality ad inventory into the marketplace, it could very well expand the practice of targeting specific audience segments, by attracting big brand marketers to it, Montgomery said.
"Brand marketers aren't taking advantage of programmable buying in scale because it's not perceived to be great inventory, nor safe," he said.
If successful, it's conceivable that these major brand advertisers would increase their digital advertising spending in order to participate in the AOL/Yahoo/Microsoft project, in addition to the money they spend on premium "tier one" display ads.
"If we have access to 'premium' unsold inventory it can be a very positive influence in the way we're buying media and it will accelerate the audience buying trend as it exists today," Montgomery said.
The deal is expected to go into effect in early 2012, once the companies have integrated their real-time bidding systems so they can tap into each other's ad networks - Yahoo Network Plus, AOL's Advertising.com and the Microsoft Media Network.
The project will also include ad inventory from third-party publishers that already participate in the Microsoft and Yahoo ad networks. It's not clear if third-party publishers associated with AOL will be included. An AOL representative didn't immediately respond to a request for comment.
For publishers that aren't part of Microsoft's ad network, Microsoft would structure deals on a case-by-case basis to include those who are interested in participating in the initiative. "Since the agreement is so fresh and won't be operational until next year, we haven't begun those discussions yet," a Microsoft spokesman said via email.