Web advertising's master auctioneersJanuary 5, 2012: 12:38 PM ET
Upstart AppNexus holds its own with heavy hitters like Google in a booming field for online ads -- the real-time auction.
By Alex Konrad, reporter
FORTUNE -- When you visit just about any website these days, ads appear as the site loads. But what you can't see is that many of those ads were not predestined for your eyes -- advertisers won the spots in near-instantaneous auctions occurring in the quarter of a second between click and use of the site.
Real-time online advertising through such auctions is a rapidly growing business, and Google (GOOG) has made it a critical part of its advertising ecosystem. But the far smaller AppNexus has emerged as another leader by taking a page out of Google's playbook.
AppNexus is a product of CEO and co-founder Brian O'Kelley's goal of broadening the online ad exchange platform that he developed with Right Media (which he sold to Yahoo (YHOO) in 2007) to offer an open market that works across the gamut of software platforms that companies use to buy and sell online ads.
The ad exchange itself emerged to solve one of the major problems of online ad sales: much ad inventory (spaces where ads appear online) would go unsold as buyers and sellers couldn't always match up in time. The first step was for companies to aggregate their available ad across a swath of sites, says eMarketer analyst Lauren Fisher. From there, basic exchanges emerged, increasing the scale of ad sales, and real-time exchanges have become the latest turn of the wheel.
Google and AppNexus both plunged into that space but, unsurprisingly, their paths have not been so similar. O'Kelley recalls that when he was first seeking investors for AppNexus, Silicon Valley venture capital was largely steering clear of New York-based startups -- although the company would receive backing from "super angel" Ron Conway, Venrock, First Round Capital, and others. Google, on the other hand, had the resources to build from within, and has grown rapidly in the advertising space thanks to its extensive reach on the web and some aggressive acquisitions, from DoubleClick in 2007 to Admeld last year.
But ask members of the ad tech space about real-time ad exchanges, and you'll probably hear both companies mentioned in the same breath. For Google, the exchange is "one key piece of the puzzle" in producing an end-to-end advertising solution, according to Neal Mohan, vice president of display advertising. Google's exchange has grown 150% in the last year, Mohan says, with much of the sales from within its own network and clients of other ad managers like DoubleClick.
In online display ads, Google is everywhere -- and many small companies that compete with the search giant in one cross-section of the online ad world are themselves Google customers. Google's goal, Mohan says, is to cut out the friction between different ad technologies, making the process easier for everyone, even those sometime-competitors.
One company that is taking advantage of Google's "open" approach is MediaMath, which offers a platform catered to marketers who want to buy ad space, using several suppliers including Google and AppNexus. MediaMath CEO Joe Zawadzki says that AppNexus might be beating Google at its own open-platform game.
According to Zawadzki, companies such as MediaMath value the flexibility of AppNexus' open platform and the ease in which they can add their own additional software on top. At AppNexus, O'Kelley says such customization is part of the company's goal of creating an online ad infrastructure. The company recently launched an application marketplace through which companies can easily add functions to their AppNexus consoles and license out apps they build to other AppNexus clients. Those plug-ins improve functionality: a proprietary bidding system, for example, gives users performance metrics so they can refine how they bid on ad spaces; a yield management system, meanwhile, makes it easier for publishers to know when and how to sell their online ad space for the most profit.
Though Google's open stewardship has a fairly strong track record -- take its recent renewal of its search contract with Mozilla last month for Firefox, a rival to Google's Chrome browser -- O'Kelley sees the AppNexus applications as the easiest to use for the little guy, saving small companies prohibitive development costs without having to buy a different proprietary product for every step in the advertising process, as Google now has the clout to offer.
Not exactly a 'David' to Google's 'Goliath'
To be sure, AppNexus has gained some powerful partners (and clout) of its own. Microsoft (MSFT) uses AppNexus as its vehicle for ad bidding across all of its platforms, from MSN to the Xbox Live Marketplace. "AppNexus has taken a really interesting approach to this business," says Dennis Buchheim, general manager of scale display for Microsoft Advertising.
According to Buchheim, there were also competitive reasons why Microsoft didn't team up with Google instead ("that would have been interesting to say the least," he says with a laugh). But any rivalry between Redmond and Mountain View aside, AppNexus and Google remain cordial competitors. Google's Mohan notes that AppNexus is a regular buyer on the Google exchange, and the companies are on the same team when it comes to promoting growth for online advertising as a field.
According to Fisher at eMarketer, only 10% of online ad revenue comes through exchanges right now as many companies rely on traditional sales teams for their "premium" content, ads that companies are careful to associate only with certain sites and come at a higher price. Opening up more premium ads to real-time sales could be critical to the growth of the exchanges. Mohan at Google thinks the "premium" label should be abolished entirely, arguing that real-time exchanges are sophisticated enough now to take a company's ad placement concerns into account while letting the market determine an ad's value.
Such opportunity leads AppNexus investor Mike Tyrrell at Venrock to bullishly predict a day when 90% of online display ads are sold through exchanges. Fisher is skeptical, but she also foresees significant growth. Billions are at stake, with online advertising revenues up 22% year-to-year to almost $8 billion in the third quarter of 2011, according to a report by the Interactive Advertising Bureau and PwC.
"The online ad market is $25 billion globally today," Mohan says. "We think it can grow to $200 billion if its potential is realized." If Google and AppNexus can bring a growing percentage of that pot through the ad exchanges, there's more than enough room in the sandbox for two.