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Cutting Out Middleman to Sell Small Ads Online

Online publishers, who have long been dismayed with the revenue from some of their advertising, are increasingly taking matters into their own hands.

In the last month, CBS Interactive and Forbes.com have both created their own ad exchanges to directly sell the lower-priced ads called remnants that typically run at the bottom of their Web pages or on secondary pages. These are following similar efforts by NBC Universal, Weather.com and Turner Broadcasting Systems.

For publishers, setting up exchanges has several advantages: they cut out the middlemen (those third-party ad networks that often sell cheaper remnant ads for teeth-whitening or weight-loss products across a broad range of sites) and they allow the publishers greater control over consumer data.

“The publishers that are setting the ground rules right now are making higher C.P.M.’s,” said Michael Greene, an analyst at Forrester Research , referring to the cost per thousand impressions, a yardstick for the value of an ad. He estimates that publishers who switch to their own exchanges can increase the C.P.M. of such ads from around $1 to up to $5.

For years, many online publishers like newspapers, magazine companies and sites affiliated with television networks have sold the premium ads — like the large banners across the top of a Web page — themselves, then used third-party networks to sell the rest at a much lower price. The switch in tactics comes at a time when online publishers are feeling a little more flush with the broad upswing in advertising and perhaps less anxious about squeezing every penny out of remnant ads.

“There is significant value in branded data,” said Kevin Gentzel, the chief revenue officer at Forbes, which has not been selling through third-party networks. “A Forbes in-market car buyer has more value that just an in-market car buyer.”

The shift also takes many publishers back to their advertising roots: building a particular audience to sell to a particular advertiser, not just spots on a Web page. “If advertisers want to come in, we’re selling them the network,” said Nick Johnson, the senior vice president of digital media sales at NBC Universal. “We’re not selling them placements; we’re selling them people.”

These private networks are also being created at a time when the federal government is investigating the surreptitious collection of personal data by third-party networks. Ad networks collect data on the users who visit publisher Web sites and sell user profiles to other advertisers. Ad networks typically use a small piece of code called a cookie to track the users across the Web.

Publishers creating their own networks now keep that data for themselves, instead of providing it to ad networks that might sell against the publisher’s target audience on another site.

“We want to make sure that we’re controlling what happens with data,” said Mr. Johnson. “We want to make sure we control pricing. Control’s a very important message. We don’t want there to be a cottage industry built on our backs.”

NBC announced its version of a private exchange, called the Universal Audience Platform, last July. In mid-February, CBS Interactive began its own private exchange. The platform, like most others, uses a technology called “real-time bidding” which allows advertisers to bid on specific users at specific times. The technology can tell advertisers data like what browser a person is using, the user’s I.P. address and location, the number of sites visited, and the current site the user is viewing. These facts help an advertiser place an ad in front of specific users at the optimum time.

For readers, the switch could mean fewer ads for herbal remedies and teeth-whitening, at least on some Web pages. “In the private exchange model, the goal is to make sure you’re delivering high-quality inventory to high-quality advertisers,” said Mr. Greene of Forrester.

Advertising agencies say they welcome publishers taking control. Brendan Moorcroft, the chief executive of Cadreon, the agency trading desk at the Interpublic Group , said that top-tier publishers could create a spot for advertising “that aligns to our needs more greatly and more efficiently.”

Mike Cassidy, the chief executive and founder of Undertone, an ad network, said networks that sell low-quality advertisements will suffer the most. “Does this over all cause concern for networks? Absolutely,” Mr. Cassidy said. “Does it cause concern for every ad network? Absolutely not.”

Mr. Cassidy said that 18 of the company’s top 20 advertisers were Fortune 500 companies and that business had grown 40 percent in 2010. Undertone sells advertising in areas not typically available on most exchanges, including formats like full-page ads and video ads. “If you look through the history of mankind, middlemen have existed forever,” Mr. Cassidy said.

In November of last year, Weather.com announced its private exchange, called Category 5, through which it has sold ad space to premium advertisers like Sprint , Chevrolet, Hewlett-Packard and Microsoft. Michael J. Kelly, the chief executive of the Weather Channel Companies, said the exchange helped the company protect sensitive consumer data from getting into the wrong hands. For instance, the company tracks users’ locations in order to provide local weather updates, Mr. Kelly said.

“By putting our inventory into ad networks, we lose control over that,” Mr. Kelly said.

Officials from the Federal Trade Commission declined to comment on the creation of private exchanges and publishers’ shift to data collection, but in a report issued in December the commission sought comment from the industry on how to better define the acceptable uses of marketing and data collection.

All of the publishers interviewed said that the data they collected was not personally identifiable and that data collection practices were in line with industry principles of self-regulation.

“I think the days of being reliant on third-party companies are numbered,” said Jason Kelly, the chief media officer for Admeld, a technology company that helps publishers manage their online advertising. “Agencies are investing in technology. Publishers are now investing in technology. Publishers are looking to own the relationship with their clients.”

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