Digital Thoughts: Consolidation Re-examined
by Sam Harrelson
Everyone
is talking about consolidation in 2004. It seems as if
every week there is a new announcement of a major buy within
the industry. Such moves receive a fair amount of publicity
and seem to signal the renewed vigor within online marketing
and the willingness of companies to spend cash in this
sector again. For those reasons, as industry folk we like
to laud and magnify such buys and consolidations and
proclaim the renewed benefits that such actions have to our
industry.
However,
consolidation in a relatively young industry needs to happen
cautiously and with forethought. There are certain
ramifications from consolidation that many in the industry
seem to be looking over in our haste to proclaim the good
news of returned interest. Let’s take a look at a few of
these points that must be considered and examined and then
draw some conclusions at the end.
1. A
consolidated market is one that is necessarily more limited
on the choices available to advertiser and publisher.
Consolidation of the most powerful companies in a space
translates into less plurality of the total number of
options that those involved in the space can manipulate for
profit. However, in a system that is consolidated to
maximize efficiency (always the goal but never achieved),
the output of consolidated companies can actually be greater
than they were before the event of consolidation. In other
words, there is a happy medium point that lies directly
between the polarities of consolidation and democratization
that intersects with the polarities of efficiency and
inefficiency.
If they
all line up, then zen can happen and the sector can thrive.
However, like a ship at sea, there are many variables that
can and do keep this state of perfect bliss from ever
occurring. Can consolidation in our industry stave off such
variables and climb ever upwards toward the golden
achievement of maximum potential and efficiency?
2.
Following, another important consideration for a more
consolidated industry is the lessening of margins for second
tier publishers because of fewer outlets for traffic
generation. With a more consolidated upper-tier controlling
traffic generation and availability of high-performing
campaigns, the rest of the industry has to deal with a
shrinking margin profit.
3.
Consequently, the barrier to entry for new companies or for
second-tier advertisers or publishers to move into new areas
of the industry becomes higher because of reduced margins
due to upper-tier consolidation. These companies can’t get
the good prices without hitting a high performance level,
which is much harder to reach in a highly consolidated
space.
4. As a
result of consolidation of players, there could also develop
a cartel-like situation where the top players are able to
keep a larger set majority. An example of this can be seen
in the CJ/Linkshare/Performics affiliate marketing space
where a set amount is automatically taken as margin and
little room for negotiation exists. Because the need for
market share would no longer be an incentive for competitive
pricing, consolidation in our industry could produce such a
climate.
5.
Brokers, as we know them, will have a much tougher time
surviving in such a climate. Some brokers could morph into
traffic specialists for exclusive clientele. In many ways,
brokers have already been undergoing such a role shift in
the industry and continue to adapt as the industry landscape
changes.
6. How
does a young, yet consolidating industry handle the
ramifications of a major player losing market share or going
under? In such a tight-woven industry that is held together
by a nucleus of a few major players, one of those going out
of business in such a climate could create a vacuum that
would lead to incredible insecurity. Because of the
inability to diversify based on a wide foundation, such an
industry could face serious challenges if the economy went
sour or a major player went under due to other
circumstances.
From
these six points, we can surmise that consolidation has both
positive and negative repercussions and the affects of such
a consolidated industry are by no means black/white or
good/bad. As the industry continues to show signs of
growth, maturity and consolidation, how will the industry
change?
Sam Harrelson
is the Co-Editor of the Digital Moses Confidential. Send comments and questions
to sam@digitalmoses.com
