Where do the RSS ad startups fit in?

Yahoo’s RSS advertising service could spell trouble for pure-play RSS advertising services unless they adapt their business model.

Disclaimer: I was a founder of Pheedo and although I no longer work there, I still own stock.

Yahoo has joined Google in offering RSS advertising to their publishers and advertisers. They each feature an easy, self-service method of putting ads in your feeds and in buying ads. This ease of use combined with their access to a large number of quality advertisers makes them attractive to small to midsize publishers that run advertising and have no ad sales force.

FeedBurner, Pheedo, and Feedster Media all have products that are sold to much the same market as both Yahoo and Google and doubts have been raised in the ability of the small startups to operate at a profit.

Feedster and Pheedo each have significant features aimed at self-serve advertisers and publishers. They want individual bloggers to sign up and run ads in their feeds and for advertisers to purchase advertising on their network. And although FeedBurner doesn’t operate a self-serve advertiser network, they do offer their ad services to individual publishers. There’s a bit of a chicken-and-egg problem with self-serve advertising networks, however. Publishers won’t sign up unless there’s a stable of quality advertisers and advertisers won’t sign up unless their ad buys will reach a large number of publishers.

Google AdSense solved this problem by building a large base of advertiser clients who purchased ads for Google Search. They solved one half of the equation by offering advertisers limitless ad inventory on Google’s own site. Pheedo, FeedBurner, and Feedster solved the same half of the equation by partnering with existing advertising companies and inserting these third-party ads into feeds. Pheedo worked with Kanoodle, Feedburner with Overture (aka Yahoo Search Marketing), and Feedster with AdBrite.

Since that time, Kanoodle has launched their own RSS ad product (although I’ve never seen a Kanoodle ad in the wild) and now Yahoo Search Marketing is providing ads in feeds via the Yahoo Publisher Network. Now the partners of Pheedo and Feedburner are in direct competition with them — always an awkward proposition. Pheedo sells most of their own inventory and only uses Kanoodle to fill in the remnants, so they’re well insulated from this. FeedBurner appears to run almost exclusively Yahoo ads. It’s unclear what the current status of the Feedster-AdBrite deal is. Feedster’s site doesn’t mention AdBrite at all and their privacy policy doesn’t disclose that they would share any information with AdBrite — something I think they’d have to do if the ads were served by AdBrite. If it’s still active, Feedster’s partnership with AdBrite could be tenuous. Either company could easily drop the other. AdBrite could develop RSS ad technology and cut Feedster out of the equation, or once Feedster has a sizable publisher base they could start to sell their own ads, and sever their relationship with AdBrite. The only real barrier to this would be a contractual one.

At the time of Google’s launch of AdSense for feeds, the attitude of existing RSS advertising services was that a rising tide lifts all boats. In response to Google’s patent application, Pheedo’s Bill Flitter said “First off, the fact that Google is taking measures to protect itself in RSS advertising is a point of validation for our growing industry.” FeedBurner launched a service to insert AdSense ads into Feedburner-managed feeds.

I opined several months ago that given their partnership with Yahoo, Feedburner would likely be purchased by Yahoo in response to Google’s RSS ad product. Obviously that didn’t happen as Yahoo has apparently developed this without assistance from Feedburner. Feedburner was quick to announce their support for AdSense; I wonder if they will be also adding support for inserting Yahoo’s RSS advertising, given that this may cannibalize FeedBurner’s own advertising services? The source of the ads are the same, after all.

How do the RSS advertising startups fit into a world where two of the largest technology companies have entered their market?

For a startup to openly compete against Google or Yahoo takes serious courage. To directly compete against both Google and Yahoo takes a complete lack of sense. Why is this? It’s possible to compete against a single 900 pound gorilla by executing better than them. Find features they don’t offer, find better ways of doing similar things, and generally fill in the holes around their product. But when two big companies compete in the same market they tend to fill in each other’s gaps. They match each other’s moves and the products end up looking very similar. If a startup tries the same thing, simply copying Google or Yahoo and trying to match them feature for feature, they will fail. What would you rather buy, a clone of Google run by a small company or the real thing run by Google, a company that you know will still be around in a few years?

To compete against Google and Yahoo, they need to avoid competing head-to-head. Each RSS company needs to find a niche or a service that neither Google or Yahoo has. FeedBurner appears to have this well covered with their extensive analytics services, but their strongest revenue stream is most likely going to be ad-based. Pheedo and FeedBurner both have a strong presence in the enterprise market, a place that Google and Yahoo don’t play. Each offers their services to large publishers and allows advertisers to buy ads that are targeted to a specific publisher. Although Feedster Media’s signup form and help text is aimed squarely at smaller publishers, an article in ComputerWorld indicates they’re working with larger publishers and advertisers as well.

Each service needs to continue to embrace the enterprise market. The primary advantage that both Google and Yahoo offer is the network effect — smaller publishers can easily earn ad dollars without an ad sales force, and smaller advertisers can reach large numbers of readers without having to pay the ad premiums on large commercial sites. This network effect is nearly non-existent in the world of larger advertisers and publishers. The ad budgets of large advertisers means that they can afford to buy ads on a one-to-one basis and don’t need to buy networks to be efficient. And publishing enterprises that derive most of their revenue from ad sales have sales people to close those deals.

By attacking this market, RSS advertising companies will stake a claim in a market untouched by Yahoo and Google and thus be able to grab a slice of the overall online advertising market. In addition to this, they will find themselves in a prime place to be acquired by one of the larger enterprise advertising software companies. The fact that both Yahoo and Google are interested in RSS ads means that DoubleClick, 24/7 RealMedia and others will be soon taking notice of this market and start looking for a quick way to enter it.