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Outlook 2008: Digital

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NEW YORK The hottest digital media segments going into 2008 continue to be online video, social networking, search and—remnant inventory? That appears to be the case, based on recent developments in the space. While Hulu, Joost and Facebook continue to dominate headlines and imaginations, it's the less sexy elements of the business—ad networks, ad exchanges, behavioral targeting firms—that experts say will spur the most significant activity in the coming year.

In 2007, industry behemoth Google reached a deal (pending regulatory approval) to acquire DoubleClick, which just prior had launched its own online ad exchange. Microsoft acquired aQuantive, landing its ad-serving platform Atlas, as well as the ad network DrivePM. And in the last few months, the software giant reached agreements to sell excess ad inventory for Facebook and Viacom.

"The most contested part of the market is display advertising right now," says Yusuf Mehdi, Microsoft's svp, strategic partnerships. "That's where the action is."

That's the way the portals see it. Over the last year, AOL acquired behavioral targeting firm Tacoda and contextual ad firm Quigo, then reorganized its business around selling inventory on non-AOL sites. Even troubled Yahoo was able to nab the network BlueLithium.

Meanwhile, a range of companies announced they were starting their own ad exchanges, aimed at selling nonpremium ad inventory in a Google-style auction manner. Throw in MySpace's recent launch of HyperTargeting, which promises to monetize more of its pages by tapping into its users' reported interests, and the trend becomes clear.

"You've got this intersection of ad exchanges, social networks and ad networks," says Ed Montes, evp, managing director of U.S. operations at Media Contacts. "Targeting is going to become one of the big issues in 2008."

Bryan Wiener, CEO of 360i, expects behavioral targeting and ad exchanges to gain prominence among buyers of digital media. "Both solve a big challenge out there: audience fragmentation and the proliferation of pages," he says.

Wiener adds that while behavioral targeting is already taking off, Google is poised to exert more influence on display ad sales whether or not the DoubleClick deal goes through.

"This is the year that auction-based display networks become a core part of the client's marketing plans," he says, referencing DoubleClick's ad exchange and Google's own growing display ad network.

If more brand marketers begin purchasing display ads via Web-based auctions, "that fundamentally changes the way display ads are bought—that changes the whole ecosystem," Wiener says.

A growing element of the online ad marketplace will continue to be social networking, with eMarketer predicting that spending on the subsegment will surge to $1.6 billion in 2008, an increase of nearly 74 percent. This as total Internet spending is projected to grow 29 percent, to $27.5 million.

The dominant players in the social networking space, MySpace and Facebook, have tons of excess inventory. Montes says the question in 2008 will be whether social nets can use targeting to better monetize inventory—something Facebook has found challenging—or whether they must rely on ad networks and exchanges.

Remnant inventory is actually premium inventory that still attracts big brand dollars. John Senior, director of consultant Oliver Wyman's communications media and technology practice, says video is set to play an even larger role in users' lives—and not just short YouTube clips.

"I do think we are going to see the emergence of better quality online video, prime-time content, more of an HD experience," he says. "And the PC will become more of a catch-up device for TV."

Several high-profile launches and partnerships of late—including the CBS Audience Network, NBC Universal and News Corp.'s Hulu, Joost, and Microsoft's distribution deal with Viacom—are attempts at marrying the tube to the Web. How audiences will respond in 2008 no doubt will impact the online video model going forward.

"It's interesting. Consumer content drove the growth of MySpace, YouTube and Facebook," says David Schatsky, president of Jupiter Research. "We don't have a similar hit in the space that is driven by professionals. Are the Hulus going to create sizable audiences? I'm not predicting that necessarily, but that's my vote for something to watch in 2008."