Advertising the open-source way with Openads

Openads is one of the most interesting open-source projects/companies on the planet. Period. It's an open-source ad server. Like DoubleClick without the lock-in or fees. In other words, it's open source--100 percent GPLv2. I guess it should be no surprise that the world's most popular ad server, powering Web 2.0 business models, is open source, just as the LAMP stack is the technological basis for Web 2.0 sites/services.

I've been following Openads since May, when my friend Bryce Roberts indicated that he was considering investing in the company. (And so he/O'Reilly Alpha Tech Ventures did, along with Index Ventures, Mangrove Capital Partner and First Capital in a $5 million Series A round of funding, as Tim O'Reilly reports.)

I caught up today with Scott Switzer, Openads' founder and CTO, to learn more about the company and what it does. Unlike most open-source start-ups, Openads isn't focused on enterprise software. It provides an ad server. This sounds great, but what does it mean? And why does open source matter in this market? That's what I asked Scott.

Scott painted the picture of a publisher (i.e., anyone that provides content on the Web). Let's say I graduate from university and start writing a blog. At first, my mom and grandma read my site (begrudgingly, no doubt). At this point, Google AdWords is enough to make a few pennies. Once I get serious readership and want to monetize that, however, the next phase would be to use an ad server like Openads to tie into more sophisticated ad networks (using a more sophisticated ad server). (The ad networks most widely used with Openads are shown at right, below.)

I could still use Google AdWords with Openads. It's just another ad network, after all. But Openads' software would give me more control over the ads served up on my site. It also allows me to deploy several different ad networks at once, letting me try out various ones to determine which is most effective for my audience. I could run them in rotation and designate the percentage that these ad networks serve ads to my site (based on contract, for example). I could have maximum control of the ads on my site.

Without paying Openads a dime.

I asked Scott how this differs from the traditional model that its major competitors, DoubleClick (1,500 Web sites around the world and a reported 300 billion page impressions) and 24/7 Real Media, use. I figured they gave away the ad server software and charged per page view or click-through or something like that. I was surprised to find out that all of the ad server companies today charge for the privilege of using their technology. Just for the ad server you pay a monthly fee and/or a CPM fee (utility fee, cost per 1,000 impressions) just for using the software.

This actually sounds reasonable to me, but Openads provides the same thing...for free. Historically, people have used Openads because it's downloadable/free to use without paying a license fee. That's why Openads has more publishers using it than all other ad servers combined, with customers in 100-plus countries. Most of these are small- to medium-size publishers--the long tail of the advertising market, as it were.

So, today Openads and DoubleClick both serve disparate ad networks (though DoubleClick also provides its own) using the technology. The differentiator is the entrance fee.

How, then, does Openads make money? Scott indicated that Openads provides consulting services to publishers with complex problems (billions of ad impressions). But the primary revenue driver comes from charging ad networks fees for sourcing publishers. (Scott equated this to how Firefox helps Google. Firefox has its search bar at the top of its screen, with Google now getting a large percentage of its search revenues through Firefox. Firefox, therefore, is helping them reach the user as simply as possible, just as Openads helps ad networks find publishers and charges for the service.)

I tried to get at how, exactly, Openads determines the fee to charge the ad network, and didn't get a clear answer. Scott noted that Openads doesn't charge any sort of CPM fees. Their goal is to figure out where the ad networks work best so that both publishers and ad networks are happy. He said that Openads helps publishers make the most money they can, and suggested that most today only use one ad network (Google AdWords, typically), and Openads wants to upgrade the level of advertising strategy sophistication these publishers have.

At any rate, this is a company worth watching. It's in one of the hottest area of the Web, and has a lot of room to continue to build the value for which it charges. Why not charge publishers for helping them maximize ad revenue? And charge ad networks for the same? Plus, there must be a wealth of data the ad server can gather on who responds to what ads, which could be used in all sorts of (ethical) ways. This is a fantastic application for open source.