It’s rare for me to quote others verbosely but this time I must as there’s so much value in Kevin Lee’s words.  If you find yourself wondering how to invest in performance marketing companies and/or networks or where to assign Web marketing budget dollars in 2006 listen up.

“One thing to remember: even with the VC money flying, industry players (marketing/advertising networks, services, vendors) are in it for the money. When you choose to shift the media success risk onto a publisher or network, that publisher or network works to maximize return on a limited number of search (or contextual) impressions. Even the pay-per-click search networks (e.g. Google), which bill on a cost-per-click basis, determine whether and where to run your ads (i.e. your ad position), based on their profit level from your ad versus that of other marketers participating in the marketplace.

The same organizations that were considered publishers two years ago now offer agency services.  Other publishers have become ad networks; they barely own any of their inventory but instead offer other publishers’ revenue share.  Agencies are spinning off publishing or network divisions, tempted by the high revenues that come with counting media as revenue (not just their fee billings).  Ad-serving and targeting technology providers are building their own publisher networks.  It’s a jungle out there.”

So says Kevin Lee, co-founder and executive chairman of Did-it.com, LLC.  Last week, Lee, who is also the Chairman on SEMPO), made these stunningly honest and insightful comments via his ClickZ column. 

Lee calls the environment a jungle.  Indeed, as it involves companies are positioning themselves for a variety of reasons ranging from courting venture capitalists to positioning in the public market… an increasingly confused one wherein fund managers, private and institutional investors still have a difficult time understanding how Google makes money in cost-per-click (CPC) advertising.

Lee’s advice? 

“I recommend you step back from all the sizzle and think about your business fundamentals. Where do you want your business to be in the next quarter? Six months? Next year? Often, choices require you to trade off growth or market share against short-term profitability. Which are more important to you and your executive team? If profitability is a factor, make sure you know what your most profitable customer’s profile looks like. If you know that, you can have informed, intelligent discussions with the multitude of agencies, publishers, networks, and technology companies to help determine the best way to move your business forward.”

Lee hits nail firmly on head and is clearly in touch with what I view as a serious problem among many retailers and Web marketers - trading long-standing, often branding oriented (consumer facing) long term concerns for short term gains.  The words “search marketing” come to mind as do “affiliate search arbitrage” wherein marketers engage in search marketing via a virtual free-for-all stemming from a “well… I just don’t have time to figure it out so I’ll entrust it to someone else and hope-for-the-best” attitude.

What Lee signals here (and he’s not coy) is that there will likely be big winners and, perhaps, some big losers in a world that is comprised of networked, service-based businesses that are racing forward… yet have very little idea of what they’re going to be when they grow up.  The risks have never been higher for buyers of media and/or performance marketing services. 

Where will Performics end up given that DoubleClick is back private again?  What conflicts-of-interest might arise as companies like ValueClick and aQuantive race forward gobbling up networks, publisher Web sites, shopping comparison properties and marketers themselves?  At what point might customers, as an example, not like to compete head-to-head with their vendors?  If I was CarrotInk I’d be thinking in these terms.

And what about Linkshare’s recent acquisition by Rakuten?  Although you can bet Linkshare and ValueClick will be choosy about what businesses they’ll be getting into this is a concern.  So far they’ve gone straight to the fat margin businesses (i.e. inkjet cartridges) where they can sell very cheaply via networks of publishers that they, of course, own.  Nothing like free media to enhance margins!

Lee concludes with…

“With all the new players, emerging marketers have a difficult market to navigate. The sales pitches all sound great (if astoundingly similar). The booths look snazzy, and the salespeople are willing to entertain at the nicest restaurants where drinks flow freely…

Five years ago, the industry woke up from a period of excessive sizzle with a major hangover.  Let’s hope this time, solid business fundamentals keep the industry humming along on a strong growth patch with no major bumps.”

Indeed but what this industry needs is less hype and spin… not more.  We need more honest dialog about what’s really going on here.  Only then can investors and marketers themselves make educated decisions.  Kudos to Kevin for giving us some.