It’s inevitable that we see some consolidation in the video content and technology sectors. The only question is, who will be doing the buying?  That list is long and varied, and don’t be surprised if ad rep firms and ad networks jump into the fray.

Online magazines tend to generate 100% of their ad inventory on their “owned-and-operated” properties, thereby keeping 100% of the ad revenue they revenue.  In that scenario, giving a cut to an ad network or ad-repping firm might make sense, but since most online content producers have a distributed model, they start off retaining a far lower percentage of their ad revenue.

The numbers are conclusive: back in 2007, around 11% of the video bloggers/producers tracked by Mefeedia uploaded their content to YouTube. Fast-forward three years, and that number is up to 36%.  The biggest losers from this trend were not other video hosters, but the producers’ own Web sites. About 57% simply uploaded their clips onto their own sites in 2007. In 2010, that number has fallen to 18%.

The upshot of a distributed model is getting far more reach across the Web.  The downside is lower margins.  The average producer splits anywhere from 25% to 50% with its distribution partner. It’s hard to make the numbers add up if a network or rep firm is bringing you deals.

This creates another challenge.  Working with an ad network might make some sense if the publisher/producer didn’t sell any campaigns directly. But the secret’s out of the bag: selling directly to marketers and ad agencies, while time-consuming and expensive, is the best long-term plan to build an advertising business.  When you go direct, you can price your ad inventory at premium and close many deals at higher CPMs than what most ad networks have to offer.

There is simply no way an ad network will match high CPMs, let alone be able to tack on their margin.

M&A might make more sense

Now that being said, over time, ad networks and ad rep firms are going to continue to acquire content companies.  For example, in the repping space, Gorilla Nation did that.  The ownership of content and properties will over time drive far more goodwill and equity value.

Ad networks are accustomed to “cashing and signing checks” as an intermediary, but over time they too will want to own content.  Adconion bought both Kush TV (renaming it Red Lever) and put Joost out of its misery (though Joost never owned content, it licensed video, so the net effect is the same: Adconion owns content — or has rights to it).

While rep firms and ad networks will buy content sites and catalogs, they’re driven by different agendas.

— The logic for rep firms is to hedge against the risk of losing publishers to competing rep firms, or see them simply build their own in-house sales teams.  Then, there is the financial incentive of trading cash on one’s balance sheet to consolidate and retain 100% of the revenues.

— For ad networks, the incentive to keep more revenues is there, too. But while historically ad networks pushed reach, advertisers will increasingly care about content.  So the ability to create content will grow.

But that is all secondary to what I perceive to be the main incentive for ad networks who have a lot of reach across the Web, having secured a lot of display banner inventory across the Web.  Imagine if they could replace their low-yield display banner ads for video content (by running short video ads before video content).

This is all a bit premature for your average ad rep or ad network to consider — a bit like recommending that a domain parking operator remove some of those Google text links and actually add content to build a real business.  Still, the logic is there. Whether or not this  idea materializes remains to be seen.