Internet Advertising, Rewired: Yaron Galai, An Israeli Brain Behind Outbrain
Referred to as 'sponsored content,' it is the Internet's way of blurring lines between information and advertising - and Outbrain is leading the charge ahead of a reported $1 billion IPO.
NETANYA — When Israeli entrepreneur Yaron Galai describes the interplay between native advertising and journalism in high-brow, glossy magazines, he makes it sound almost spellbinding.
"To pull it out of the plastic bag, to thumb through its pages, from one story to another, even from a story to an advertisement ...," he says wistfully. "It's that magic of leafing through paper that hasn't been cracked and translated to the Internet yet."
Creating that flowing experience is the singular mission of Outbrain, the company Galai started seven years ago. And though he says he sees himself as "a story promoter," Outbrain's first job is to promote products.
Many might not recognize the name, but most Internet users are familiar with what the company does: You visit a website, read a news story. At the bottom of the page, or on the side, you see recommendations for "other stories that may interest you." Some of them offer journalistic content, while others fall into the grey area between journalism and marketing.
Last Friday, the Wall Street Journal reported that Outbrain had filed a confidential request the U.S. Securities and Exchanged Commission seeking a possible $1 billion valuation to list shares on the Nasdaq Stock Market.
So-called "sponsored content" has been around since the early days of the press, but the Internet has long been searching for a way to expose users to it without them noticing. Enter Galai. "I invented this market," he says.
At 43, the serial entrepreneur, a former Jerusalemite who has been living in New York for a decade, is proud to claim title to shaping Internet behavior — enticing Web users to jump from one recommendation to another, at times without realizing their navigation had been carefully planned and paid for.
In November 2007, Galai sold his search engine marketing company Quigo to AOL for $363 million. On the very same day that he bid farewell to the company, he'd founded 11 years earlier, he signed the first capital investment for his next venture, Outbrain.
In 2009, headed by co-founders Galai and Ori Lahav, Outbrain launched the native ads of the kind that boast a benefit for everybody — the advertisers, who use them to promote products in a more targeted and efficient way; the news websites that enjoy ad revenues without scaring readers away; and the users, who get a website with less noise and more tailored content. As part of the service, Outbrain also promotes journalistic content alongside promotional content.
The goal is for users not to feel that they're being fed commercials, and so the Outbrain marketing recommendations are labeled with a "sponsored content" disclaimer. Still, this labeling isn't enough to deflect criticism that the method blurs the line between user and advertiser interests.
In a bid to boost Outbrain's image as a provider of quality content, Galai has had to abandon certain clients. In 2011, he dropped those who offered controversial products and lured users to provide their credit card details — forex websites, unregulated medications, food enhancers — thereby ceding a quarter of the company's income that year. In 2013, he parted ways with websites that sponsored content without disclaimers, again writing off another one-tenth of revenues.
It was a price worth paying to attract major brands and key online news players that distance themselves from exactly this kind of sketchy content. In fact, he tried to make Outbrain the premium service in the field.
According to Israeli web analytics company SimilarWeb, most of Outbrain's traffic comes from or goes to giant websites such as international news outlets. Competitor traffic is driven more by viral, entertainment and gossip content.
Yet Galai didn't just establish the market. He actually firmly controls it now. According to market estimates, Outbrain is the leading company in the field of native advertising. It boasts more than 190 billion recommendations a month to more than 560 million users of 100,000 websites, including 800 premium sites and major news outlets such as BBC, CNN and the Conde Nast group.
In other words, more people are exposed to the leads Galai offers than to the content they search themselves on Google.
Ushering in competition
With the company's growth, it has doubled its workforce in two years, now standing at about 430 people, most of them in Outbrain's Israeli offices in the northern coastal city of Netanya. The next natural step would be an IPO, and though Galai can't discuss it, Calcalist sources indicate it is scheduled for the first half of 2015.
Though competitors are trying to challenge Galai at the game he created, he has no intention of forfeiting the lead just yet. "We've bought three firms, mobilized the largest sum in the market $100 million, and we're investing the largest sums in development," he says.
Most of this development is happening in Israel, from which Outbrain's main competition also hails.
Ten years Galai's junior, entrepreneur Adam Singolda launched his company Taboola, a direct competitor, two years after Outbrain. Over the past year, its momentum has been impressive, as it has expanded its global market share, especially after winning strategic client Yahoo Japan in a bid in the tens of millions, beating both Outbrain and Yahoo U.S. It now has 480 million unique users compared with Outbrain's 560 million, but Taboola has registered 30% less revenue than Outbrain.
"Singolda and I have friendly contact, and in the beginning I even helped them," Galai says. "There is a competition between us, but at the end of the day, the real competition is over the user's time, and it's against slightly bigger companies like Facebook, Google and Yahoo."
He adds, "I think that as a marketing network, Taboola is doing a good job and performing well. But we think about things differently."
Outbrain's other key rival is Yahoo's Gemini project, currently being developed at the company's Tel Aviv office. When the last quarter's data turned out to be a positive surprise, CEO Marissa Mayer said that native ads were one of the central drivers for revenue growth.
Two years ago, Yahoo was one of Outbrain's primary clients. "I take it as a compliment," Galai says about the client-turned-competitor, "because they've learned that fantastic results come from using our technology."
The next big player to enter the field is Google, which has already begun cooperating with Forbes. And Galai can't wait.
"Today, there is no website in the world that doesn't implement Google's AdSense, but the prices we charge for our ads are perhaps a tenth or fifth of what Google charges, and the extent of activity our ads generate is much higher," he says. "But we're not complacent. We understand there will be competition, and we invest a lot to prepare. I'm sure that Google will eventually enter the field."