This is a tale of two niche advertising companies: One is a young company planning on a bright future, and the other is an older company that once had such a future. Both target the gay and lesbian audience.

Gay Ad Network, a newcomer in gay-focused advertising, is the newby. The Florida-based start-up says it has doubled the size of its network in a year, and that it’s the largest network, in terms of audience reach, in the lesbian, gay, bisexual and transgender (LGBT) category.

Gay Ad Network’s network of more than 100 sites attracted 893,000 unique users in March, according to comScore Media Metrix. That’s not a whole lot (many Web stand-alone sites these day command millions of uniques), but it’s arguably a good start for such a niche effort.

“Our strength is that we represent a variety of individual publishers whereas our competitors represent only the sites they own,” Mark Elderkin, the CEO of Gay Ad Network, says.

Small, individual gay and lesbian publishers have had difficulties attracting advertisers, but when the scattered but valuable audience is combined, advertisers’ interest is apparently rising.

Gay Ad Network says it runs campaigns for about 30 advertisers, including Bridgestone, Air New Zealand, Canadian Tourism Commision, Paramount Pictures, Travelocity – and a bit surprisingly, Gay.com. The latter brand is owned by PlanetOut inc., the biggest competitor of Gay Ad Network.

San Francisco-based PlanetOut is a publicly-traded gay media conglomerate, the first gay-focused company to go public in 2004. The company is listed in Nasdaq under the ticker symbol “LGBT”, and at the end of last year it had over 200 employees. But the older company, that came of age during Web 1.0 (versus Web 2.0, where Gay Ad Network is just starting fresh), has run into big trouble. It’s struggling to survive.

PlanetOut was founded 1994 and was dominating its niche for years, showing how to create value from the gay audience.

Its stock price has dropped from $15 per share in 2005 to under $3, it reported a $51.2 million loss for 2007, and it has been closing down its offices. The company is selling off its magazine and book publishing business, Liberation Publications — which includes leading gay-interest magazines Advocate, Out and OutTraveler — to Here!Networks, a gay-interest television network, for $6 million. Here!Networks, meanwhile, belongs to Regent Entertainment, which also owns GayWiredmedia, a gay interest advertising network (which includes popular site GayWired.com.) PlanetOut bought LPI, the largest gay and lesbian publisher in the United States, four years ago for $31.1 million.

In January PlanetOut announced that it is working with Allen&Co, an investment banking firm, to assist it in raising cash and “explore strategic alternatives,” that might include a sale.

Last fall, PlanetOut sold RSVP Vacations, a gay cruise company, that it had bought only a year earlier, to competitor Atlantis Events with big losses. Both the deals to sell LPI and RSVP include promises from the buyers to spend money on PlanetOut’s online and print properties.

RSVP Vacations CruisePlanetOut’s online segment has been contributing less to its revenue during last three years. In 2005, online brought in 87 percent of the revenue, in 2007 only 51 percent. After its misadventures in exploring the offline world, company is returning back to its roots. CEO Karen Magee wants to refocus to web sites Gay.com and Planetout.com.

As we covered earlier, PlanetOut got private funding of $26.2 million last year from a group of investors, including Microsoft billionaire Bill Gates, Cascade Investment LLC, SF Capital Partners, PAR Investment Partners LP and Allen & Co. During the past, firms such as JPMorgan have backed PlanetOut.

The interesting twist is that Mark Elderkin, the CEO and founder of Gay Ad Network, is founder of Gay.com and former president of PlanetOut.

He founded Gay.com in 1994, and in 1999, Gay.com merged with Gay.net parent company Online Partners.com, inc. In 2000, Online Partners and PlanetOut merged.

Elderkin left PlanetOut in 2006, and took a break until last year when he launched Gay Ad Network. Elderkin says he has financed the startup with his own funds, and hasn’t raised any venture capital.

Gay Ad Network’s technology platform and infrastructure is provided by Adify, a San Bruno, Calif.-based start-up. Cox Enterprises, the privately-held parent of Cox Newspapers and Cox Communications, bought Adify this week for $300 million. Adify is backed by media companies such as NBC Universal, Inc. and Time Warner Investment.

Gay Ad Network employs three people, and Elderkin recently hired Scott Mazer from PlanetOut to be Gay Ad Network’s Vice President of Sales. Mazer was a Senior Sales Director at PlanetOut.
Elderkin is not concerned that PlanetOut’s rise-and-fall story will repeat itself in Gay Ad Network. He thinks the value of gay audience is growing and his business model is strong. The centralized ownership of the assets doesn’t necessarily bring success and ability to gather the fragmented audience, as is evident from PlanetOut’s turmoil.

”Internally, lack of technical and business innovation and the inability to adapt to a changing marketplace seem to be at the core. The fragmentation of online media is making it hard for some centralized media properties to remain competitive. These factors helped create an opportunity for Gay Ad Network,” Elderkin says. He has set a new goal for his so company: Within one year, to double the number of advertisers from its 30 currently.