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Online advertising agency Federated Media announced today that it’s eliminating its direct display advertising business.

The move marks a significant shift in the agency’s overall business strategy. FM is among the top ad agencies in the industry, with 180 million monthly unique page views and over 145,000 publishing (content) partners. [Disclosure: VentureBeat is one of Federated Media’s publishing partners.] Direct ads accounted for 15 percent of FM’s total revenue in 2010, and only 11 percent last year.

Display ads (aka banner ads) are the ones on a website that are usually more prominently places in areas that everyone is likely to look. They come in a few standard sizes and are typically sold to marketers or company brands for a premium price. In the past, web publishers have relied on firms like FM to find companies to advertise on those display ads. However, the demand for those ads is dropping, according to Federated Media.

“The model of ‘boxes and rectangles’ – the display banner – is failing to fully support traditional ‘content’ sites beyond a handful of exceptions,” wrote Federated Media founder John Battelle in a recent blog post. He explained that the next generation of native ads on social networks and strength of Google Adwords make direct sales more competitive, and that ad agencies must evolve with the growing trend of advertisers who want more social/conversational ad campaigns.

Essentially, it no longer makes financial sense for companies like Federated Media to hire a team of people to find and keep track of advertisers who want to buy banner ads. And if publishers still want to fulfill what they view as a demand for premium-level direct banner ad sales, they’ll need to use a self-serve ad service like isocket.

Federated Media plans to refocus all its resources into the two areas of advertising it believes is growing. The first is its premium conversational & native advertising, which includes sponsored posts, special coverage sections, and ads/promotions that are more directly integrated with a publisher’s content. The second area is in less expensive, “programmatic” advertising, which automatically displays ads on websites at all times. The ad agency purchased startup Lijit in October 2011 as a response to the growing demand for programmatic ad buying.

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