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Ad exchanges: Why Google will ultimately win

Ad exchanges: Why Google will ultimately win Stephan Pretorius
Using this same reasoning, I want to predict that Google will also win the battle to build the biggest, strongest ad exchange -- because it will be better at monetising display ad inventory. This is not simply a reckless prediction; it is based on the underlying economics of ad exchanges and the careful choices Google is making in building out its exchange business. 
Some background
Ad exchanges have been around for a number of years now, with Yahoo's RightMedia being the largest and most successful exchange to date. DoubleClick launched its ad exchange shortly before being acquired by Google, but since the acquisition have not promoted it heavily, and put it on idle while rethinking and rebuilding the tool. 
At a recent roundtable event, Google outlined their next generation ad exchange to be launched in the autumn of this year. The way they've tweaked the model is simple, yet fundamental. Here are the most significant changes and how it will impact publishers and advertisers alike:
1. AdWords becomes the buying platform
One of the biggest barriers to purchasing from ad exchanges is that they are separate platforms with their own workflow, billing and legal requirements. In short, it is hard for buyers to start trading with them. But from autumn, all agencies and advertisers will be able to buy ad exchange ad inventory through the AdWords UI. This means that all of Google's existing paid search advertisers will have instant access to all ad exchange inventory, producing a massive increase in liquidity, better workflow and fewer barriers to trade. For AdWords customers that are already buying 'content' as part of their paid search buys, the change will be almost unnoticeable. 
It also makes the ad exchange that much more appealing to publishers looking to increase their yield and sell-through rates. The more advertisers, the greater the chances of getting a good price for hard-to-sell blocks of inventory (like long-tail international inventory) or of getting a match for user list targeted impressions in a remarketing campaign. A classic positive network effect.
2. Guaranteed publishers payments on 30 days
Yes, this is not a typo! No sequential liability, no waiting for payment. Google is guaranteeing 100 per cent of revenues for publishers on 30 days, regardless of whether they have been paid by the advertiser. Of course, everyone pays Google on time, so this is probably not a major risk for them, but for most publishers (even large enterprise publishers) invoicing correctly and getting paid on time is a major headache and a major inefficiency in their businesses. A sales channel that guarantees payment on 30 days therefore becomes incredibly appealing.
3. Dynamic allocation for all
Dynamic allocation refers to the ability of an ad server to automatically select the highest yielding ad for a particular publisher impression, without the publisher having to make a hard allocation of that impression for a particular campaign or sales channel. The concept is fundamental to publishers that want to maximise yield across multiple sales channels (direct, sales houses, multiple ad networks etc). In the first version of DoubleClick's ad exchange, dynamic allocation was only possible if you ran DoubleClick's DART for Publishers as your ad serving tool. The new Google ad exchange will make dynamic allocation available to all publishers via an open API. This means that any publisher -- regardless of what ad serving platform they use -- will be able to include the Google ad exchange in their sales channel mix. This will massively increase the available set of publishers who can sell inventory through the exchange.
The bottom line
The above issues might seem slightly obscure or theoretical to some of you, and their impact will probably not be visible in the marketplace until well into next year, but the result is inevitable. Google will win the ad exchange battle. Integration with AdWords, guaranteed payment and the opportunity for more publishers to get involved, all equates to a stronger network and better potential to monetise. 
As a publisher, you should seriously consider integrating Google's ad exchange as part of your sales channel mix, and figure out how best to use it to increase yield. And as an advertiser or agency, make sure you understand how to buy display inventory through AdWords and leverage the advanced targeting, retargeting and optimisation techniques it offers.
Stephan Pretorius is the president of Acceleration.

Stephan Pretorius founded Acceleration in 1999 and is currently responsible for product development and client strategy. In the seven years since founding Acceleration, he has grown the company's product line from the initial online media buying...

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to leave comments.

Commenter: Lawrence Merritt

2009, September 18

i'm not a publisher but i used to work for one and i always thought of the 'ad exchange' as a bit like crack cocaine - if you resist you're likely to be the only at the party not 'on it' so wandering what you're missing out on yet if you succumb you're likely to develop an addiction to something that is ultimately very bad for you. to pretend otherwise is naive (in my view) given that the dna of the ad exchange is 'pay for performance' pricing, not a natural bed fellow to premium CPM based pricing without which you die. google is out to disintermediate the publisher and make it all about the network. it will be interesting to watch from the sidelines.

Commenter: Sami Linnanvuo

2009, September 10

"Google is not winning the paid search battle because it is a better search engine, but because it is better at monetising search queries. "

I don't agree with your statement about Google winning the paid search because of its monetisation capabilities. Google is winning the paid search battle because it can offer advertisers the biggest reach. And why can Google offer better reach than competing search engines? Because people prefer to use Google over any other search engine. And that has very little to do with Google's monetisation capabilities and very much to do with usability issues and the quality of the algorithm. Google has the best ability to monetise now - after it built the best search engine.

As soon as users switch from Google to some other search provider, advertisers will follow. You may have innovative monetisation concepts but who cares if you have no users?

I agree with the rest of your article, but the first premise is simply false. Had Google not built the best search engine, it would not be winning the paid search game now. The algorithm and the usability had to be there first.

Commenter: Opie Rodriguez

2009, September 10

Good article with some well thought out points but how much emphasis can be placed on it I don't know considering that ; "Stephan is a member of DoubleClick's Client Advisory Board ". How much this is biased opinion vs significant insight into Google's business I don't know. That said, all valid points but the fact remains that Google is yet to make a significant splash into the ad exchange space. We have all been waiting with naited breath ever since the acquisition of DoubleClick so I will remain skeptical for now.

Commenter: David Shay

2009, September 10

Sound arguments, to be sure, and who in their right mind would bet AGAINST Google, but unless they drastically change their MO they will only realize the scale and reach that exchanges compete for now and not the SERVICE and STRATEGY piece of the puzzle that good AD NETWORKS bring to the table.