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Ad Exchanges: Online Inventory's Future?

Ad Exchanges: Online Inventory's Future? Brad Berens

The last few months have brought changes in the way online ad inventory can be bought and sold-- in addition to going straight to publishers or working with ad networks there are now ad exchanges.

As these changes begin to get traction they may have a broad impact on the industry. In an effort to get a better handle on what these changes are, I invited three people to sit down for a roundtable discussion: Michael Walrath, CEO of Right Media, William Urschel, CEO of AdECN, and Chas Edwards, VP of sales and market development for Federated Media. Each of these companies -- and there are certainly others -- has a new approach to buying and selling online ad inventory.

Please note that this is only the first such conversation: we expect to continue chatting about ad exchanges, and I invite those who might like to take part in such conversations to contact me.
Brad Berens: What's wrong with the current model of advertising and relative availability of ad inventory that has provoked each of your companies to try something different?

Michael Walrath: Simply put, there is a distressing lack of transparency in interactive advertising today. Advertisers and publishers struggle to understand the supply and demand trends that impact their advertising businesses. Intermediaries are numerous and often go to great lengths to keep information from buyers and sellers. There is extraordinary operational friction between buyers, sellers, intermediaries and ad-management platforms. Online advertising is the most accountable advertising medium in history, yet there is a lack of accountability in the way the market operates. Historically, markets drive toward efficiency, transparency and accountability, all of which benefit the principal buyers and sellers. Properly enabled by technology, the online advertising market -- and even the broader advertising market -- will move in this direction.

Chas Edwards: The bulk of the online ad-buying/ad-selling discussion is still guided by a discussion of effective CPC. Because we can track it, we often forget to talk about any other value that comes with advertising a brand. And when the conversation gets stuck on CPC, advertisers stop paying a premium for innovative, integrated opportunities that entail partnership with a particular publishing brand, voice or conversation. Federated Media (FM) pulls together leading authors, community leaders and sites, and it hopes to bring marketers into those specific conversations.

William Urschel: Liquidity is the problem-- if we're limiting the discussion to the availability of ad inventory. 
Every ad network -- even the very best -- has transitory supply and demand problems: campaigns that can't finish because they f-capped out, or inventory that is going unsold because some other campaign ran out of budget. So ad networks go looking for someplace to run those campaigns or sell that inventory. They need liquidity, and sometimes they get it, but at too high a price, which wastes advertisers' dollars, short-sheets publishers, and feeds middlemen who do nothing but pass along deals.
Imagine a world with lots of stock brokers, but no stock exchange. If you went to your stockbroker and asked to buy 1,000 shares of Microsoft, he would look to see if any of his own clients wanted to sell 1,000 shares of Microsoft. If not, he would call his buddy at another brokerage, who, if he didn't have a selling client, would pass the deal in turn to his buddy, and so on and on, until someone came up with those 1,000 shares. The problem is that: a) this is slow, and b) every stockbroker in the daisy chain takes a commission, increasing the price for the buyer and decreasing the price for the seller. Would we put up with a 500 percent spread between the purchase and sales prices for a share of stock? Hell no. But we do, billions of times a day, in online advertising.
A real-time trading exchange solves that liquidity problem. In the stock market example, a broker with a buyer first looks to his own clients for a seller. (Why split the commission if you don't have to?) If he doesn't have a seller, he goes to the stock exchange to get the other half of the transaction, splitting the commission with the broker representing the seller. It's one hop, one commission, and it is very fast.
Once you have an exchange, we get to the second problem: the pricing models. Fixed? Auction?  If auction, CPM, CPC, or CPA, and how is the publisher paid? Who wins under each model: advertiser, publisher, or network? Ahhh. I love this stuff.

Next: So what do these new ways of buying and selling inventory actually look like?

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Berens: What's the elevator pitch for what your company is doing that is new and different?

Walrath: Right Media has created the first open media exchange in order to bring more efficiency, value and standardization to interactive advertising.

The Right Media Exchange is open to ad networks, publishers and advertisers who buy and sell digital media using our common open transparent platform. Right Media offers these companies a range of solutions to help them operate more efficiently. Our current offerings include simple exchange access, white label sales programs and professional services. We also encourage companies with proven technologies to use our open APIs to provide better behavioral targeting, campaign optimization, contextual targeting and other value-add services that all Exchange members can use to improve their businesses.

The Right Media Exchange currently handles two billion ads per day, and has over 11,000 advertiser, publisher and network participants.

Edwards: Federated Media is pulling together leading, independently published sites in order to give marketers a scalable and safe opportunity to join the highest quality, most engaged conversations online.

Urschel: AdECN is a real-time automated exchange for online ads. In a way, we took the computer-based "ECN" exchanges that do most of the stock trading these days (Island was recently acquired by the NYSE) and applied the concept to online advertising. It is all about solving that liquidity problem. 
Like a stock market, we serve the members of our exchange: advertising networks, some agencies, brokers and others; anyone with solid relationships with both buyers and sellers. A member buys on the exchange for its advertisers and sells on the exchange for its publishers. Our members in turn work with their clients, as always.
The core of the exchange is a real-time auction for every impression in which the advertiser can use a dozen targeting methods. Every time a viewer lands on a web page in the exchange it triggers an auction among all the interested advertisers; in less than 100 milliseconds the highest bid wins and that ad is shown. The advertiser knows what he is getting and he is paying only what it is worth to him. The publisher gets the highest price possible for each impression, and he sells more of his inventory. 
The bottom line is that our members get the best possible liquidity. Fewer campaigns go unfilled; less inventory goes unsold. As the financial clearing house, AdECN even guarantees that everyone gets paid.
AdECN is just getting started. We launched in a limited way back in October with Experclick as the first seat on the exchange. We brought on five more members at the end of July, and are opening the doors to others in the second half of August.

Berens: The May 15 issue of Ad Age had a cover story that talked about an online auction for all types of advertising, with Wal-Mart CMO Julie Roehm as its fiercest advocate-- particularly for television. Aside from the more narrow scope of your project to online (at least at the moment), how does what you're doing relate or not relate to what Roehm proposes?
Walrath: In principal, what we're doing is closely related to what Roehm proposes. We're bringing efficiency, transparency and accountability to the sales process for online media, which is precisely what Roehm's initiative is calling for.

In practice, there are some fundamental differences between how TV can be auctioned and how online media can be auctioned. TV is still mainly a one-to-many advertising experience, and even in an auction marketplace it will be sold in blocks of inventory, in advance. Online is a one-to-one advertising experience. Because of the granularity of data associated with an online ad, advertisers can inform their bidding for each impression in real-time, and publishers can discover the true market value of an impression on every impression via the same real-time bidding mechanism.
Another similarity between the Roehm/eBay initiative and the online market is that there is a fair amount of concern/unrest on the part of networks and publishers over the threat of inventory commoditization through an exchange. This is an important psychological barrier for sellers of media. They're naturally concerned that putting their inventory up for auction will result in lower ad rates. Most market history refutes this idea. An efficient marketplace is more likely to increase the value of inventory by allowing a far broader set of buyers to compete for available inventory. Of course, pricing will fluctuate as the market moves (advertising is cyclical in nature), but more efficient mechanisms for selling inventory will smooth out the dips and provide sellers with more consistency and upside, even as buyers gain transparency.

Edwards: FM is a big supporter of dynamic pricing based on demand. But it forces publishers to create one-size-fits-all advertising packages for display "on the auction block," rather than opening a dialog between a marketer (who often has a unique challenge he/she wants to solve) and a publisher (who may have a unique solution to that challenge). While marketplaces like eBay and Google teach us a lot about pricing floors for commodity products, we still see value in human intervention to create customization for marketers and a premium for publishers who can execute that customization. Here's a somewhat absurd example: A woman sells an ad tattooed on her forehead and eBay got her a mere $11 CPM!

Urschel: Ms. Roehm's proposal is, I think, a good one for television advertising. But television is still a bulk-buy. We're talking about a very simple auction for, say, a 15-second ad spot on a show, where every viewer of that show will see the same ad. 
AdECN is all about the uniqueness and value of each individual impression. When each television set has a unique IP address, AdECN will be able to target to the individual viewer linked to that address, showing each viewer potentially a different ad in that same 15-second spot, and advertisers will pay different amounts to show different ads to different viewers. AdECN does exactly that today on the web, and we will be doing it soon on mobile devices (which have something like IP addresses), but for now, television is not granular enough to benefit from the AdECN exchange.

Next: What does this mean for ad networks?

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Berens: How will your new approaches to inventory work with relation to ad networks? Is it inclusive of ad networks? Exclusive, or something else? In your answers, I'm also hoping that you can be specific about what sort of ad networks might be affected and in what ways, as there are many kinds.

Chas, what FM is doing (with its self-service adtools that we covered here) I'd describe as a publisher network that deals the ad networks out of the game, although not, I think, the rep firms.

Bill and Mike, you both come out of the heavy-hitting ad networks space: how is this different? Who should be happy? Who should rethink their business plans if this takes off
Walrath: Our exchange model is definitely inclusive of ad networks. We have over 60 networks using the Right Media Exchange platform today-- rep-firms, niche content aggregators, arbitrage networks, behavioral networks, context networks and many others. Any network that brings value to the exchange will benefit from it, accessing exponentially more supply and demand.

Because an exchange environment is transparent, advertisers and publishers have insight into the true value that each network offers. This means that smaller niche players are no longer disadvantaged relative to the larger distribution networks such as Advertising.com, Adsense, ValueClick. Advertisers and publishers can differentiate on every impression the value of a behavioral network versus a content aggregator versus an arbitrage network. This allows networks that have traditionally found it difficult to build critical mass of supply or demand to access more of both.

But that transparency also puts networks to the test, forcing them to prove their value. In the exchange, advertisers and publishers can identify the delta between the margin a network is taking and the value that network creates. Any network that's creating more value (relative to the rest of the market) than they take in margin will do well in an exchange environment. Any network that takes more margin than they create in value will need to re-think their business model.

Five years out, if exchanges gain traction, there will be more ad networks, but fewer huge, dominant networks. Networks will have to differentiate with either technology, inventory, sales expertise or some other area of the business to thrive. Their success will be based on an ability to create value, much more than an ability to leverage existing distribution.

Edwards: FM utilizes inventory on our sites a few ways.

At the premium-priced end, we have advertisers to whom we sell direct (say GM or Intel) and those who use our self-service platform (say a small advertiser that loves Boing Boing, like Mind Candy Design) who pay a premium for guaranteed positioning or sponsorships on specific sites.

At a mid-priced range we have advertisers who want to run on a limited set of FM sites (say the 12 parenting sites), but are willing to give us flexibility on exact mix across the sites in exchange for a "run of federation" discounted price.

Finally, if we have inventory not used by the two above advertisers, we work with third party ad networks (including Google Adsense) on a remnant basis. We've invited all of the third party networks to bid for that unsold inventory-- so the networks that have customers who are the best fit for FM's sites are willing to pay the highest rates.

In essence, this creates dynamic pricing where advertisers pay premiums for control, positioning and context, and others trade away control, positioning and context for price breaks.

Urschel: Just as a stock exchange provides liquidity to his member stock brokers, AdECN exists to provide liquidity for its member ad networks. In other words, the ad networks are our customers, not the advertisers and publishers they work with.  
But what's an ad network? For the purposes of membership in the AdECN Exchange, we define a network very broadly as any entity that has a direct relationship with both advertisers and publishers. This can be a traditional CPM, CPC or CPA network, or a CPL lead generating network, or an ad agency running campaigns for its advertiser clients but who also reps some of their inventory, or a publisher network that represents websites or blogs but also gets them ad revenue (this is how we think of Federated Media), or it can be a mega-publisher who has a direct sales force that sells space on its own inventory (which is a sort of captive network). The point is, our members provide real service to their advertisers and publishers.
We would exclude from membership a simple broker who does nothing but pass deals around.
It is this latter type, the expensive middlemen, who will disappear as the AdECN Exchange grows. They exist now only to provide liquidity, but that is better done through the Exchange.
Brad Berens is executive editor for iMedia Communications. Read full bio.

A trusted advisor to companies of all sizes and a respected voice within the interactive media industry, Dr. Brad Berens has enjoyed a wide-ranging career that features storytelling as an organizing theme. These days, he divides his time among...

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