Our exec editor sits down with AdECN, Right Media and Federated Media to see how new entities called "ad exchanges" will change how advertisers buy and sell inventory.
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?