Recently on the Internet Oldtimers List, someone posted a link to a video mashup where someone had taken a clip from the movie "A Few Good Men" and replaced the famous "You can't handle the truth!" dialogue between Nicholson and Cruise with a farcical semi-humorous debate about demand-side platforms (DSPs). What was interesting about this clip was that its central argument was that DSPs lower the CPM of premium publishers' impressions (with Cruise arguing for the premium publisher and Nicholson arguing for the DSP).
The video is cute -- pretty well done, and worth a view if you're someone on the inside of this particular space online. But what really surprised me about it was that very few people seem to really understand what's happening with DSPs in general -- and there's obviously misinformation going around. This particular debate about DSPs lowering the yield of publisher impressions was one I hadn't heard articulated before.
So let's get started digging into this by discussing what a demand-side platform really is. These advertiser/agency facing systems let buyers do self-service media buying from publishers; publisher aggregators (sometimes now being called sell-side platforms, or SSPs) like PubMatic, AdMeld, Rubicon, and others; and ad exchanges. The most important part of these mechanisms is that they enable real-time bidding against inventory on these sites. This is really important because in real-time bidding, the DSP can let the buyer specify business rules describing the value of impressions based on their audience attributes. That means the buyer can assign monetary value against specific audiences, and the DSP can bid on every impression in real time based on its actual value to the advertiser.
One reason real-time bidding is so valuable is that advertisers can bring multiple data sources to bear on the valuation problem. This would include the targeting attributes that the publisher lists about its own impressions, data attributes from third-party data providers like BlueKai and others, and most importantly, proprietary data that the advertiser owns about its own set of customers. Based on all these different targeting attributes, the buyer can assign various business rules that align the campaign goals against potential impressions, and the bids can be set against all the various providers of inventory.
The DSP then will begin bidding across the sell-side platforms, exchanges, and any publishers that directly support real-time bidding, and will automatically optimize the bids based on success and results. The result can be as simple as reaching 100,000 people that fit some specific criteria -- or it could optimize across CPC or CPA. Real-time bidding is vastly superior to other mechanisms when it comes to ensuring that the advertiser gets the best ROI. But there are some issues.
I've heard from many of the DSPs that they are running out of real-time biddable inventory, meaning that their CPMs are rising because their supply is constrained. This might sound funny to those who fondly quote that there is unlimited supply of display inventory -- but consider that there are short- and long-term factors driving this imbalance. In the short term, the sources for this type of inventory are still somewhat limited; even with the explosive growth we're seeing in this category, there are not enough impressions available to satisfy demand. DSPs can still participate in non-real-time auctions in order to supplement impressions, but they lose the extra value they bring to the table when they can examine the impression before bidding.
Long term, there will be lots of impressions being made available. (In fact, I predict that most impressions will ultimately be made available in real-time.) But this real-time bidding world is all based on audience targeting -- and the same users that Whole Foods wants to reach are also highly valuable to Best Buy and The Home Depot. This means that those impressions driven by highly desirable audiences will be a small percentage of the total number. But note: Although from a percentage perspective we're talking small numbers, from a volume perspective that could still represent massive amounts of high bid-density inventory. Paid search impressions are a tiny fraction of display impressions today, yet drive half the revenue in online advertising. This could change significantly if we can drive enough bid density on a small fraction of display inventory that represents valuable audiences.
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