The ad exchange should be a dream come true for marketers. After all, exchanges help marketers leverage consumer data from a variety of sources and tie that data freely to inexpensive inventory opportunities. It sounds perfect, right?
Well, it is nearly perfect if you're primarily focused on direct response and other sales-oriented marketing activities (although even there, ad exchanges can certainly be improved). When it comes to brand oriented activities (the so-called top of the funnel), however, the promise of an ad exchange isn't so promising at this moment. In fact, there's a lot of work to do, and ad exchanges need to create some opportunities that don't exist right now in order to provide value to marketers for any objective.
Trading environment
To be blunt, marketers working at brand-oriented activities don't use ad exchanges because the trading environment can't deliver what they're looking for -- namely rich media messages paired with quality content. To compound matters, ad exchanges are presently plagued by middleman technologies like demand- and supply-side platforms that have sprung up to help sellers placefacilitate transactions and optimize their value orders. For every dollar spent on a media buy, a small toll goes to these a variety of middlemen. This chart by Tolman Geffs from The Jordan Edmiston Group provides a nice break down:
For direct response buys where the CPM is relatively low, the middleman fee amounts to a few pennies, but it becomes significant -- and prohibitive -- as the CPMs rise to reflect greater branding opportunities. The reality today is that brand-focused buyers turn to direct deals with publishers, or in some cases, ad networks. Unfortunately, those methods have two key drawbacks.
First, without input from the marketer side, most media buys suffer from inherent waste. When multiple buyers each bring their own data to the table, waste is significantly reduced because both buyer and seller have a true market valuation for the inventory. But when a buyer and seller negotiate outside of a market, the real value is anyone's guess and the end result is that both sides work hard to arrive at the wrong price.
Second, direct media buys tend to ignore the current inventory imbalance. We see this all over the web today. Supply continues to outpace demand, yet no market mechanism exists that tells buyers they're overpaying. Instead, buyers make direct deals with publishers and both choose to ignore the fact there's too much inventory out there.
Can ad exchanges improve the trading environment? Yes. But ad exchanges will only become the go-to method for media buys aimed at delivering on brand-oriented objectives when opportunities for buyers to trim waste and leverage the balance between supply and demand are developed. If an ad exchange can't give both buyer and seller a robust market for brand-focused activities, publishers will withhold their best inventory and marketers will continue to do business in the dark.
Data and scale
As marketers, we want to achieve scale in an efficient and cost effective manner. In theory, ad exchanges should do just that. However, the reality is that ad exchanges flirt with scale but don't really deliver on the promise when it comes to brand-oriented activities. The reason? Most buys on ad exchanges rely on basic retargeting and pre-baked audience segments provided by third-party vendors. The result is a buying environment with two key limitations.
First, reliance on retargeting necessarily limits the size of the audience pool. That is, retargeted media buys must first be targeted. In subsequent passes, retargeted buys therefore represent a pairing down of the audience. This is fine for certain activities, but if the goal is to focus on brand-oriented objectives, the audience needs to grow, not shrink.
Second, reliance on third-party vendors for pre-baked audiences and retargeting means that buyers are under-leveraging their own data. By focusing on a small segment of the audience deemed likely to take immediate action, buyers are ignoring data that could be used to efficiently and cost-effectively increase their scale. Amazingly, this is data the buyer owns but isn't bringing to the table. But if ad exchanges can help buyers bring their own data with them, they will create a huge opportunity for brand activities because exchanges will become tools not just for refining audiences, but also for growing them in a smart and cost effective way.
Ad products
In the last few years, sophisticated advertisers have found real value in rich media. These ad formats deliver in-depth experiences to consumers and great results for marketers. Below is a table that can help demonstrate the estimated spend on rich media ads (granted, definition for rich media vary, and the below figures should be treated as an estimation only).
Unfortunately, rich media buys are very limited on ad exchanges. That's not just an inconvenience for buyers; it's a huge missed opportunity because the highest value ads (in terms of effort and cost) are often blasted out onto the web with little or no direction. In other words, all that audience data marketers have collected on their own and beefed up with third-party sources is effectively going to waste on buys that deliver audiences that are a mix of good, bad, and irrelevant consumers. Instead, we need to match the strength of exchanges (namely the ability to quantify and dissect audience) with the power of rich media ads to give brand marketers robust messaging that's right on target.
Quality content
Pure and simple, there is value to quality content. Some marketers do well regardless of where the audience sees the ad, but many marketers know that some messages have to be paired with quality content to be effective. There's nothing new about this. However, most ad exchange buyers don't have access to a publisher's quality content. This is especially true when you look at premium publishers, many of whom have stated publicly that they won't sell their inventory on exchanges. That reality means that the web's best content -- the kind that is most likely to deliver branding results for advertisers -- gets bought and sold with only the most rudimentary targeting. And that means that media buyers are missing the opportunity to get the right ad in front of the right audience at the right time.
Solution
In the final analysis, agencies need to be able to deploy audience strategies across the board for all types of marketing objectives -- their business depends on that kind of expertise and ability. Right now, ad exchanges offer agencies a somewhat limited arsenal. But the flip side to limitations is opportunity. That opportunity will present itself to agencies when the right environment materializes. That right environment is a fine balance between marketing goals and publisher needs. While striking that balance is easier said than done, I believe we are on the verge of the next iteration of ad exchanges, where sellers will have confidence and a fair share of the pie and buyers will be able to harness their data and buying power in order to reach -- and grow -- the right audience at the right price.
Yoav Arnstein is CEO and co-founder of Legolas Media.
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