The fate of ad networks in a post-exchange world

Upset with the Hollywood monopoly on the film business, director Francis Ford Coppola bucked the system in the late 1970s and raised his own money to produce the brilliant independent film "Apocalypse Now." Twenty years later, commenting on the rise of low-cost video cameras, Coppola said, "Well, of course filmmaking is changing because of these little cameras that are out there that cost very little money that everyone has. There's equality of opportunity in filmmaking that didn't exist when I was making films. And right now there's some fat little girl in Idaho who's the new Mozart of cinema using her mother's camcorder to create a new grammar and language of film."

The core issue he was talking about was access. A revolution occurs in any industry when the flood doors open and access is granted to many and not just to a few. The same thing is happening in our business. With the rise of the exchanges, any advertiser or agency with a demand-side platform (DSP) can instantly access billions of display impressions from thousands of sites with the cost efficiency and reach to rival even some of our industry's most well-known publishers. Premium publishers will take a hit, but it seems likely that it is the ad networks that will feel the most negative impact as the landscape changes.

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So, in a post-exchange world, how will the ad nets adapt in order to stay relevant and profitable?

It seems that the first line of defense has been to create dialogue about the true value of the inventory found via the exchange channel. There certainly are some real brand safety concerns with automated buying, and the general consensus from the creative half of our industry seems to be that exchanges help aid in the commoditization of online advertising and push the real issue of "good advertising" further off course. Finally, there's always the issue that the very nature of the exchange inventory (i.e., the fact that it's remnant/perishable to begin with) is a big indicator of its true value -- you get what you pay for, right?

The first person I wanted to chat with for this post was Michael Katz, CEO and founder of ad network Interclick. Earlier this year, I sat in on an agency meeting with Katz's company where our teams discussed the changing landscape. I mentioned that I had been recently advised by my DSP (and various exchanges) to change the language of our insertion orders to bar our ad net partners from buying via the exchanges because we would be bidding against ourselves and driving up prices needlessly. As well, why would I need them to purchase exchange inventory with their up-charge when I could buy it myself directly at lower CPMs?

Katz's answer was similar then as it is now: "Access does not imply success. If I go to Whole Foods with a celebrity chef, and we each have to prepare the same dish, despite the fact that we have access to all of the same ingredients, the final results will actually be very different. Inventory and data exchanges must be viewed as what they are, which is an access point for raw materials. The difference is in how you are able to transform those raw materials into a final product -- the final product being a highly responsive audience." He takes me deeper into his company's deep process, tools, and expertise -- all components to his current success and future growth.

What Katz said made logical sense. Even if I can buy directly from exchanges at half the cost, if at the end of the day ad networks can end up with a better cost-per-whatever than I can, wouldn't it be best for my clients to put them on the media plan? So, yes, the performance approach ad network could work in the post-exchange world, especially for our industry's direct response campaigns.

Think about it: When a media buyer's consideration set suddenly grows from a few hundred select premium publishers and ad nets to 6 billion individual ad impressions each day, the importance of human expertise grows tenfold. Actually, this really isn't a big shift for Interclick and other similar ad nets that have been preaching the value of their execution process for years. But the issue now becomes more pronounced when access to inventory isn't a concern anymore.

For another perspective on the future of ad networks, I checked in with Ed Carey, VP of sales for Undertone, and my go-to guy for all things ad network related. Undertone is a very relevant ad network for this discussion because it recently launched its own exchange, DirectConnect, which "integrates with existing buy-side technology, enabling agency executives to buy Undertone's premium inventory electronically." Outside of this new addition, Carey's message is similar to Katz's, which is that the company plans to stay the course with what it's been promoting as its strength for years. In Undertone's case, it is to focus on its quality display inventory.

"We focus on creating great relationships with our publisher partners and treat them as customers, not commodities," he says. "With the vast reach and liquidity on exchanges, having millions of uniques is not that impressive anymore. Our focus is to create unique inventory/products and data opportunities while providing high levels of service to often overloaded agencies." Carey relates to me a recent multi-site, multi-day homepage takeover campaign for an auto manufacturer as example of the kind of interesting package only something like an ad network could put together for an advertiser.

Carey explains to me some more of the inner workings of the value that ad networks bring to publishers and makes a pretty solid case regarding the important role they play in the ecosystem. For example, there are always going to be long-tail publishers that need monetization partners to help sell their inventory. On the flip side, premium publishers need ways to bring their perishable impressions to market without creating channel conflicts with their sales teams. Plus, why sell for rock-bottom prices on exchanges when ad nets will bring in higher costs per thousands?

So, what's the future of ad networks once the exchanges hit critical mass and every agency either leases or builds its own trading desk? I think both of the executives I spoke to have the right idea to continue pushing their core value proposition. It's the ad networks that solely rely on efficiency and reach that might find themselves phased out of the equation.

Ultimately, an ad network needs to continue to demonstrate value whether it's a pre-exchange or post-exchange world. However, with the dropping of the velvet ropes on inventory (a la Doug Weaver), it becomes clear that it's not only the ad nets that will need to evolve and adapt. The rise of the exchanges is just another game-changer for our industry, which has already seen its fair share of curveballs in its young existence. Agencies, advertisers, data vendors, etc., all have to continue to provide value to their partners, clients, and customers to stay relevant and profitable. That will never change.

Josh Dreller is VP of media technology and analytics at Fuor Digital.

On Twitter? Follow Josh Dreller at @mediatechguy. Follow iMedia Connection at @iMediaTweet.

 

Comments

What TF
What TF January 6, 2011 at 11:57 AM

What a dumb example. The movie industry is still hard to crack. Once in a while you get a low budget film make it, but at the end of the day the big hollywood studios will win outright. Agencies and start up exchanges and DSPs are making so much noise about this platform, but it will be the networks that continue to run the bulk of the impressions. Publishers will found out quickly that while there RPM's my triple, their volumes will plummet. They will need networks to maintain their revenue stream. Could there be anymore exchange propaganda on the web?

So if you want to trust your online revenues with a home made filmaker working out of her basement, go for it. If you want to make real, consistent and more money you should probably trust your inventory with Spielberg.

Good luck to you start ups that are beating the open x drum. See you when the bubble bursts...again

Brooke Aker
Brooke Aker January 5, 2011 at 9:18 AM

Thanks Josh. Very good, thoughtful piece.

At ADmantX (admantx.com) we agree 100%. We believe in both the creativity and the technology that makes for a good match between content and ad. Current keyword and math based matching cuts out the creativity - leaving agency strategists and media buyers beholden to the tech crowd. Within the next 6 weeks you will see ADmantX launch it's public site restoring the rightful place of these important creative professionals in the value chain.

Ad Networks that go back up the value chain to aid these agency and publisher professionals will win. Those that concede in "the race to the bottom" using exchanges will cease to be relevant.