A simple guide to how ad exchanges work

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More and more online display inventory is being purchased via ad exchanges than ever before. On these platforms, advertisers utilize technology to bid on each and every ad impression in a real-time marketplace based on the value they put on the viewer. For example, retargeting has become a popular tactic as advertisers are able to tag (and then buy ads exposed to) users who have already shown interest in them by visiting their site. This technique has proven to be very effective, with higher than normal click-through rates (CTR), conversion rates, and other key performance indicators (KPIs).

Currently, more than 400 billion global monthly impressions are up for bid to online marketers -- that translates to about 150,000 ads each second during high internet traffic times!

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Since the first banner ad was sold more than a decade and a half ago, it's no big surprise that publishers have aggressively sought ways to increase revenue by optimizing their ad inventory. Because so much of online inventory goes unsold or dropped into remnant channels for a micro-fraction of what can be made from presold, premium inventory, ad exchanges were an organic evolution in the ecosystem. A successful model was already in place with paid search where advertisers bid in a real-time, auction environment for ad impressions. As with paid search, exchange ad inventory is optimized by capitalist equilibrium -- some inventory is worth pennies, some is worth tens of dollars. Either way, ad price is determined by what the market is willing to pay.

Because most of the transaction is automated by technology, exchanges are very efficient for publishers to monetize previously unsold inventory without the need for robust sales teams, as well as for advertisers to buy direct inventory without middle men (such as ad networks) inflating costs. This has led some industry experts to predict that the market share of exchange vs. traditional online display buying methods will grow quickly in the next several years. In fact, this may have set off a revolution in which we will see more and more inventory moved to digital channels -- it might not be all available in real-time, but the efficiencies of this model cannot be denied. It's very possible that one day that any inventory that can be sold this way, will be sold this way... not just online, but TV, print, radio, etc.

The debates of the value of audience vs. context, technology vs. manual expertise, commoditization of inventory and its effect on our industry, etc., are already taking place in board rooms, industry conferences, and the blogosphere. As exciting as the new opportunity might be, there is resistance from the owners of the status quo, who will find their importance and market share drastically reduced by this evolution. As well, there is concern about the quality of this inventory and, as is always the case when targeting individual users, there will be privacy issues to take into account.

Regardless of the positive and negative context surrounding ad exchange buying, there still exists some mystery into how the technology actually works. Below is a top-level overview on how a publisher impression gets passed through the exchange value chain and ultimately gets served as an ad to the end user.

Note: This entire process happens in less than one-third of a second.

The publisher
An online user makes it to a publisher's site via a link or direct URL typed into a browser. The page loads and swoosh...

The publisher ad server
...the site's ad server recognizes that an ad box is on the page that needs to be filled. Publishers have a variety of choices on where to buy inventory. They can have in-house sales teams that work to presell their best (premium) inventory, ad networks that agree to help sell the inventory (either on an exclusive or non-exclusive basis), and, of course, ad exchanges, where advertisers can bid, in real time, for the impression. 

So the first-party ad server may put the ad impression up for bid on the exchanges directly or through...

The publisher's tools
...which can enable them to let the impression be handled by yield optimizers (such as Rubicon, Admeld, and PubMatic) that can help them maximize their site revenue. They can consult with optimization service teams to help set pricing, decide what kind of ad units should go on specific pages, make deals with ad networks and exchanges, etc. As well, these partners can offer propriety technology to facilitate and optimize ad sales.

If the publisher tool decides at this time that the best value for the impression is on an exchange, it will send the impression there.

The exchanges
Currently, there are only a handful of "major" ad exchanges:

  • AdBrite
  • AdECN (Microsoft)
  • ContextWeb  
  • DoubleClick Ad Exchange (Google)
  • Right Media (Yahoo... currently testing real-time bidding)

These media entities have direct deals with publishers, networks, or publisher tools to sell inventory on their open platforms. On its DoubleClick Ad Exchange, for example, Google has migrated inventory from its very successful AdSense program, which enables it to sell advertising this way on literally billions of web pages. Exchanges negotiate rates with the media providers and get paid to simply handle the transaction.

Advertisers and their agencies can elect to "get a seat" on these exchanges in order to be involved in the bidding marketplace. Exchanges have self-service, back-end platforms that media buyers can log into, set up and manage campaigns, and run analytics reports to analyze and then optimize their accounts without ever talking to a sales person.

However, many advertisers elect to not work with exchanges directly, and opt to use a demand-side platform (DSP) as their trading desk of choice.



Jacob Zuteck
Jacob Zuteck September 1, 2011 at 1:22 PM

Great clarification on ad exchanges. I know that this is becoming a growing trend, and have even seen classes including these topics in their e-commerce courses. Several universities such as www.coloradotech.edu have degrees specific to web development. Normally when this happens, we tend to see a new crop of entrepreneurs emerge with a slightly different look at our existing framework, such as ad exchanges. It will be interesting to see how this field evolves over the next 5 years.

James Oppenheim
James Oppenheim February 24, 2011 at 6:07 PM

Great article, Josh. You do a really good job of explaining the ad exchange process and ad ecosystem in its entirety. While I do agree with what you said about Peer39's technology – that our customers do use us as a way to filter out impressions that don't align with their brand or definition of safety in real time, thus ensuring a safe environment for them – we're more aligned with what you call the "data layer” not "verification systems”. Verification is just that, a way to verify that which was bought by an advertiser is what was delivered by the publisher, or network. Ad Blocking, which you also mention is another means of protecting a brand. Ad Block happens at the creative level to not show an ad after the impression has been bought. And then there is what we do: Peer39 uses semantics and page level intelligence to understand content at the page level. This enables advertisers to make buying decisions based on our attributes before they buy an ad impression, according to their brand or definition of safety. We work in RTB environments to provide this data in real time to help inform media bids and buys. The main difference between us and verification companies is that we are pro-active vs. re-active.

Liz Zedo
Liz Zedo February 23, 2011 at 12:08 PM

Great piece. Apparently there is going to be a new type of exchange coming to the market for only tier 1 agencies and high end premium publishers - www.zincx.com. I hear it is invite only and there are limited invitations.

To get your invitation visist www.zincx.com now

AdOps Insider
AdOps Insider February 18, 2011 at 4:15 PM

If you're interested in a more detailed / technical explanation I invite you to read my post geared towards Ops professionals - http://www.adopsinsider.com/ad-serving/diagramming-the-ssp-dsp-and-rtb-redirect-path/

Ken Lauher
Ken Lauher February 17, 2011 at 1:44 PM

Josh, Thank you for including CONTEXTWEB in the list of "major" ad exchanges. Just wanted to provide clarification on the ADSDAQ name. As of October 7th, 2010, CONTEXTWEB has changed the name of that exchange to the CONTEXTWEB Ad Exchange. Dropping the ADSDAQ sub-brand helps to minimize confusion in a very complicated market and enables CONTEXTWEB to speak in a unified voice. If you could please update the listing to replace ADSDAQ (ContextWeb) with just CONTEXTWEB would be greatly appreciated.

Nathan Schor
Nathan Schor February 17, 2011 at 11:24 AM

Great explanation! I've read a few of these types of articles that attempt to spell out the logic and supporting technology behind ad exchanges and how they differ from ad networks, but this one is the most lucid.
You also specified the timing constrictions necessary to make it all work smoothly. I always suspected they must be met but this is the first time actual numbers were provided.