Our media strategies editor talks about why the auction marketplace can’t always work for media planning and buying.

A lot of people are big fans of auction marketplaces. The continuing popularity of eBay over the years is proof of that: the company has a market capitalization of over 56.4 billion dollars.

The stock market is another example of how an open auction marketplace (or nearly open) is desirable for both buyers and sellers.

In the face of large, successful auction marketplaces, every few years the question is asked why doesn’t media get bought and sold by that route?

The argument seems simple enough. If you have a large, open market where both buyers and sellers can communicate easily with one another and engage with full disclosure, the actual value of inventory can be determined and exchanged. Prices will pitch and yaw with the movement of demand, and visa versa. Media assets can be defined in commonly accepted ways that will correlate with value such as targeting parameters, context, behavior, demographics, et cetera. In the online space in particular, assets can be delivered with minimal cost and low friction, the marketplace will be trusted and agrees that the asset is of value, and there is a critical mass of participation in the marketplace.

Those of you who’ve been around long enough might remember several attempts at doing this, most of them turning out unsuccessfully. Remember the earliest version of Flycast? Remember AdAuction? Some might say that those didn’t work because the specifics of those media assets were not fully disclosed and so therefore there was not enough information to even begin a market dialogue because both parties didn’t know what was being talked about. There is some truth to that.

But auctions are helpful really only when the value of a product is indeterminate, when neither buyer nor seller has a real sense of an asset’s innate value.

Look at it like this: there is a difference between materiel value and perceived value. The wider the margin between the latter and the former, the more money one can make on the sale and the better the buyer feels about what has been procured if what is paid is less than that perception.

It is the objective of the producer to drive down the materiel costs and the seller/marketer to drive up the perceived value.

Trial and experience with the product in the marketplace will contribute to the perceived value. Over time that perception of value will stabilize. Auctions don’t apply well to product that has been subject to the normalizing means of valuation both time and experience enforces. With a mature product, the margin yield becomes too small to justify the resource allocation necessary to realize it.

Why Not Media?

The problem with auction-based marketplaces for intangible product such as media is its susceptibility to the irrational exuberance and hysterical whimsy of human passions. A mixture of limited inventory, greater fool theory, and the incorrect predictions of any audience's content consumption can lead to an illogical attribution of value.

If enough market movers are possessed with the same misdirected desires, the entire market can be driven first into the sky and then over a cliff. 

For examples of this, I refer you to the Tulip Bulb Frenzy of 1637. Or the NASDAQ of 2000.

This is not to say that auction marketplaces cannot be self-correcting. Price exhaustion and consumer fatigue (in this case, the advertisers) would eventually bring costs back to reasonable levels. The problem is that those corrections will be more violent. Higher highs lead to lower lows. And with advertising, some investment must always be made in it so as to keep one’s hold on the general marketplace, meaning a correction will only come once all options (and maybe budgets) are depleted.

Maybe that’s alright. Marketers can try other, less expensive media. Maybe someone will invent new ways to communicate to audiences. But if low CPMs were the only consideration, everyone would be buying cost-per-action and outdoor media.

Auctions won’t do well with that media which tradition has established a particular value. It will certainly allow highly priced and highly prized media to realize greater dollar yield, but it could also lead to a kind of tulip bulb frenzy situation, which will ultimately just damage the larger market. There is an entire Himalayan mountain range’s worth of media out there; focusing on just Mt. Everest without any degree of regulation that a negotiable fixed-price marketplace creates just ends up ruining that mountain for everyone, including even those who can afford to climb it.

Auctions are great when the value of the product is uncertain. It can work for some media when the seller of that media isn’t sure what it is worth and a buyer isn’t sure how much they can pay for it.  But there are plenty of reasons for products not to be subject to a floating marketplace, producer confidence in the value of the product or buyer inertia among them. To have a successful bid-model marketplace, you have to not only have willing buyers but willing sellers.

If everything was a viable subject for an auction model, we’d be buying cans of sodas and Jaguars in this fashion. And some media inventory is like a Jag, and some is like a can of soda. Some of it can be subjected to auction, but that kind of marketplace will never be right for all media inventory and all advertisers who want to buy it.