One of the things I find fascinating about online advertising are the dynamics between the advertisers (buyers of ad inventory), the publishers (sellers of ad inventory), and the many middlemen that are part of the relatively complex ecosystem that makes online advertising work (ad networks, ad exchanges, data providers, technology providers, ad rep firms, etc.).
The goal of the advertiser is to get the best ROI possible from their media buys, the goal of the publisher is to maximize monetization from their inventory, and the goal of the middleman or middlemen is to get the most out of the value they provide in the chain. In essence, they all have the same goals – to generate the highest possible profit for their business.
It’s the chain of middlemen between the advertisers and the networks that I find most fascinating because the only way they build a sustainable business is by providing the best possible ROI to both advertisers and publisers, while simultaneously trying to meet their own profit maximization goals. It’s this delicate balancing act that keeps the industry so dynamic and pushes innovation forward.
Ad networks were the first level of efficiency brought to the market, but there are a few clear inefficiencies with the traditional ad network model. Ad exchanges tried to address those inefficiencies and have succeeded to a large degree, with all the industry giants now owning and operating ad exchanges. What’s interesting is how ad exchanges will leverage valuable targeting data from 3rd parties online data providers are going to make the traditional ad network obsolete.
Let’s first clearly define the difference between an ad network and an ad exchange.
An ad network aggregates supply from publishers and aggregated inventory to advertisers. This is clearly an efficient way for advertisers to buy media since they don’t have to deal with tens or hundreds of individual publishers. Can you imagine if Netflix had to do a deal with the thousands of sites that run it’s ads? Despite the clear value they provide, however, advertisers and publishers both have a little bone to pick with the traditional ad network model.
Advertisers often complain that they don’t know exactly which sites their ads run on (since many ad networks are ‘blind’ networks). If there are 1,000 sites in the ad network, they’d naturally like to know exactly where their ads are run. The other big issue from the advertiser perspective is that the ad network in incentivized to deliver the number of impressions agreed upon in the campaign, while trying to maximize their own profit. For example, let’s say an advertiser makes a buy of 10 million impressions at a $1 CPM (cost per thousand impressions), for a total cost of $10,000. They know quite will that the goal of the ad network will be to deliver those 10M impressions at the lowest cost possible – so they can maximize their proft – while meeting the overall campaign goals so that the advertiser will continue to buy from them.
The publishers, on the other hand, are unsure if they are getting the best possible eCPM (revenue per thousand impressions) for their inventory. They know that the ad network is trying to “buy low, and sell high” – so they are always a bit skeptical that they are getting the best possible deal.
The ad exchange model addresses these core issues. While the traditional ad network controls the supply of ad inventory (publishers) and demand (advertisers) on it’s network, the ad exchange is a platform where supply and demand is not controlled by any one company. Any company that wants to either buy advertising inventory or sell advertising inventory is able to do so down the the level of an actual ad impression, simply by joining the exchange and participating in an auction. The price paid by a buyer or seller is closer to the true market value based purely on supply/demand. This is a huge leap forward in terms of efficiency and transparency, and will bring yet more innovation and healthy competition to the market.
With exchange technology, advertisers can buy only the inventory they want and pay (or bid) only the price that they want. Publishers, on the other hand benefit because they know they are getting the highest possible price for each impression they serve since advertisers are bidding for their inventory.
So now that supply and demand of ad inventory is more efficiently aligned in the exchange model, what is the next wave of innovation going to look like in order to make online advertising more effective for all parties involved. I think it’s clearly the evolution of online data providers. Companies such as BlueKai and eXelate are quickly gaining traction. They do not buy or sell advertising like a traditional network – instead, they simply buy and sell data which can be used to improve advertising. Better data equals better targeting of ads which result in better advertising rsults. No longer do networks or exchanges have to be constrained by the data they collect through their network. They can simply partner with companies like Blue Kai to get cookie-level data on users that they have no prior data for.
This combination of precision targeting data with the reach and efficiency of the exchange model will bring online advertising another step forward in terms of delivering results and reducing waste.
