Ad exchanges take ad impressions and let many potential buyers place a bid for said impressions. The buyer who bids the most wins the impression.
Right now, some ad exchange inventory (i.e. Right Media's Yahoo inventory) auctions off only non-guaranteed inventory. So if you step up and pay rate card or near rate card prices, you are guaranteed that inventory. If not, the inventory goes into an exchange, and the highest bidder gets it.
Participants in this exchange for non-guaranteed inventory include not only real-time bidders, but networks and other companies that have more fixed-price type contracts with various advertisers. One advertiser may be willing to pay $.75 CPM for an above-the-fold leaderboard on a top 1,000 sports site with a frequency cap of 2 per day. So this is entered as a $.75 (or less) bid for every impression that fulfills the above requirements.
As the market matures, though, you'll find that exchanges won't only include "non-guaranteed" impressions in their exchange marketplace, they will essentially include "guaranteed" campaigns in the exchange and just make sure they charge enough such that these advertisers win the auction enough of the time, essentially "guaranteeing" delivery. Good forecasting and data will enable them to make set these market prices for "guaranteed" inventory. If your rate card is $5/CPM and an ad exchange participant can pay $6/CPM for some impressions, why not sell it to the higher bidder (or raise the price as appropriate to the guaranteed buyer)?
So where does this leave the unsophisticated buyer, buying on more traditional contract terms, in essentially a non-real-time, or pseudo-real-time through an intermediary basis? You'll end up with impressions that meet your contract's criteria, but have very little value. Depending upon what criteria you fail to specify (and you can never specify them all), you'll get high frequency users (with notoriously low CTRs), younger users (even if the exchange doesn't know their age, someone else will), placements that are below the fold and go un-noticed by users, and impressions from users whose value is less then average due solely to the fact that no other advertiser has found an attribute that would make them look valuable. Even if there's no known attribute that makes an impression less then average valuable, the fact that there's no attribute that makes it more then average valuable (known by any participant bidding on the exchange) probably means it's worth little.
In summary, if you buy display advertising, get sophisticated, and get sophisticated fast. Understand exactly what user actions or conversions you associate value with and make sure you or a company on your behalf can correlate this value to every single data point that you or they or the data exchange has on a possible impressions. Those who fail to de-average groups of inventory will be stuck buying the slop, and firms who properly value inventory across a huge number of dimensions (both declared and proprietary data dimensions) will benefit significantly in this change in the way advertising impressions are allocated to buyers.
Right now, some ad exchange inventory (i.e. Right Media's Yahoo inventory) auctions off only non-guaranteed inventory. So if you step up and pay rate card or near rate card prices, you are guaranteed that inventory. If not, the inventory goes into an exchange, and the highest bidder gets it.
Participants in this exchange for non-guaranteed inventory include not only real-time bidders, but networks and other companies that have more fixed-price type contracts with various advertisers. One advertiser may be willing to pay $.75 CPM for an above-the-fold leaderboard on a top 1,000 sports site with a frequency cap of 2 per day. So this is entered as a $.75 (or less) bid for every impression that fulfills the above requirements.
As the market matures, though, you'll find that exchanges won't only include "non-guaranteed" impressions in their exchange marketplace, they will essentially include "guaranteed" campaigns in the exchange and just make sure they charge enough such that these advertisers win the auction enough of the time, essentially "guaranteeing" delivery. Good forecasting and data will enable them to make set these market prices for "guaranteed" inventory. If your rate card is $5/CPM and an ad exchange participant can pay $6/CPM for some impressions, why not sell it to the higher bidder (or raise the price as appropriate to the guaranteed buyer)?
So where does this leave the unsophisticated buyer, buying on more traditional contract terms, in essentially a non-real-time, or pseudo-real-time through an intermediary basis? You'll end up with impressions that meet your contract's criteria, but have very little value. Depending upon what criteria you fail to specify (and you can never specify them all), you'll get high frequency users (with notoriously low CTRs), younger users (even if the exchange doesn't know their age, someone else will), placements that are below the fold and go un-noticed by users, and impressions from users whose value is less then average due solely to the fact that no other advertiser has found an attribute that would make them look valuable. Even if there's no known attribute that makes an impression less then average valuable, the fact that there's no attribute that makes it more then average valuable (known by any participant bidding on the exchange) probably means it's worth little.
In summary, if you buy display advertising, get sophisticated, and get sophisticated fast. Understand exactly what user actions or conversions you associate value with and make sure you or a company on your behalf can correlate this value to every single data point that you or they or the data exchange has on a possible impressions. Those who fail to de-average groups of inventory will be stuck buying the slop, and firms who properly value inventory across a huge number of dimensions (both declared and proprietary data dimensions) will benefit significantly in this change in the way advertising impressions are allocated to buyers.
And just you wait until the search platforms let people real-time-bid on a much larger set of variables then are available to search advertisers today. How many relevant mathematicians are on your team, that can handle machine-learning and statistical inference type problems, utilizing data from advanced data mining?
Use ad exchanges to effectively de-average the value of impressions across a huge number of impression attributes (and bid appropriately), or get stuck with what no one else wants...and watch your ROI and volume get whiped out.
@Tom K- A big part of the equation is that there are lots of people who are willing to spend $100 million to generate a $435 million outcome.
Others believe it will be much less expensive the 2nd time around because others have taken similar approaches and the market has gotten dramatically larger since ad.com did it.
That said, I agree with your overarching point: when faced with the reality of how expensive learning is in the exchange ecosystem, many marketers will happily pay networks their extra margin because it is very well deserved. De-averaging is harder than it sounds!
The revolution that the exchanges have delivered is that every marketer is going to have to make this decision. De-average or perish!
Posted by: Tim Ogilvie | November 18, 2009 at 10:03 AM
Good points John - this is one of the reasons why I view exchanges as a step backwards in evolution. Why would you want to worry about all this when networks handle all this for you and are so confident in that ability that they bear some or all of the risk? How many mathematicians on your team will you need to hire to beat our AdLearn (which costs about $100 MM to build)?
People knock some networks for just taking a cut – if middle men don’t provide value, they tend to fail. What many people never had the chance to know is “what that value is”. Maybe it will take trying to do all the things a good network does on one’s own to realize that a GOOD network actually provides a hell of a lot of value. Happy bidding!
Posted by: Tom K | November 17, 2009 at 11:49 AM