blog ad exchanges are future picard

Ad Exchanges Are the Future

By Eric Picard, ClickZ

Advertising is one of the last significant
business markets that remains opaque, manual, archaically complex, and
requires a large relatively skilled set of humans to perform each
transaction. It's a market ripe to embrace technology for automation,
liquidity of inventory, pricing transparency, and simplification of
business process.

Today, every ad campaign can be traced back
across a host of human driven processes. The final cost of the
inventory is calculated through an opaque process that smells more like
1907 than 2007. The vast majority of hours spent by media buyers and
media sellers are related to process and nailing down the minutiae of
"the order." The buyer ends up with inventory that had no clear price
when the discussion began, and frequently contains inventory they
really didn't want or need tacked onto the package in order to meet the
seller's sales goals. The seller ends up spending most of their time
putting the package together and meeting the requirements of the
order-taking process rather than working on strategic relationship
sales.

A few years ago, a friend complained that moving to an
exchange for advertising would reduce inventory to a commodity status.
I argued then, and even more strongly now, that inventory is already a
commodity – one with an explicitly time-sensitive shelf-life. Selling
an ephemeral commodity through a complex, time intensive process
doesn't make sense. Additionally, as technology evolves and gives us
the opportunity to evaluate and enrich the value of inventory (through
various types of targeting and optimization), the complexity moves from
content associated inventory to audience attributions evaluated in
real-time. With all this complexity we must simplify the buying
process, and things are only going to get more complicated.

An
advertising exchange creates a transparent, automated clearinghouse
that will enable publishers to get maximum yield (highest price per
impression) while enabling advertisers to buy each impression with
complete transparency regarding the value of that impression, evaluated
against their own buy criteria. Bidding in these scenarios would occur
in real-time, but unlike the current auction environments, there's no
reason why the activity couldn't replicate the reserved (guaranteed)
buying that happens in display premium advertising today.

To
accommodate this new world, we require a variety of new functionality
that not offered in the current market, particularly much more
interoperability across the various tools. For example, in real-time
the agency side ad server could customize the offer based on targeting
data available from an outside vendor, and the bid optimization system
could alter the bid based on targeting attributes offered by the
publisher. The exchange sits in the middle and simply acts as a
clearinghouse, ensuring the highest bid wins the impression. This
scenario isn't technically feasible today.

In the short term,
ad exchanges are relegated primarily to the remnant ad market, where
they optimize yield for the publisher by ensuring the highest bid
always wins a real-time auction. This isn't terribly different from
what happens in other real-time auction environments such as search.
But this is display advertising. The inventory owner can set a minimum
for the impression to be accepted by the exchange.

The
future of advertising via ad exchanges is the place where advertising's
promise is met. To illustrate, let's drill into a single ad impression
on a news Web site.

The page that the impression sits on is an
article on anti-lock brake technology. Some amount of inventory bought
against that page is explicitly a buy against news. Additionally, some
inventory is booked against this page and also the auto section of the
news site. Audience-based buys were also made against various targets
as run of network buys.

How does this play out in the future advertising exchange?

1. Person visits a Web page with an ad call sitting on it.
2. Ad call is made to the publisher's ad server.
3. Publisher shares the impression with the ad exchange.

• The publisher's ad server enriches the impression data with anonymous targeting attributes owned by that publisher
• Publisher sets a minimum price of $5 CPM on the impression because they already sold inventory on that page, as described above

4. Ad exchange exposes the impression to a variety of bidders in real-time

• Bidder 1 has a pre-set bid for the targeting criteria delivered by the publisher system set for $8 CPM
• Bidder
  2 uses a bid optimization system that evaluates both the publisher's
  enriched data and uses its own set of targeting capabilities. They
  determine an exact match between the browser behind this impression and
  past visits to the advertiser's site and bid $20 CPM
• Bidder 3
  is a contextual network that scrapes the page the impression is sitting
  on. It determines they're willing to take a risk and bid $1.85 CPM on
  the impression because there's a high likelihood of a click.
• Bidder 4 has a pre-set bid for news pages at $.50 CPM.
• Bidder 5 has a pre-set bid for auto-related news stories at $1 CPM.
• Bidder 6 has a pre-set bid for any content at $.10 CPM.
• Bidder
  7 uses a bid optimization system integrated with their own database of
  behavioral targeting data. He knows the user behind this impression is
  searching for red SUV Hybrids, and has visited several automotive Web
  sites that day shopping for them. They have several advertisers with
  creative that show red SUV Hybrids. They bid $35 CPM.

5. Ad
exchange reviews the bids in real-time and determines Bidder 7 has the
best bid. It connects them back to the publisher ad server, which
redirects to Bidder 7's system for ad delivery.

This
brave new world scenario isn't far away. In some ways, this is how
exchanges could function with current technology (the Bidder 7 example
is a bit extreme). Within a few years ad exchanges and the various
technology components needed to serve this need will be able to deliver
on a scenario exactly as I've described. And there could be thousands
of bidders on every impression.

So what happens to the media buyer and seller roles? They evolve.

Media
buyers will move more to an analyst role. They'll create business rules
that match their advertisers' campaign goals and that will function in
the bid-management/optimization system of their choice. Their work will
be somewhat automated, but much more technically complex. It will
require more skills and knowledge than a junior media buyer may be able
to handle today.

The sales roles will move away from order
taking to focus on relationship sales, educating media buyers on the
value their inventory may have beyond the simply quantifiable. That
means fewer but more senior sales people. New technical roles that
involve higher scale will arrive on the publisher side. Bear in mind
some portion of inventory will always be sold directly, and
super-premium inventory (home pages, site takeovers, etc.) are unlikely
to move into auction environments any time soon. But for the vast
majority of inventory, auction based sales and exchanges that act as
clearinghouses for inventory, will be the norm. This future is coming.
For some companies, it's already here.

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