If you haven’t already, be sure to read The Ad-Exchange Model (Part I) first as this is a continuation of that post.

Technology Integration

I’m sure you’ve got a picture in your head by now that there’s an annoying manual process here. Well, the technology piece gets worse. Today, most technologies that companies will consider “competitive advantages” are either optimization/prediction algorithms, contextual engines or behavioral datasets. Say we have this company called Google that has a great technology that matches ads to page content. The payout on each click depends greatly on what the ad is for. Pages relevant to autos or medication will net far higher payments than pages about the local pizza joint. So how is the publisher to decide when to show ‘Adsense’ over the $1.00 CPM deal he just signed? There’s absolutely no way for the Publisher to know the effective CPM of the adsense ad before he shows it.

Currently there are two ways that publishers manage this problem. The first is to simply accept an inefficiency in pricing. He may prioritize Google Adsense at $0.95 CPM across all pages because on average that’s what he can expect to receive at the end of the month. The other option would be to setup tens or hundreds of different tags targeted to different types of pages and then setup different prices for each. Again, this would require setting up tens or hundreds of categories in Adsense and then trafficking tens or hundreds of different tags into the Publisher’s adserver. Not really the best solution.

What about a behavioral advertiser that wants to buy New York Times traffic because he thinks he has data on some of the users. Since the behavioral data is stored in his cookie (see my post here about behavioral advertisers) there is no way for the Publisher to know which of his users will be valuable to the advertiser! How is he supposed to price this? This one isn’t so easy. One way is for the advertiser to simply buy a flat rate for all New York Times users and then simply count the users for which he doesn’t have data as a loss. The other would be some sort of rudimentary integration where the advertiser drops a pixel for the Publisher’s cookie domain for his users. Again, not ideal, not simple and INEFFICIENT!

High Latency/Slow Adserving

Each call to a different adserver costs time. The more hops that a user’s browser has to go to to receive the actual ad, the more likely that he is to click-off to another page before he actually sees it. Try it, go to myspace.com and click through on a few links. How often did the actual ad finish loading? The higher the number of systems involved in an ad call, the higher the difference between how many impression the Advertiser and Publisher’s systems count. Last I heard, 5-10% of impressions are lost for each additional adserver that is added to an ad-chain.

The Exchange Model

Fundamentally I believe people don’t quite understand why Ad-Exchanges are key is because they don’t realize that an ad-exchange is simply a glorified adserver. Really… nothing special, just one centralized system instead of three or more. Take a look a the following diagram:


Exchange Model

Notice a difference? In this case, there’s only ONE request to ONE system, the ad-exchange. The exchange is the ecosystem through which advertisers, publishers and networks all manage their businesses. Some may integrate their contextual technologies, some may simply use the system to set prices. But it’s ONE ADSERVER! Lets revisit the three main challenges we listed before.

Pricing/Operational Inefficiency — On the Exchange

Now that the advertiser and the publisher are both on the same system the whole world changes. There is no longer a need to transfer “tags” back and forth, as all the data is in the same system. Pricing is also no longer an issue as the advertiser has integrated his technology solution with the exchange and can now bid a different price on each ad impression depending on the page the user is visiting.

Technology Integration

Although there is still a significant amount of work to be done to integrate an Advertiser’s technology solution with the exchange, it’s worth it since it’s work that only needs to be done once. Once done, this technology will work across any and all publishers. Imagine this, the New York Times starts using Googleclick as their adserver, which is, of course, fully integrated with adsense. The NYT no longer has to worry about inefficient pricing for Adsense as the technology will be integrated with exchange. On every ad-call, Adsense can check the page content and place and appropriate bid according to the types of ads that it would place. Genius right?

Now what about the Behavioral network? Of course it will integrate it’s data with the exchange, and again, on every ad call it can enter bids on the users that it has data on and even price differently based on the types of data. Of course it will be slightly more difficult to integrate technology with the exchange adserver as by nature it’s more complex than a basic adserver, but this doesn’t really matter. Since the Advertiser only has to integrate his technology once, with one adserver it’s worth the effort.

High Latency/Slow Adserving

This one should be pretty obvious. Since there is only one request, ads serve faster and fewer impressions are lost.

Final Thoughts

I realize this post is long, but I think it’s important that people realize the true value that Exchanges bring to the market. It’ll be fascinating to see how the market changes as Google and Yahoo each attempt to take control of the billions of dollars of advertising that flow through the internet every day. This new model will truly change the online advertising world for the better, except perhaps for those ad-networks out that there purely benefit from the pricing and operational inefficiencies that exist in todays world.

Stay tuned for more thoughts on the potential acquisition of 24/7 by Microsoft, securing an exchange, ‘broker networks’!

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  • http://newspeedwayboogie.blogspot.com/ Weissman

    Another illuminating post. Sorry for hogging comment space.

    If your presentation is how the industry plays out (and I think it might), will all the players (publishers and advertisers) suffer from the same inefficiencies as multiple exchanges spring forth? Will we them for example, see the rise of “private label exchanges” that same way we have lately seen private label ad networks?

    If there are multiple exchanges will they all connect?

    Not that there are direct answers to these questions, but these are some that spring to mind. There does appear to be enormous value now in the idea of an ad exchange; I wonder over time do those become commoditized also? And if so, will ultimately value in this ecosystem come from data analysis and collection and manipulation (that’s where I think it will).

    Thanks Mike.

  • Jamie Bayardelle

    Wow, excellent explanation! Even though it is 4 years later, it still strongly applies…

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