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The “Exchange” Buzz!!

Back in May I started a three part series on “The Ad Exchange Model” where I focused primarily on the technical benefits that exchanges bring to the online advertising industry. Since then exchanges have received quite a bit of press with all the recent acquisitions and the word exchange has reached buzz-word status, without much understanding of what it actually means. Perhaps most confusing is that many don’t seem to be able to differentiate between an Exchange and an Ad-Network. For example, compare these two quotes from iMedia and, can you tell what the difference is?

“An ad exchange is a company that brokers online advertising by bringing publishers and advertisers together on a website where they can participate in auctions for ad space.” iMedia Connections — Ad Exchanges At a Glance

“Websites have ad space. Advertisers have ads. We’re the middle man – using our phenomenal technology to match ads to space.” Homepage

The ‘Nasdaq’ Analogy

One of the most common explanations I have heard goes something like this — “An ad-exchange functions just like the Nasdaq.” (this is in no way a jab at ContextWeb’s Adsdaq, this analogy is regularly used on all ad-exchanges). You like the Nasdaq right? Good, the Nasdaq is efficient has some fancy electronic trading and does lots of good things, which is why you should buy this ad-exchange. Oh, well of course! Ad exchanges bring efficiency just like the Nasdaq does, that makes absolute perfect sense! Try explaining an ad-exchange like this, it’s actually quite amusing. Generally what happens is the other person’s eyes glaze over slightly and he starts nodding as if everything has been made extremely clear even though he still has no clue what the ad-exchange actually does. You see, the Nasdaq analogy really doesn’t make sense but nobody wants to sound stupid and say “I don’t get it”, so they let it slide and remain confused.

So why doesn’t it make sense? Well, we could argue semantics of stock markets versus commodity and future exchanges — but who cares. The real problem is that the Nasdaq analogy works just as well for as it does for Right Media, adECN or AdsDaq. The Nasdaq is a mechanism which enables people to buy and sell stocks. Ad-networks are mechanisms by which people buy and sell ad-inventory. If this is surprising, it shouldn’t be — an ad-network is a mini-marketplace, very similar to an exchange or stock-market. The whole reason we have them to begin with is to enable thousands of sites to work with thousands of buyers. Can you imagine Netflix writing individual checks to the thousands of different sites where their ads are displayed?

So what’s the difference

Even though an ad-network may perform many of the same functions as an exchange there is a subtle difference. The network operates and controls all aspects of the mini-marketplace whereas the exchange is an “agnostic” platform that many buyers and sellers use to run their own businesses. In most ad-network limits each transaction (or ad-impression) to three parties: a buyer, the network and a seller. The exceptions to this would be networks such as Tacoda where a fourth data-provider might receive a cut of the transaction based on information about the user that the network provided. Of course in reality online advertising is far more complex than that and a single online ad impression can involve far more parties.

That’s where the exchange model shines — instead of one party “operating” the exchange on behalf of a number of buyers and sellers, the exchange provides a single technology platform upon which many companies — advertisers, publishers and networks — can buy and sell ads. Each impression can have anywhere from zero to many middlemen.

Who cares?

First off, the exchange is many companies versus one in the case of the ad-network. The platform is an ecosystem that supports a large variety of business models which results in more innovation and competition. Then there are certain basic technical benefits from having multiple participants in a transaction use the same platform, something that isn’t possible with an ad-network. For example, a proper exchange removes the operational barriers that have limited access to inventory in the past are eliminated in an ad-exchange. This enhanced the liquidity of the marketplace, which results in higher and more stable rates for publishers. I’ve covered most of these benefits in detail in my ad-exchange series.

Of course some of the above is still somewhat theoretical as we are just now starting to see the exchange model mature. As the model grows, most standalone networks will find life difficult without some level of integration with one or more of the coming exchanges.

In Parts II & III of this series I’ll talk about some tactical steps Publishers and Advertisers can take to leverage exchanges as either sources of inventory or pools of advertisers to maximize ROI and revenue and perhaps some bits on how Networks can different themselves in the coming landscape.

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  • Jennifer

    It finally makes sense, thank you.

  • Prabhu Ram

    That was insightful article – thanks @

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  • George

    Is there a use case for 0 middleman case? In that case what is the revenue model?

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