Mike On Ads

One of the things that boggles my mind is how massively fragmented and confusing the display world still is. It’s been over three years since the first ad-exchange launched yet the world hasn’t significantly changed. What makes matters more confusing is that there is no consistent terminology to describe what a company does. It seems everybody describes themselves as either a platform, marketplace or exchange — so what’s the difference?

A company can call itself a publisher, an agency, a network, a broker, a marketplace, an exchange, an optimizer — what does it all mean? What’s the difference between Right Media and Contextweb? Admeld and Rubicon? That’s really the problem — today’s commonly used labels are useless.

Instead of evaluating a company based on labels, evaluate it based on the services it provides, technology it has, the partners it works with, the revenue model and the media revenue it facilitates. Note — below I focus entirely on companies that in some shape or form touch an *impression* — either as a technology provider, buyer or seller. There are peripheral companies that provide a whole world of supporting services, but I’m leaving those out for now to avoid confusion.

Services

Each company provides certain core services to partners, customers and vendors. These primarily center around the relationship the company has with the media that flows through it.

Technologies

There are certain core technologies that define what a company does. Note that you will find technologies such as dynamic creative optimization, behavioral classification and contextualization missing from the below list as they are differentiators — they don’t define what a company does but provide a competitive advantage over the competition.

Size Matters

Last but not least, the size and the partnerships of a company matters. I’ve written before about the perils of building technology in a void. You can have the most amazing platform that provides great services, but if you’re only running a few thousand dollars a month it’s all moot in the grand scheme of things.

Size can be measured either in impressions or revenue, the latter being far more telling. Getting a billion impressions of traffic a day isn’t hard these days — between Facebook and Myspace alone you probably have close to fifteen billion impressions of traffic running daily.

There’s a huge difference between a partnership and a media relationship. If you’re willing to foot the minimum monthly bill, anybody can buy Yahoo’s inventory through the Right Media platform. That doesn’t say much about who you are as a company. A partnership is different — it might be deep API integrations tying two platforms together or co-selling and marketing a joint solution.

What does it all mean?

Phew… that was a long list, so what does it all mean? Well, the above provides a slightly less fuzzy framework than the classical “ad-network”, “marketplace” or “exchange” commonly used labels to describe a company. Let’s look at a few examples:

Rubicon Project provides publisher representation services through it’s network optimization platform, arbitrages inventory through it’s internal sales team has both an internal and has an externally available adserver (one for the sales team and one for publishers) and is rumored to be working on real time buying APIs. That’s a hell of a lot more descriptive than “publisher aggregator” or “network optimizer”. The one thing I always find confusing about rubicon is that it their incentives seem to be fundamentally misaligned. How can you both arbitrage inventory and serve as a publisher representative? Updated (5/3/09 @ 8pm EST) — I seem to be misinformed. Per comments, Rubicon does not sell inventory directly to agencies.

Compare this to AdMeld which provides publisher representation services through it’s network optimization platform — an externally available adserver — and provides buying APIs (currently via passback). So what’s the difference with Rubicon? Well, one has an internal ad-network and the other doesn’t — different incentives. Publishers are starting to treat Rubicon as another ad-network in the daisy chain whereas AdMeld sells all remnant inventory as a trusted partner.

ContextWeb has an internal adserver (with a self-service interface… I don’t count that as external), they arbitrage inventory, and provide buying APIs. Compare this to Right Media which has an externally available adserver, buying and selling APIs, internal trading, data aggregation and arbitrages media (through BlueLithium/Yahoo Network). Both are “exchanges”, but clearly there is a pretty big difference between the two!

Of course if you get to Google your mind starts to explode just a little bit — as they do everything. Seriously. They buy & sell, have multiple adservers, provide buying APIs, internal trading, data aggregation…

Final Thoughts

I hope this post has given you some ways to start thinking about companies in the online ad space. I’d love to hear your feedback in the comments — what core services & technologies am I missing?

Now — next time someone says — “I’m an exchange”, why not ask — “Ok, that’s great, but what do you really do.”

Yahoo Research via Geeking with Greg:

In Web advertising it is acceptable, and occasionally even desirable, not to show any [ads] if no “good” [ads] are available. If no ads are relevant to the user’s interests, then showing irrelevant ads should be avoided since they impair the user experience [and] … may drive users away or “train” them to ignore ads.

What a crazy idea — what if one were to actually make more money by not advertising. It makes total sense. We’re inundated with media. Our eyes have been trained to ignore those lovely 160×600 and 300×250 size objects that we see all over our web pages — especially on social networking sites where our users spend so much time.

This fascinating paper on negative externalities further reinforces this idea:

Most models for online advertising assume that an advertiser’s value from winning an ad auction [...] is independent of other advertisements served alongside it in the same session. This ignores an important externality effect: as the advertising audience has a limited attention span, a high-quality ad on a page can detract attention from other ads on the same page.

I’m sure everyone by now is familiar with Pareto’s law — otherwise known as the 80/20 rule. Applied to advertising Pareto’s law states that 20% of impressions generate 80% of the revenue — and yes this is true for most web 2.0 properties that I have worked with. So what if we stopped showing ads on the 80% that were only generating 20% of the revenue?

Instead of showing crappy CPA offers the publisher should show either nothing at all, or some relevant site content. Show a snippet of the friend-feed, or maybe a list of ‘online friends’. Show “interesting related links”, or “new photos posted”… it doesn’t really matter. Show something that is of interest to the user. The point of the exercise is to train the user to start looking at this specific space again.

In the short term this may very well sacrifice 20% of revenue, as users who were previously inundated with ads are learning to trust those slots again. Longer term we get more user engagement which means higher rates on the other 80% of revenue. I wouldn’t be surprised if you saw a 50% increase in engagement just by showing 80% fewer ads — and that increase in engagement translates directly to higher rates and a fatter bottom line.

There are a world of other benefits too. First of all — fewer ads means happier users. It also means fewer creative issues (whether content or malvertising). The publisher can also use this as an opportunity to drive traffic from lower to higher monetized sections of the site. Eg, Myspace could drive users from the low $0.15 CPM User-Generated Content pages over to the very brandable ‘Movies’ section. And last but not least — showing fewer ads will create a sense of scarcity around what today is most certainly considered “bulk” inventory. This scarcity will help justify higher rates on the premium guaranteed buys — further helping to fatten up that bottom line.

If this is obviously so good, why is nobody doing it? Well there’s only one small insignificant problem… Publishers have no way of identifying the top 20% of impressions. You see, especially on social networking sites a huge portion of that 20% are impressions that are sold behaviorally via ad-networks and exchanges. Those ad-networks and exchanges need to see the full 100% to be able to cherry-pick the 10% that are valuable to them thereby making it quite difficult for the publisher to “not show ads” on worthless impressions. In fact, since all reporting is aggregated, most publishers don’t even realize that the majority of their revenue comes from a relatively small # of impressions.

How do we get around this? Well… that’s another blog post =).

In my last post I said that the traditional ad network model was dying — what I didn’t talk about is how I think the network model will evolve over the coming years.

The fundamental flaw with the traditional network model is that the network is incentivized to optimize it’s own revenue — not maximize value for the advertiser. As long as you keep the advertiser happy that he’s getting a great ROI, and the publisher gets his paycheck — the network can keep the rest. The less demanding the advertiser, the less intelligent the advertiser — the better for the network!

Let’s take a simple example — A classic agency IO line item has a size, cpm, budget and some basic targeting parameters and goals. For example, one agency may buy $10,000 worth of US based inventory at a $0.50 CPM for 728×90s with a target CTR of 0.5%. Another way to think about this is that $10,000 @ $0.50 is 20M impressions, and at a 0.5% CTR means the agency is expecting to receive 100,000 clicks.

Now the smart network will go out and see how cheap he can go and acquire 100k clicks on news inventory. Why? Well, assuming he can deliver the volume his revenue has already been fixed — it’s $10,000 no matter what he does. The only thing on the line is whether or not this IO will be renewed or expanded next quarter. Since cost is the only variable the network can manipulate to increase profit he will go out and find the cheapest possible inventory that at least a 0.5% click through rate. The chart below demonstrates this with fictitious data. Buying cheaper inventory results in a lower CTR, but also significantly higher profits. All the network has to do is figure out how happy he wants to make the advertiser — just happy enough to renew (and maybe increase) next quarter’s IO, but not quite enough to cut into his healthy profit margin.

Network Profit & Cost w/ Campaign Performance

Now you might think that this only works if advertisers are buying on a CPM, but sadly that is not the case. Whether it’s on a CPC, or even a CPA — it’s all about finding the cheapest way to fill the requirements. You see, there is actually a strong difference in lead-value depending on the source of the inventory. A click from Yahoo’s homepage is actually worth significantly more than a click from a social networking site such as Myspace or Facebook. Similarly, a lead or conversion from the New York Times (one of the most affluent properties on the web) is worth more than a conversion from helpforhomeowners.org. The majority of buyers out there today do not have the necessary lead tracking tools to accurately identify who is sending them good or bad leads.

I think that it’s this fact alone that justifies the need for central exchanges — which charge transparent fees to connect buyers and sellers. The problem with exchanges is that most agencies lack the deep buying knowledge that the ad-networks have. Just because there direct access to billions of impressions per day doesn’t mean that anybody *can* just buy them effectively. It takes serious skill and agencies still need help finding the inventory that will work best for their campaigns.

It is here that we are starting to see a new breed of ‘network’ — 100% advertiser focused buying networks that put their interest squarely with the actual agency. By charging transparent fees (say 10-20%) and being open about the inventory they buy — the agency can trust that efforts are spent optimizing and acquiring the best possible inventory for each campaign — not the cheapest that will fulfill the actual requirements.

Yet there is also a longevity question. Although agencies lack the skills to buy effectively today, this is something that they are all working on — at what point does the agency become a competitor of the “buy side” network — and visa versa? Logically these business don’t need to be separate, but practically I wouldn’t be surprised if they remain that way. Agencies are naturally filled with “right brain” people — they are creative, imaginative. Networks are naturally “left brain” focused — analytical.

Next post — we’ll take a look at the publisher rep firms and their growing role over the coming years.

Unless you’ve been living under a rock somewhere you’ve probably heard that the whole world is crumbling around us. We’re entering the great depression, guard your cash, no more VC, we’re all POOR.

Well, first let me reassure you — so far the nuclear winter hasn’t started yet. The data that exists so far has been fairly sparse and inconclusive — Google is up, AOL is down… Rubicon claims the sky isn’t falling whereas PubMatic claims prices are steadily falling. I’ve had quite a few in depth discussions over the past few weeks on exactly this topic — where is the industry headed? How is the economic downturn affecting online advertising? What are the big boys doing? What’s new exciting?

Last week’s AdECN announcement and a short stroll through the booths at AdTech finally motivated me to get up and write another blog post! (sorry for my absence, life is pretty hectic these days). So here goes in no particular order my views of exciting things in the market today and what’s coming next.

The traditional “marketplace” network model is dead

By traditional networks I mean the models that ValueClick, Casale and Ad.com were founded on — networks that were primarily built by matching large amounts of supply and demand. The name of the game was to get as many advertisers and publishers together as possible to build the largest marketplace. Once the network was large enough, ad dollars naturally flowed to these players as they were a “one stop shop” for thousands of publishers. Large margins are made by buying low and selling inventory to advertisers at a higher price.

This model was used by many companies to build incredibly successful networks — and in fact — most of these networks are *still* very successful. The problem is, the world is changing. Namely:

First, access to inventory is no longer a competitive advantage. Between Exchanges, publisher aggregators and a mass influx of social networking inventory — everybody has access to billions of impressions.

Second, agencies want to cut out the middle man. Agencies have started to realize that networks are taking massive cuts out of their media buys while in many cases simply serving as an aggregator. And indeed, with supply easier and easier to get access to, many agencies are launching initiatives to cut out the middle man. Whether it’s the new Havas Artemis system, the Publicis Vivaki network or the WPP 24/7 acquisition — they’re all moving in the same direction.

Essentially — networks are getting pressure from both sides. On the supply side they are getting commoditized by aggregators and network optimizers and on the demand side a new crop of technology companies is attempting to empower agencies to buy directly — cutting off the ‘marketplace’ networks.

The rise of the pubgregatimizer

Publishers have finally realized that they might not be the best ones to sell their non-guaranteed inventory. Three well funded companies have emerged that are looking to help publishers navigate the sea of ad-networks and best monetize — PubMatic, Rubicon and AdMeld. I think the value prop is obvious — only the largest of publishers can afford the staff to fully manage the distribution of remnant inventory across various networks. At the moment it looks like the three are neck & neck in terms of unique visitors:

Decreased growth rate will force more accountability for agencies

Although the sky isn’t falling, money is getting scarcer. This scarcity will force everyone along the entire value-chain to be more competitive. This will start with the agencies and go all the way to the publisher — everyone will have to prove both effectiveness and figure out new ways to differentiate themselves from others. Scarcity of dollars will also put pressure on agency margins forcing them to look elsewhere on ways to increase their revenues.

Some initiatives have already started here — Publicis has launched Vivaki, WPP bought 24/7 and Havas has Artemis. Although the exact strategies are vague, one thing is clear — Agencies are going to start getting more involved in the buying process as they see their margins drop to 10% or below whereas our traditional networks (dying per the above) are still pulling in 30-50% margins on their media.

The challenge here is that most agencies aren’t setup to buy effectively online. Buying online is much more about technology, analytics & strategy than it is about creativity, ingenuity and imagination. To buy effectively online an agency needs to start working on it’s brain — which of course is currently largely dominated by “right brain” creative folks and lacking in “left brain” analytics. One of the things we see here as an increase in popularity of the ‘media trading experts’ — networks that focus exclusively on helping agencies buy the best possible media for their clients. Leveraging exchanges & aggregators instead of traditional ties to publishers these networks can serve as an unbiased agent of the agency.

Exchanges will move to real-time integration

Even though only one has made it public — AOL, Yahoo, Microsoft & Google are all working on real-time integrations. Why? Any central trading platform for media needs to support different engines & algorithms. If nobody can differentiate themselves on a platform, then nobody will want to use said platform! Although Right Media was a terrific step forward as the first central trading platform, it’s major flaw is that it took the technology out of the network. Real time bidding platforms solve that by allowing smart advertisers & networks to run their own engines. With the big 4 all working on something… it’s going to be interesting to watch what happens!

This combined with all of the above show a great picture for technology focused ad networks. As I wrote about earlier here and here — it is the difficulty of integration that has limited many an online ad technology startup from succeeding. With supply becoming more and more available in more and more programmatic manners — a time is coming when the guy with the best algorithm will actually stand a chance competing against the guy with the best relationships at WPP.

Final Thoughts

This is an incredibly exciting time in the industry — the whole industry is fragmented, there is little standardization and there is a massive amount of pain. I think big changes are coming. I’ll try my best to be a little more prompt about blogging about it while it happens

Also — if anybody is going to be at Adrevenue 08 and wants to meet up, shoot me a note.

This post by Carsten Cumbrowski on data-flow in affiliate marketing gives some good insight into the inefficiencies of the affiliate marketing world. The diagrams (see below) look very similar to display — too many tiers of aggregators primarily dealing with massive segregation, lack of standards and inefficiencies.

A few weeks ago I wrote a post about the difficult times that tech startups are having in the industry today. Reading through the post, I realized there was a key point that I forgot to make. Whether or not your company is a services business, a technology play or a media company:

If you aren’t generating revenue, it’s time to re-evaluate your business.

There is so much VC money out there these days (although word on the street is it’s drying up!), that it’s easy to forgo initial revenue and start building & scaling a business in a void without having hard cash paying customers. Here’s the thing — you should be able to prove your technology quickly and with minimal investment… if you can’t, you’re overthinking either your product or overestimating the requirements of your clients. In fact, with the right contacts you can probably sell a 20-line PHP script as a “pixel server” — at least to a network or agency that desperately needs to have “behavioral technology” for the next big agency deal.

Of course the script won’t scale, and it probably won’t work as a standalone product for multiple customers which means you’ll have to rewrite it and hire some real engineering talent to turn it into a packageable product. But if you have an idea — build a POC quickly, get yourself a customer, prove there’s interest and start generating revenue! Doesn’t matter if it’s adserver, behavioral tracking, a new media network — each idea has a revenue-generating “quick win” you can close to prove the business works. Right Media was a profitable for over a year before it launched the exchange. A single good CPA deal with AOL funded most of the first year of the company!

And it’s not just about the revenue. Real customers provide real data, real feedback and real stats about scalability & performance — invaluable feedback & information that will help you build a better and ultimately more competitive final product and/or service offering.

I’m not saying you have to be profitable (although if you’re a pure media company you better have a damn good reason not to be). There is definitely an argument to be made that investing in engineering today will pay off in revenues later, but that does not give you an excuse to develop in a void hoping that your product will be a smash hit.

If you’re not making money now, chances are you won’t make any later either.

PubMatic just released a new AdPrice Index which was immediately picked up by a rather frightening number of news sources: Business Week, ClickZ, The Washington Post to name just a few.

First off, serious kudos to the PubMatic team for releasing these numbers. This post is in no way meant to be negative to them, they’ve got a great service and by releasing this index they are upping the bar for everybody else — I wish everybody released a monthly report indicating their view of the market. Note that Rubicon had previously released a less statistical and more narrative Q1 Ad Network Market Report.

What I find somewhat surprising is the level of buzz the PubMatic release generated. Although I’m certain that the statistical quality of their numbers is good I want to point out that there is an inherent sample bias for the Index not only on the publishers selected but also the ad-inventory being analyzed. The publishers are ones that chose to signup for the PubMatic service to help them optimize revenue from Ad Networks. Next, PubMatic’s numbers reflect only the subset of inventory that was sent to PubMatic and the media dollars that inventory made based on the networks that work with PubMatic’s platform.

So even taking these numbers with a grain of salt there are probably enough pubs & networks that something happened in April… so surely it must be time to PANIC because we’re in this massive recession and online advertising is going to dry up and die … right?

Well, I’ll let you in on a little secret. Agencies have quarterly budgets. Each ad-campaign has a certain target revenue that needs to be spent by the end of the quarter, and since most publisher forecasting systems are prone to error there are a large # of campaigns that find that their guaranteed buys have under-delivered and are now nearing the end of the quarter with significant money left to spend. Where do they go? Ad-Networks. Through years at RM we saw the same thing year after year, quarter after quarter. March, June, September and December were always high in revenue, with December being particularly great with some nice “end of year” budgets moving to remnant display. So my guess — what we’re seeing is a normal cyclical trend, where Q1 budgets moved to Ad-Networks in March, disappeared in April and hence PubMatic saw a significant drop in revenue. Of course I could be wrong, but either way the media should certainly stop predicting the impending doom of the online-ad market.

More important than the actual numbers, I think that the reaction to this event shows how desperate we are for insight and visibility into what’s going on. How much money is flowing, and to which parties? What I’d like to see is the Quantcast 100 Advertising Index. Impressions, CPMs & revenue for the aggregate top-100 sites on the Net — now those would be numbers to analyze and report on!

No, this isn’t another “OMG, the facebook API IS AWESOME” post. I mean, it is, it’s pretty damn cool, I’ve played with it a bit this month. The real revolution with the facebook API are the server-side requests.

Traditionally widgets & plugins interfaced with social networks by placing snippets of HTML on profile pages. In the Facebook world no content can show up on a user’s profile without passing through Facebook’s servers first. Even your actual application pages must either be within an IFRAME or pass through Facebook. This process provides Facebook with an extraordinary level of control over what can and cannot be displayed on a user’s page. FB can perform a virus scan on all content and analyze any scripts for vulnerabilities or exploits. By directly serving content Facebook also eliminates cookie access — making it far more difficult to track or distribute data about their users.

Yet, the approach has it’s limitations for application developers. I tried briefly to build a “stalker tracker” application which using cookies would tell the user how many people regularly checkout their profile page. No matter what I tried, I couldn’t get access to the cookie without somehow initiating a click — rendering my application completely useless.

Why should you care? Well — advertising isn’t that much different from a traditional social networking widget — both are delivered via a snippet of HTML. Online ads have also been plagued by security issues this past year and I wouldn’t be surprised if the bigger players (Myspace, Yahoo, MSN, etc.) start to ask for server-side ad-requests soon. Server-side requests are the only way that a seller can technically guarantee the safety of third-party ads. Of course this will open up a world of technical challenges — server-side cookies storage, strict global latency requirements and a need for increased capacity to only name a few.

Many publishers either don’t have a strategy for maximizing network revenue or use aging technies such as daisy-chaining to

Out of all the publishers that I’ve talked to many don’t have a solid strategy for maximizing revenue from ad-networks. Many simply don’t understand how networks price, since most are black-boxes that don’t publish how they optimize and choose which ads to display. Yet, there are a couple factors that I find can be large drivers of revenue.

The more times an individual user sees an ad, the less likely he is to respond to it. Ok, seems obvious right? What you may not realize is exactly how quickly user response to an individual ad drops. The following graph is fictitious but representative of the normal response curve of a user on a single site to repeatedly seeing the same ad.

What the above shows is that if you are to maximize revenue you need to start thinking about users and not impressions. A user that’s been on your site for hours and has seen a hundred ads is far less valuable than someone who just logged-on.

Of course every ad-network will tell you that they have a large # of advertisers and deals and that you shouldn’t worry about such things — but lets not forget the Pareto Principle, also known as the 80/20 rule. A small percentage of top advertisers will generate the majority of revenue (and hence higher rates). What that means is that each ad-network will only have one or a couple high CPM ads.

Hence the effective CPM that you receive per user from a network declines as that network continues to see him over and over again. The larger the network the slower the decline, but each will look similar — here’s a rather rough sketch of what various network payout look like (again, numbers are hypothetical, but shape of graph will generally be correct).

Obviously daisy-chaining will not work in this situation as both the medium and large networks have paying ads for each individual ad-view. In the hypothetical example above, you would want an individual user to see the following sequence of ads to maximize revenue:

1. Small
2. Medium
3. Large
4. Medium
5. Large
6. Large
7. Medium
8. Small

Comparing the effective CPM of each network individually versus optimized together:

What you see is that you can vastly increase your CPMs by distributing your networks. Now — although these are fictional numbers — the concepts are real and they work. So how do you do it? Rather simple!

It’s impossible to allocate impressions on a per view basis as I did above so we must rely on a little bit of approximation. The way to do this is to setup multiple placements or zones with your ad-network and then to frequency cap them individually within your own adserver. The above could look something like this:

The key here is not to over-complicate. Sure, a Myspace, Facebook or Bebo may create hundreds of different placements each with different caps and priorities, but there are two reasons you shouldn’t

1. It’s incredibly resource intensive to manage
2. You don’t have enough inventory

Each placement needs to run a minimum amount of volume otherwise pulling out the effective CPM will be nearly impossible. A lot of pricing is based around user response to ads — eg CPC or CPA based pricing. Since clicks and conversions are rare events you need to have enough volume in each placement to get a predictable effective CPM. On CPC networks you can probably get away with a couple thousand impressions per placement per day but on CPA you’ll want to go closer to ten to twenty thousand.

There is some art here as you will have to update both the frequency caps and the pricing on your placements regularly. The first couple times chances are you’ll see your network cpms fluctuate as you play with the caps & inventory allocations but as you get a hang of it you should gain some serious lift.

Enough for today — next, how to effectively target network placements to maximize revenue.

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 Ad.com, 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.” Advertising.com 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 Advertising.com 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.