The Evolution of Programmatic Buying: Ad Exchanges

In today’s post we will be covering this topic a little more in depth, starting with the ad network and the renaissance of media buying, which began with the ad exchange.

Ad Networks

We already know how and why the ad network came to be. In short, there were so many advertisers and publishers in the ecosystem, it was impossible for advertisers to handle the direct media buying process and it was impossible for publishers to sell most of their inventory. So the ad network came to be.

For advertisers, this was very good because it enabled them to extend their reach and reach a larger number of publishers through one platform. For small and medium publishers, this was also very good. This was because these publishers had a very hard time selling their inventory to advertisers and now they were able to sell their inventory as part of a larger package on behalf of the ad network.

Ok, so how does an ad network actually work?

Firstly, the ad network needed access to a huge audience. This audience was brought by the publishers, and along with it, an abundance of consumer behavior data. Next, the ad network would look at all the inventory they had aggregated and they would use an algorithm to forecast how much of this inventory would be available in the following months per each publisher. Next, they would aggregate this data based on segments, which they are able to do with the use of the consumer behavior data. They would then package this segmented data (based on things such as age, gender, demographics, etc.), mark them up, and sell them to advertisers.

It sounds fine…so what’s the problem?

Let’s start with the advertisers. First of all, most ad networks don’t want advertisers to know where their ads are getting published. This is for several reasons, the most important being that if you, as an advertiser, knew which publishers your ad network was working with, you would be able to pass the ad network and work directly with those publishers, eliminating the need for the ad network. Because of this, advertisers can’t identify which inventory works best for them. Next, because advertisers buy inventory in packages, and these packages often include both remnant inventory and premium inventory, advertisers can’t really know what the value of any single impression is and can’t really obtain too many insights. Additionally, because there is almost no transparency and advertisers don’t know what sites their ads are running on, they could be taking the risk that it is showing up on a nefarious site.

Publishers didn’t have it much better. The lack of transparency also ran on the side of the publishers. They were unable to identify which advertisers were bringing in the best results and had to take the chance that the ad network would bring in very low quality ads, which could in turn lower the reputation of the publisher’s site, decrease any likelihood of conversions, and so forth. Because publishers were working with multiple ad networks at once, they had to constantly be evaluating with ad network was bringing them the best results—this was a manual and time consuming process. And most importantly, ad networks, more often than not, were also working with a chain of other ad networks, buying and selling inventory from one another. Each one of these took a cut from the publisher leading the publisher to receive lower and lower revenue.

And let’s not forget the challenges the ad networks themselves had. Although their plan seemed to be seamless, let’s remember that there is no such thing as concrete forecasting. It is a prediction, not an accurate science. So of course, forecasting publisher inventory was often faulty. And because of this instability, their packages were inconsistent and they were either overselling or underselling inventory.

So you see the problem. What started off as a solution turned out to be a little more detrimental to its key players than intended. And this is where ad exchanges came into the picture.

Ad Exchanges

An ad exchange is a platform which facilitates the buying and selling of inventory through real-time auctions.  Unlike ad networks, which don’t work in real-time and sell inventory by the bulk, ad exchanges buy and sell per impression. This gives the advertiser complete control over each ad- they have specific criteria they specify ahead of time so that each impression is bought with a real purpose. It eliminates the traditional methods that provoked wasted impressions. Now, they are able to choose exactly who would see their ad, where they would see it, how they would see it, and when they would see it. So not only would they get to choose each and every impression they are buying, but they also decide how much they want to pay for each impression and only pay for the impressions that they want.

Ad exchanges conduct auctions for every single impression and just like in real life, the highest bidder wins the prize. So now, rather than the publisher selling 10,000 impressions in one bulk package and not necessarily getting the best bang for their buck, each impression is auctioned off to the highest bidder, which ensures that the publisher is getting the maximum profit based on market values.

The key differences between ad exchanges and ad networks

Although I assume most of you are starting to understand the key differences between ad networks and ad exchanges, it won’t hurt to reiterate them in this section.

• Because each impression is sold to the highest bidder, there is high competition between the advertisers. If they know they want it they will try to outbid each other, raising the CPM for publishers.
• Advertisers can now buy only the impressions that they are interested in. Rather than buying in bulk from ad networks, they have complete control over their impression buys which allows them to buy at a much higher price.
• Transparency for all! Because ad exchanges provide both the advertisers and publishers with transparency and visibility, advertisers are now able to gain insights as to which were the best performing sites and help them optimize for future campaigns. Publishers are able to see which advertisers are driving the highest eCPM to their sites, giving them the insights they need to make better decisions regarding which advertisers they want to encourage on their site.
• If you remember, when I introduced the ad exchanges, I said that they are a direct connection between advertisers and publishers. Ad networks, on the other hand, can work with multiple intermediaries, causing the distance between the advertiser and publisher to grow. The problem with that scenario is that each middleman takes a cut of the profit, lowering the revenue left for the publisher. So with ad exchanges create an environment for a more efficient relationship, enabling the publisher to make more money.

Ok, so how do ad exchanges work?

Lucky for you, this is the part where we talk about what programmatic is and how RTB works. Stay tuned for the next post and get ready to put the pieces together.