Some areas of media are understandably more glamorous than others, and its a sad fact of life that ad exchanges are not a sexy topic of conversation. While other media types are propping up the bar in Soho House, the geeky ad exchange is sat at home in a darkened room, probably watching Battlestar Galactica. 

But geek is the new cool and ad exchanges are a big part of the online media business world. Most of you by now will have either had clients ask about them, read articles about them, seen them mentioned in pitch requirements, or heard mentioned internally. You may have even met someone in the space.

This article then from MediaMind is for the ad-ex novice, and introduces the key terms and concepts in this area so you can get up to speed with the essentials of ad exchanges. 

What are ad exchanges also known as?

Audience-based buying
Data-based buying
Exchange-based buying
Trading

Who are the main players?

Ad exchanges – Represent the inventory/supply side. This is where the impressions are bought from. The impressions are put into Ad Exchanges by publishers and ad networks primarily as a way to monetise unsold inventory.

The largest Ad Exchanges are Google Ad Ex 2.0, Yahoo Right Media, Pubmatic, Rubicon, AdMeld, and OpenX.

Demand Side Platform (DSP) – Represent the demand/buy side. Agencies and advertisers use DSPs to connect to multiple Ad Exchanges, view the available inventory, evaluate how much they are willing to pay and take part in the bidding process. The best comparison for a DSP is a Search Bid Management technology for Display.

Popular DSPs are MediaMind, Invite Media, MediaMath, Turn, X+1, Triggit, and DataXu.

Third Party Data vendor – Aggregate data from sites to build profiles which can be used to target audiences. The data is derived from leading web publishers in the social network, dating and shopping sectors that deliver highly qualified, registration-based targeting information. Buys can use this data to target:

1. Demographics – eg. Females 18-24, earning $40k +, living in NY
2. Interests – eg. Cooking
3. Purchase intents – eg. Recently searched for flight to London.

How is media bought in Exchanges?

It works on an auction model. Each party makes their bid, highest wins, pays $0.01 more than the next highest bidder. Here’s an example which illustrates this:

Bidder 1 $0.50
Bidder 2 $0.60
Bidder 3 (winner) $0.80

Price Paid $0.61

The actual bidding process which takes less than 100 milliseconds looks like this:

1. The Exchange makes a call to the DSP with an available impression.
2. DSP checks to see if they want this impression – it could be someone in their retargeting pool, or in a desired audience segment according to a third party data vendor. If yes …
3. DSP makes a bid for it based on how much they think it’s worth or can afford to pay
4. Exchange sells the impression to the highest bidder.
5. Ad is delivered by the winning bidder.

I’ve heard Real time bidding mentioned – how does that fit in?

Real time bidding (RTB) is the name given to the process I outlined above. Instead of buying impressions in buckets of 1000, RTB enables buying on a per impression basis – allowing it to be extremely targeted and at the price you think that impression is worth.
Here’s a nice visual aid:

http://www.slideshare.net/DapperWebinar/what-is-real-time-bidding-in-30-seconds

How much is it worth?

Estimates have the total US market spend by DSPs in 2010 at $850m – meaning 10% of display ad spend.

Why is this type of buying becoming popular?

Five main reasons below, with the overall attractiveness being agencies can actually make money in digital now! Trading offers opportunity for media arbitrage – buy the impression for X and sell at X + 50%. The agency can decide how much margin to place before passing on to the client.

1. Buy Audience instead of Media - Agencies traditionally bought Media or Content as a proxy for audience. Eg. I want to reach Females 18-29 then I should buy onto sites with a high concentration of them. Exchange world allows an agency or advertiser to buy actual audience for the first time at scale.

2. Buying Process for digital media is inefficient - There is a plethora of choice available to agencies. A single online display campaign can take 5x as long as an offline campaign to plan and buy. Exchanges offer an automated buying solution with similar efficiency to search.

3. Reduce Intermediaries - As valuable as the Ad Networks are at aggregating audience and providing agencies alternative buying strategies (CPC, CPA, cheap CPM), agencies are envious of the large margins enjoyed by the networks. 4. Achieve CPC or CPA targets – Sure you’ll hear people talk about advanced audience targeting strategies, but the majority of buys right now are on direct performance goals – hitting a CPC or CPA target. Exchange inventory is cheaper and is in abundant supply so it’s easier to hit existing goals or greatly reduce them.

DSP v Trading Desk

All the major agency groups have set up Trading Desks. These are centralized teams within the agency who handle all Exchange-based buying. They are not DSPs - they would utilize a DSP as the technology to execute the buys on the Exchanges.

Note 100% of an agency’s trading buy may not happen through their trading desk – individual planners/buyers in an existing account team may buy from an Exchange – we expect the trading desk to aggressively aggregate as much of the spend as possible.

Why are agency groups setting up Trading Desks?

Trading Desks can add value by aggregating all of the activity run by all advertisers across the agencies in the group. This could let them do things like build their own audience targeting segments (eg. People who responded to Auto ads) or create private exchanges by leveraging buying power with premium publishers (ie. Give me your inventory and I’ll decide in real-time what advertiser to use it for).

Of course, an attractive business model helps too. As they get squeezed by their clients, agencies see themselves squeezed by some of their ad network partners, and want the ad network margin for themselves.

The individual agency, is in control of the media spend and as well as (or instead of) putting budget to publishers and ad networks they set aside budget for their trading desk, to buy inventory on the Exchanges.

Self Serve v Managed-Service

Managed-Service is the dominant model provided by DSPs today. Most claim to have full platforms, but that is not the case. In the short term managed-service happens to be a more profitable business model for DSPs because they do not have to be fully transparent about media costs (ie. say how much they actually bought the impression for) and can arbitrage.

Just about every client you speak to will say they want a platform solution which they can manage themselves and be responsible for. They love the thought of pulling all the levers and pushing all the buttons. The reality is, that’s not what they want, or certainly not what they can successfully handle today.

They need a managed service model currently because:

1. It’s a complicated space, and to run effectively you need expertise.
2. This expertise is hard to find.
3. Current self-service tools are in their infancy and hard to use.

So DSPs appear on media plans as simply another line item. The agency may never actually touch the technology nor know the actual cost of the media before the DSP marks it up. Wait, doesn’t this mean a DSP is an Ad Network or even a Media Agency by another name you might ask. Well, on the managed-service model yes – and that’s a growing source of friction.

Immediately there is opportunity to offer a managed-service solution with transparent pricing. This will give the agency all the help they need whilst charging fair value for it.

We expect to see a long term shift away from managed-service to self-serve technology as agencies reject the arbitrage business model run by DSPs, see them as increasingly competitive, grow their own expertise and capacity, and the technology innovates to become useful and effective.

Pricing models

In a managed-service play the actual fees may never be known to the agency. If the agency is paying an Ad Network $5 CPM, and the DSP delivers at $3 CPM then the agency is happy. However the real cost to the DSP may only be $1 CPM – so the agency is actually paying a hefty fee. This is why DSPs are so profitable today and why there is an explosion of them in the market. Typical margins range anywhere from 20% to 80%.

However as the market evolves to a technology play the fees are far more transparent. They range anywhere from 10% to 20% of the media cost. Eg. agency puts $100,000 through DSP – fee would be $10,000. 

MediaMind is a global provider of digital advertising solutions that optimise the use of media, creative and data for enhanced campaign performance.

WHY IS THIS ON CREAM? Because ad exchanges and DSPs are frequently talked about, but seldom understood!