Ad Exchanges, RTB and IAB Rising Star Ad Formats

Three things are coming together right now that I believe will bring Internet Advertising to the promise land. This will close the gap of time spent online compared to ad dollars spent, it will create viable business models that will help online publishers to thrive and it will greatly level the economic playing field for all publishers.

Ad exchanges have been around for several years now, but they have been largely relegated to second tier inventory. The idea of an exchange is a marketplace where buyers (advertisers) and sellers (website publishers) meet. Advertisers can look at all sorts of market signals to bid on impressions. Signals include data about a user, like if they have seen the user before, if the user matches demographics they want to target, if the page is contextually relevant to the offer and many more. The key is that there is a liquid market of buyers and sellers. There have been two things holding back ad exchanges. First, brand advertisers have been leary of buying on exchanges for the fear of having their ads placed in inappropriate places. Secondly, the inventory has largely been second tier. This is changing quickly because the incentives to digital ad agencies are now aligned.

First, agencies have struggled moving to digital because there is way to much friction in the execution of a media buy. From placing orders, to delivering creative and to completing post campaign reporting. Digital agencies are overworked and under paid because of the current conditions. Making sure all the parts are executed properly takes way too many people and frankly isn't efficient enough through all involved parties. So, what's changed this. RTB (Real Time Bidding) that is executed through a DSP (Demand Side Platform). DSP technology allows agencies to buy the audiences they want in real time through the exchanges. This dramatically reduces the friction in the system and more importantly, it allows the digital agencies to add value to their clients by mastering these technologies while at the same time reducing their costs and increasing their revenues and margins. Simple math works like this before agencies were able to buy via RTB. Ad network sells a mass reach audience to a consumer goods site at a $3 CPM for a total buy of $100K. The agency earns 10% ($10K on top of the $100K buy), the ad network gets about 50% ($50K) and the publisher gets 50% ($50K). In the new agency trading desk model, the agency places a $100K buy at varying CPMs that average out to $3 CPM. The ad network is removed and the order goes through the DSP using RTB. The exchange charges 20% ($20K), the agency charges a technology fee of 10% ($10K) and the publisher gets 70% ($70K), and the agency gets it's additional 10%, so with the DSP and agency fee, they now take $20K in of revenue. Agencies are now incentiveized to purchase directly from the marketplace. This may very well be the future of digital ad agencies.

This leaves us with the last challenge. Since agencies have found a way to make money out of the ad exchanges with this new technology which essentially is like have a seat on the stock exchange to buy and sell impressions, now they need to find a way to increase spend. This is the final leg of the trifecta. Agencies need to be able to spend brand dollars that increase CPMs so they make higher fees. This is now coming together with the adoption of the new IAB rising star ad units. By all accounts I've seen, these units are a massive improvement for brand advertisers. The sizes alone gives the advertiser the creative freedom to deliver a high impact message. Now publishers must adopt these units and offer their top tier inventory. Exchanges are just starting to accept these new large ad sizes. Everyone's incentives are now aligned. Agencies can keep more of the revenue, and publishers can reduce cost and get brand dollars via the large format ads. This is the trifecta that will allow display advertising to reach its golden age.