Are Ad Exchanges and Real Time Bidding The Next Big Thing?

(This article was first posted April 29th, 2010 so some information may be out of date. However the basic concepts are still valid…)

There is a great deal of buzz in the industry around Ad Exchanges and the technology associated with them. However, it is not well understood how they operate and what the benefits to publishers and advertisers are. In researching this topic, we found that while Real Time Bidding (RTB) receives a great deal of attention, there are other attributes of Ad Exchanges that are not widely discussed, yet have the potential to make a major impact on the digital marketing ecosystem. We’ll attempt to clarify some of the concepts used in the Ad Exchange technology stack in this article. First let’s examine traditional Ad Networks.

How Ad Networks Operate

In the Ad Network model, the building blocks are the traditional components of web advertising: Web Content Servers, Publisher Ad Servers, Advertiser (third party) Ad Servers, Database Providers, Cookies, Tracking Pixels and Content Delivery Networks (CDN).

The process generally works as follows (simplified for clarity):

  • User begins to load a web page.
  • Web page issues a request for an advertisement from the Publisher’s Ad Server which logs the request and returns a “NET TAG”.
  • Web page issues request to the Ad Network Server, which processes its pixel, reads and/or drops its cookie, queries its database and applies targeting (demographic, geographic, contextual, behavioral or all of the above) algorithms. It then applies the rules set in the contract with the advertiser. If it finds a profitable match it issues an ADV TAG and logs the transaction. If it does not find a match, the Ad Network may pass the request on to a partner Network, which repeats the process to determine if it has a profitable ad to display and so on until a network claims the impression. This processes typically involves multiple http requests and redirects, which impact load time negatively.
  • Web page processes the ADV TAG resulting in the Advertiser Ad Server either serving the ad or handing off the request to a Content Delivery Network (CDN).
  • The browser loads the ad, if the user hasn’t already moved on to another page.

Whew!

This architecture has evolved as the online advertising industry has matured. At this point, it has become what tech types refer to as a “kluge”- a process which is inefficient, slow to serve creative, problematic to traffic, difficult to report upon and expensive relative to the real cost of the media. Add in secondary networks, yield management techniques and third party data sources and you have a cumbersome architecture that does not scale well.

What Ad Exchanges Do

If you’ve read this far, you now understand one of the most important (if not often publicized) rationales for Ad Exchanges: Efficiency. Suppose instead of the “Round Robin” approach described above, there was a centralized mechanism for aggregating the impressions offered across multiple Ad Networks and matching them (based on the advertisers target, budget and placement requirements) with the most appropriate ads?  What if this mechanism existed in the cloud with a well understood API (application programming interface) for audience targeting data and there was dynamic auction functionality around pricing which allowed the publisher to supply his impression to the highest bidder at any given instant? Add self serve applications for ad creation, traffic, campaign management and reporting and you have the basic components an Ad Exchange or Demand Side Platform (DSP)

Real Time Bidding (RTB)

Real Time Bidding is a dynamic auction process where each impression is bid for in (near) real time versus a static auction where the impressions are typically bundled in groups of 1,000. The potential advantages are cost efficiency, higher performance and greater granularity with targeting and measurement.

Demand Side Platforms (DSP)

Demand side platforms (DSPs) give buyers direct RTB access to multiple sources of inventory. They typically streamline ad operations with applications that simplify workflow and reporting. These products are directed at agencies, agency holding companies and large advertisers (the buyers). The technology stack that powers an Ad Exchange can also provide the foundation for a DSP, thus there is a synergy for plays in both spaces.

Supply Side Platforms (SSP)

Large publishers incorporate yield management techniques to increase ad revenue. This typically involves managing multiple networks. The SSP play uses the data generated from impression level bidding to help the publisher increase the value of his inventory by being on target. Applications to manage ad operations are also bundled into these solutions. Again, the technology is adapted from the Ad Exchange tech stack.

Obstacles to Adoption

While this technology sounds promising, there are arguments against Ad Exchanges:

  • Questionable ability to appropriately value premium inventory.
  • Devaluation of direct sales efforts.
  • Fear of the commoditization of inventory (allegedly suppressing price).
  • Suitability of addressing Branding as well as Direct Response objectives and goals.

While the jury is certainly still out, sentiments on these issues are leaning in a positive direction based upon these assumptions:

  • Homepage takeovers, guarantees and deep integration on major properties will continue to command premium pricing and require the efforts of direct sales teams to package, promote and manage.
  • Because Ad Exchanges increase reach and provide hooks for multiple third party data sources to plug in to the ecosystem, the ability of the architecture to leverage RTB functionality with accurate targeting potentially raises the value of inventory. Perhaps advertisers will pay more to reach consumers that have been qualified by current, actionable data and are therefore more likely to have immediate brand interest or purchase intent.
  • The tactical advantages of Ad Exchanges potentially make branding campaigns across premium inventory more effective by broadening reach. Additionally the tools for targeting, traffic, frequency capping, rotation and reporting are ROI enhancing to brand as well as direct response efforts.

The Players

The technology supporting Ad Exchanges is complex and expensive. In order to scale up to handle the level of traffic enterprise clients demand, software engineers often have to code tools from scratch. Open source and/or off the shelf databases just can’t handle the load.

Therefore, it’s no surprise that the big three (Google, Yahoo and Microsoft) are taking the lead in building out Ad Exchange infrastructure. Their deep benches and pockets allow them to invest the resources necessary to make technology like RTB actually work.

Yahoo’s Right Media was arguably the first out of the gate with an exchange. With broad reach across the Yahoo network it is well positioned and has recently committed to offering more premium inventory.

Google AdEx leverages the DoubleClick Ad Serving platform with RTB. As is typical with Google, the technology stack is the most sophisticated of the top tier exchanges.

Microsoft AdECN is Microsoft’s Ad Exchange for the Microsoft Media Network.

AdMeld helps premium publishers maximize revenue from their ad inventory, reduce operating costs and eliminate unwanted ads by giving publishers access to demand from ad networks, exchanges and DSPs.

PubMatic is an ad monetization and management solution which combines impression-level ad auction technology, brand protection tools and ad operations support.

The Rubicon Project offers Supply and Demand platforms with integrated API’s for data providers.

ContextWeb provides real-time contextual targeting.

AdBrite is an advertising exchange focused targeting and optimization, has real-time bidding, API functionality and a self-service account management interface.

OpenX combines ad serving and yield management with RTB.

Media Math is a demand side buying and analytics  platform that aggregates the AdEx, Right Media and AdECN exchanges.

DataXu offers a real-time ad optimization platform which manages buys on an impression-by-impression basis across AdEX and Right Media.

AppNexus is a single-point integration to exchanges and inventory aggregators, including Google’s DoubleClick, Microsoft’s AdECN, and others.

Turn is a demand side platform with targeting, exchange integration and analytics.

Audience Science specializes in segmentation and targeting data.

x+1 is a targeting platform for advertisers and publishers. They also build dynamically assembled landing pages and micro-sites based on demographic and behavioral data.

Triggit integrates with Ad Exchanges via its RTB Platform.

Invite Media’s Bid Manager is a RTB buying application.

Content Monetized by RTB Technology

The evolution of the technical infrastructure supporting display advertising is all the more interesting because this tech stack conceivably is applicable to other media types as well. Imagine video on whatever screen supported by ads delivered with this technology…

Thanks to adexchanger.com and mikeonads.com for the knowledge.