Actually, the first reason they exist is efficiency. There are tens of thousands of websites (and even hundreds of ad networks) -- do you want to spend all day on the phone and chasing e-mails hunting for inventory? A network or exchange either does that legwork for you or automates it. Of course, there are also the fairly closely related issues of scale, reach and price. Want to drive a ton of impressions across a huge audience at a good price? This is the traditional sweet spot for networks and exchanges.
Wow, hundreds of networks. Where would one even begin?
Let's start with the basics. In the most common case, an independent company (the "network") does the work of bringing all of the network sites and their inventory together to be sold. But increasingly, some network owners have a stake in the game. Portals sell impressions across their properties. And publishers start with their sites and then grow a network by placing ads on related sites in their niche. Meanwhile, "demand-side" or "agency networks" involve agencies buying inventory in bulk on behalf of clients.
What else distinguishes one network from another?
Some offer low pricing and lots of inventory, but advertisers (mostly click-conscious, direct marketers) have little control over where their ads go. Other networks offer a more costly but brand-friendly experience, guaranteeing advertisers (mainly brand marketers) that they'll know where their ads are running. Beyond that, most networks these days, including some new specialty networks, are working to improve their targeting capabilities, offering the ability to match ads to a user's behavior (behavioral targeting) or the content of the page (contextual targeting). Capturing, buying and selling the data to perform that ad targeting is becoming a business onto itself.
What about exchanges?
Exchanges try to apply the efficiency of Wall Street (all right, no giggles) to the online-ad game. The biggest difference is that while one party is in control of an ad network, an exchange operates on behalf of all the parties in the process. That starts with matching sellers and buyers. As exchanges of any sort gain liquidity -- basically, volume -- not only does the exchange "run itself" by matching buyers and sellers, it also tends to bring in parties that can add value to the transactions. In the case of ad exchanges, additional parties can be ad networks, which commonly use them to buy and sell excess inventory; data providers, increasingly common as data about ads become important for targeting and retargeting; and, eventually, futures players and other arbitragers.
Wow, that's confusing.
It is. That's part of the reason exchanges have been slow to take off, as well as why they hold so much promise. When it works properly, an exchange provides what advertisers -- and publishers -- have always wanted: a fair way to measure and charge for the value of an ad. Who's trying to make this happen? ContextWeb runs the Adsdaq (like Nasdaq, get it?) exchange. The Big Three search/portal players have all bought exchanges, including Microsoft (AdECN), Yahoo (Right Media) and Google (DoubleClick/AdX).
But won't this turn the buying and selling of ad inventory into a pure commodity game, à la pork bellies?
Yes and no. Commodity impressions will be priced accordingly. The challenge for every player in the system will be to use data about users, context or behavior to make each impression more valuable. That data can be brought onto an exchange by the sellers and buyers themselves, or even by third parties. Meanwhile, publishers in this scenario can not only be sellers of inventory, they can also be buyers on behalf of their traditional high-CPM customers. It's messy, yes. But it looks more and more to be the future.