IAB Study: Programmatic Revenue Exceeds $10 Billion, but Industry Still Confused

Understanding Where Dollars Are Distributed

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Programmatic ad revenue totaled $10.1 billion in 2014, accounting for a healthy chunk of the almost $50 billion total internet advertising during that time, according to a new survey conducted by PricewaterhouseCoopers on behalf of the Interactive Advertising Bureau.

That $10.1 billion represents a massive shift in how advertisers buy media and publishers sell it. It also accounts for more than half of all revenue from online display advertising.

But there are also inconsistencies in how industry players define programmatic, as well as transparency shortfalls across ad formats and media marketplaces, making it difficult to clearly delineate the area, the study found. In the new report, programmatic refers to display and video ads on desktop and mobile that were bought and sold through automated channels.

"I wasn't surprised by the findings so much as the challenge it took to get clean numbers," said Sherrill Mane, senior VP-research, analytics and measurement for the IAB. In a complex digital ad ecosystem where some companies support both the buy- and sell-sides, PwC and the IAB had to be careful not to double-count revenue.

"We need more consistency and clarity around what we're talking about, and the value of automation and targeting and efficiency will come through," Ms. Mane said.

Who's making money, and how
Only 10 companies accounted for 66% of total programmatic revenue in 2014, according to the study, and 25 companies accounted for 75%.

Ad-tech companies' revenue comprised about 55% of the programmatic total last year, while publishers collected 45%, according to the study. "Ad-tech companies" in this case includes all industry players that make money from programmatic buying and selling before the revenue gets to publishers, including agency trading desks and a range of technology companies that facilitate sales for publishers and buys for marketers.

The fees those tech companies charge buyers and sellers to use a demand-side platform or ad server, among other technology, can represent a markup from 15% to 50% over the cost of the ad space, according to the report. For example, ad networks, which can facilitate both the purchase and sale of online ad inventory, typically charge 30% to 50% in value-add mark-up fees, with a few networks charging even more, the report said. By contrast, the fees for demand-side platforms, agency trading desks and exchange marketplaces tend to fall below 30%. Specifics surrounding the ad tech fees were derived from a mix of industry sources and were not a part of the PwC survey findings, the IAB noted in the report.

Adding agencies to the mix may only increase the cost for marketers, it said. The IAB found that an advertiser that uses a DSP to buy ads on an exchange that gets its inventory directly from the publisher will likely pay less than an advertiser who pays an agency that uses an agency trading desk, which then licenses a DSP to buy the same inventory.

Video vs. display
Display banner ads for desktop and mobile accounted for 80% of programmatic revenue in 2014. Mobile programmatic adoption, however, is behind that of programmatic desktop. The study attributed the lag to "challenges" in tracking and targeting audiences across devices. "For example, behavioral data available in apps may not be available outside of those apps," according to the study. That makes it difficult to track engagement across devices and within mobile phones.

Social platforms have higher adoption rates for mobile programmatic, since they have access to their customers' logged-in data and can more accurately target and track those customers across devices.

Video is also seeing slower adoption rates than banner ads, partly due to the scarcity of available premium video inventory that can be bought programmatically, according to the study. "Less valuable" inventory that goes unsold on premium video publishers is often pushed to the programmatic channel. However, it's still early days, and the IAB expects that programmatic video will see future growth.

Where programmatic is bought and sold
Open auction marketplaces fueled 70% of programmatic revenue in 2014, while invitation-only auction, unreserved fixed-rate and automated-guaranteed markets collectively accounted for the other 30%.

In an open auction, advertisers bid for inventory often without knowing exactly which publishers are offering the inventory. An invitation-only auction usually places more restrictions on the buyers, while unreserved, fixed-rate transactions have fixed pricing. An automated-guaranteed transaction resembles a traditional, digital-direct sale, as the deal is negotiated directly between buyer and seller and the inventory and pricing are guaranteed.

While open auctions generated up the majority of programmatic revenue in 2014, the IAB said it expects other formats, especially private marketplaces, to become more prevalent. "We believe this shift is due to an increase in demand on the buy side for increased transparency (i.e. reporting, targeting and features), brand safeguarding, along with a desire from ad buyers to ensure reserved and quality inventory," it said in the study.

Programmatic obstacles
For each of its findings, the report also presented as many questions and concerns about programmatic buying and selling.

"In its current state, the open auction market is perceived as a big black box for advertisers, and demand from advertisers for greater control over brand safety, ad verification and performance measurement will require better solutions," the report said.

In addition to varying definitions of "programmatic" and its constituent parts, the IAB found that ROI remained difficult to calculate and continuing problems with ad fraud and served ads that don't meet the industry's standard for "viewable" inventory.

"With our estimate of approximately 45% of programmatic revenues reaching publishers, understanding where dollars are distributed across the ad-stack from advertiser to publisher can be quite disorienting in the current programmatic landscape," the IAB wrote. "Are the added costs of programmatic buying and selling resulting in stronger overall revenues than traditional direct sales?"

Programmatic fee transparency project
To shed light on some of these issues, a subset of the IAB's programmatic council is starting a Programmatic Fee Transparency Project, led by Carl Kalapesi, VP-industry initiatives at the IAB. "Limited transparency around fees in programmatic has the potential to undermine trust and liquidity in the marketplace," said Mr. Kalapesi in a statement. "The IAB Programmatic Fee Transparency project will develop guidance around fee disclosure and transparency within the programmatic ecosystem."

PwC used three methodologies and surveyed or interviewed people from 46 companies for the study. Revenue linked to traffic acquisition was excluded to avoid double-counting.