Place Your Bets: Programmatic Tech Is Leading to a Market in Media Futures
Marketers often have no idea how much the digital inventory they're buying actually costs, but a handful of companies are attempting to build a version of a futures market that could change that -- along with the small matter of the way ads are bought and sold online.
As with crude oil and corn, a futures market for digital media would invite industry players and finan-ciers to bet, through online exchanges, on the future price of media inventory. Ad sellers could lock in sales further out, while buyers could lock in prices on inventory that they expect to become more expensive.
The key, according to a number of industry experts, is newly available information that can be used to determine the market price of inventory at any given time.
AdFin, a New York market intelligence company, is working toward providing buyers with that pricing data. It has attracted a number of high-profile investors, including former Reuters CEO Tom Glocer and Cantor Fitzgerald CEO Howard Lutnick. Ad-tech firm Mass Exchange, which touts the technology to support a futures exchange, counts the agency holding company MDC as an investor. And a London-based firm called MediaGamma, offering a similar technology service for media futures and options, is gaining traction in the form of seed funding.
With interest and dollars, these companies are testing an idea for a market in which buyers tie down future inventory at what they believe to be a low cost, sellers secure revenue and Wall Street finds another product to hedge.
Baby steps, beginning with a forward market
AdFin's vision does not yet entail a market where media futures trade next to traditional commodities on massive central exchanges. In a futures market, the buyer and seller are typically accredited by the exchange, and contracts are standardized.
Rather, AdFin's vision for the next few years is to develop a version of that: a "forward marketplace" in which ad buyers and sellers create bespoke contracts with particular terms determined by either side. In both scenarios, the deals are underpinned by a new level of data on prevailing prices.
For example, in a custom deal between a buyer and seller, a marketer might commit to a fixed price of $10 per thousand impressions for video display inventory targeting specific audiences across screens on Christmas Eve. If the price goes up close to Christmas Eve, the buyer can hold on to the order and use the inventory, knowing it locked in a good rate, or sell the order and make money on the difference. If the price goes down close to the future time, the buyer can sell the order at a loss or shed a tear over missing out on a good rate. Down the road, there may also be hedge funds or cash-rich investors buying and selling media futures, without any intention of filling the media orders. (In finance, they're called speculators.)
In a forward contract, AdFin or another independent company would provide its pricing data for a fee. That data comes from the firm's technology, which is used to "normalize pricing data" that comes from existing platforms serving buyers and sellers ("demand side" and "supply side"), as well as from digital ad exchanges, said AdFin CEO Andrew Altersohn, a former president at Havas Media. AdFin's technology aggregates and anonymizes a lot of trades together to "approximate and track" the market, he said.
A forward market is a possibility now because there are these "marketplaces" that provide an automated record of every transaction, said Mr. Altersohn, referring to the shift toward programmatic buying and more sophisticated data technology that comes with it. "That didn't exist before. Deals over the phone and through emails are not captured."
Until now, the annual TV upfront marketplace has been the closest thing to a futures or forward market for media, gathering ad buyers and networks every summer for negotiations over commercial time in the upcoming TV season. But the commitments reached during the upfronts are held close to the vest. Deals in a forward market would thrive on publicly available information. They invite buyers to take bets on a constant basis, instead of haggling over individual, private deals once every year.
"We're in a place where most of the ecosystem is arguing over who has a right to know what when it comes to … transaction price," said Mr. Altersohn. "If we can crack the code on making price discovery a reality in that marketplace, the next step isn't that hard. It would start where the information is the richest, which is probably in display and mobile video."
Brian Lesser, CEO of WPP data and digital buying company Xaxis, believes a futures market for video, rather than display, is more likely, because there are more supply constraints in video and "massive quality fluctuation" in video inventory.
The challenge is getting buyers and sellers on board to create volume, he added. "We're already a substantial buyer in that market, not in an upfront manner but certainly from a commitment standpoint to insulate or protect ourselves against pricing and quality [issues]. So, yes, that could happen but you'd need several major buyers and sellers to be able to do that."
Where are futures actually bought and sold?
Mass Exchange is also pushing for a version of a futures market, touting its technology and exchange marketplace. The media-agency network Assembly, part of Mass Exchange backer MDC, is working with Mass Exchange to test a system that automates the purchase of future audience buys. In this scenario, "future" could mean 20 minutes or six months.
The tests are currently on small-scale audiences, said Assembly CEO Martin Cass. Still, he sees the potential for this kind of marketplace to grow.
"You're able to place positions on the price of an audience going further in the future than you can today, and put data behind that," he said. "A piece of inventory clears because someone is prepared to bid more for one audience vs. another. It creates a real market exchange, a futures exchange and a pricing model going forward, and it automates it."
Mass Exchange CEO Habib Khoury said his firm is also in talks with publishers that would provide inventory to be traded on a forward basis.
In the marketplace, futures prices are based on set consumer groups. Marketers who want to target working moms of a certain age, for example, would pay a specific amount for that group at a future point in time. But the value of the publisher creates "context" that could alter the price. When it gets past the testing phase, Mass Exchange would get paid on transaction fees from the sell orders it matches to buy orders in its marketplace, as well as through software and market-data fees.
"It creates an environment where you have transparency on transactions, liquidity and the ability to really buy on a forward basis in the future," Mr. Khoury said.
The "precursor" to a futures market is the programmatic direct or automated guaranteed marketplace, in which buyers can transact in milliseconds on spot inventory targeting audiences, but "that's a static marketplace," Mr. Khoury said. "The evolution of that is a futures market in which you're able to do automated negotiations and trading on inventory specs, price and terms."
London-based MediaGamma similarly describes itself as an "automated futures and options exchange for digital advertising." The independent ad-tech firm in May achieved seed funding after starting its pilot with an undisclosed number of participants, according to an announcement. MediaGamma said it's currently working on its business model, but explained that these types of exchanges usually charge a commission.
The exchange mechanism is also ripe for agency holding company trading desks, which are already competing with ad tech on a number of fronts. They could offer themselves as a broker or even build the exchange using their own technology. Alternatively, they could make bets on media futures using their data solely to make money.
Opportunity and skepticism
To create a successful futures market, there needs to be a real economic need to hedge risk, an extremely liquid marketplace and volatility driving uncertainty around the pricing of the item, said George Constantinides, a Leo Melamed professor of finance at the University of Chicago's Booth Graduate School of Business. Out of the couple dozen products introduced every year, maybe one to two turn out to be successful, he said. "People are not interested in trading in a product if there isn't a big debate."
When an exchange introduced futures hedging against inflation rates in the 1980s, that was in principle a great product -- but it wound up landing at a time when inflation dropped and there wasn't enough volatility, he said.
Media is certainly no stranger to uncertainty, and inventory left on the table in today's media market could indeed create an economic need for a market that clears ads more efficiently.
"Given the vagaries of our industry, including excess inventory, the shift to last-minute trading and the collapse of rate-card discipline, publishers badly need to hedge risk securing certain revenue and profit in advance of delivery," said Bill Lederer, a media and marketing industry consultant, former WPP executive and programmatic media CEO, in an email.
If the investment activity surrounding companies pushing for a futures market continues, the liquidity for a market may exist down the road. There's already more investment activity in this space over the last 12 months, said Mr. Glocer. He's backing AdFin with a six-figure investment, and said that among the firm's other backers there are seven-figure investments. Still, he admits it's too early to see how far this will go in the near term. "The only question in my mind is, when will this happen? Is it this year, next year or in 10 years?"
"Once you introduce the concept, you could have multiple purchases of spot, then futures, then derivatives, and you easily get into the tens of billions [of dollars in play] early on," he said. "Later on, it becomes one of the largest markets traded on spot. I don't see why a standardized display ad wouldn't be just like a treasury futures contract traded on the CME in Chicago. This is down the road with a lot of market infrastructure and players." Those players might include hedge funds looking to bet and buy without the intention of using the inventory.
While Mr. Lederer is enthusiastic about the idea of media futures for risk-reduction reasons, he's cautious regarding the speed of market adoption. To gain traction, the demand side must "demonstrate greater liquidity directly or via a market-making function like other commodity markets," he said.
"Media futures is one more step in the larger, inexorable Wall Street-meets-Madison Avenue direction that started years ago with the advent of auctions," Mr. Lederer said. "The availability of futures, forwards and options … is desirable and inevitable."
In a futures market, there is always the chance, for the seller, that the market will decide the pricing is too high.
But the idea presents more opportunity than risk because of the increased pricing transparency, according to Kyle Harris, exec VP for Mundial Sports Network, a publisher experimenting with Mass Exchange's system. (He was previously crude oil marketing manager for the New York Mercantile Exchange.) And besides, no publisher would put all its inventory in a futures market. "You'll always keep some to balance fluctuation," Mr. Harris said. The market and Mass Exchange technology offers "a good strong defense for how we price and sell."
Being able to count on future sales, meanwhile, could help publishers invest now in other parts of their business, such as costly video content, Mr. Harris added. "Being able to lock in future revenue streams allows you to reinvest in your content differently."