Ad Networks and Exchanges 101
NEW YORK (AdAge.com) -- Let's start at the beginning.
What is an ad network?
Good question. Of course, there's not a single answer. At a high level, ad networks exist to help marketers achieve reach and scale in a fragmented online display ad marketplace. No marketer wants to run around piecing together inventory for a campaign from hundreds of individual websites or publishers. Ad networks help by bringing together inventory, and more to the point, audiences, to enable marketers to buy online ad impressions faster, more efficiently and, yes, more cheaply. That said, there are many different types of ad networks. Some focus on reach and price and don't provide much insight on who or where. Other, more premium networks -- including publisher-specific networks -- are all about guaranteeing audience demographics and quality.
While some predicted that the emergence of ad exchanges and demand-side platforms would blow up the ad-network model by removing artificial inefficiencies, ad networks are still going strong and diversifying and morphing in interesting ways.
You mentioned exchanges. Aren't exchanges the future?
Exchanges have certainly gained influence in recent years, in part because long-promised exchanges from Google, Microsoft and others have finally, formally launched and started gaining traction. Meanwhile, other more mature exchanges, like Yahoo's Right Media Exchange, have made recent moves to bolster their position. For Right Media, that meant focusing more on premium inventory rather than sheer quantity of impressions on its exchange. Exchanges bring new levels of efficiency to the online ad market, making it easier for marketers to find the audiences and impressions they need at the right price. The key phrase to know here is "liquidity" -- the moment when there are enough impressions, buyers and sellers in a marketplace to ensure that it runs on a pure demand-supply basis. Think about a stock exchange, like the Nasdaq, where no one wonders if there are enough shares to match buyers and sellers at a fair price, it just happens moment by moment.
Are networks and exchanges mutually exclusive? Does the success of one mean the end or failure of the other?
The answer appears to be no. Stock exchanges didn't put stock brokers or other players in the financial services ecosystem out of business. If anything, a functioning exchange-based model means there are likely to be more niche players. That certainly has happened in the ad network/exchange ecosystem where different types of entities including publisher networks, agency "demand-side" exchanges, data re-targeting exchanges, yield managers and other players have emerged to both feed and be driven by the increasingly vibrant online ad marketplace. There are also a lot of hands in the cookie jar. Jordan Edmiston Group estimated that of a $5 ad buy, just $1 may ultimately go to the publisher, with the agency (75 cents), ad network ($2), data provider (75 cents), ad exchange (25 cents) and the ad server (25 cents) all taking their cut.
Have exchanges made the buying and selling of ad inventory akin to selling "pork bellies," as feared?
Well, with numbers like we just mentioned, it certainly remains a major fear. Publishers, in particular, are always on the lookout here. And the down economy of the past few years has certainly cut both ways on this issue. Publishers, more than ever, couldn't afford to see their CPMs (and overall brand values) shrink. At the same time, when revenues are scarce, it's hard to turn down even dimes on the dollar for impressions that might otherwise go unsold. With the online display market picking up in recent quarters, we may learn about this issue in the coming months.
So what's new in ad networks and exchanges?
The network model has migrated to mobile and video, each with unique characteristics. Not surprisingly, in the year of the iPhone (and competitor platforms like Google's Android), the purchase of mobile ad networks by Apple (Quattro) and Google (AdMob) may be the biggest news on the ad-network front. In both cases, the deals place those companies at the center of an important new advertising ecosystem, albeit one driven less by the banners of the web world and more by apps, location, timeliness and other factors that bring new opportunity -- and complexity -- to the world of ad networks and exchanges.
The proliferation and influence of ad networks and exchanges -- as well as advanced targeting techniques -- is bringing with it increased government scrutiny. Consumer and privacy activists are asking the Federal Trade Commission and Congress to investigate the use of data targeting by ad networks and exchanges, as well as the use of personal data and the tracking of behavioral activity by the industry. This scrutiny places the network and exchange business at a crossroad. Just as it begins to get the ad liquidity and data to improve the efficacy of online ads, the practices that enable that leap forward are being called into question.