Ad Network & Exchange Guide

Ad Exchanges See a Premium-Level Future

Ad Networks Try to Climb From Bargain Basement to the Penthouse

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Google, with its vast AdWords marketplace that matches search queries with keyword ads, has demonstrated to the world the value of extracting every last ounce of efficiency out of web advertising. Now ad exchanges are following suit, hoping to do the same for display ads.

These exchanges aim to wring more revenue from the far reaches of the web by creating a more efficient and liquid marketplace for unsold or undervalued ad inventory online -- though many are migrating into premium spots, too.

An ad exchange's best analogy is Wall Street, where buyers and sellers use different brokerage firms (in this case, ad networks) but all trade in a central market (in this case, the ad exchange). Of course, some publishers and advertisers are trading in the exchange directly. Like the stock market's shares, impressions are priced, bought and sold based on supply and demand.

DoubleClick, now officially part of Google, launched a display-ad exchange in the last year, and industry heavyweights such as Microsoft Corp. and Yahoo snatched up their own via acquisitions. There are still independent start-ups hoping to capitalize on exchange models, including ContextWeb, AdBrite and Traffiq, which is even crafting an offline strategy.

Valuable market
An ad exchange delivers two primary benefits, said Shar Van-Boskirk, a Forrester Research analyst. "It makes it easier to access inventory that might be otherwise impossible for an advertiser to access, like user-generated content or niche sites that don't have a relationship with an ad network," she said. "And it regulates pricing [because] the value of inventory is based on demand for that inventory."

Forrester believes ad exchanges will become so integral that eventually they will replace the traditional ad server. Ms. VanBoskirk recommends marketers and publishers seek out exchanges that are transparent and give advertisers more control over where their ads run and publishers more control over which advertisers show up on their site. The company also believes that as marketers and publishers become accustomed to the greater transparency that exchanges can provide, it will force consolidation among ad networks, especially blind networks.

Right now, most of the inventory available on exchanges is remnant inventory, though that's starting to change. Ad exchanges started with remnant spots to achieve scale, said Bill Wise, general manager for Right Media, Yahoo's exchange. "We are going through the same evolution as eBay to move into premium," he said.

Right Media handles both premium and non-premium spots, and manages more than 5 billion ad impressions each day for more than 30,000 buyers and sellers. Revenue is growing year over year, Mr. Wise said, though he declined to disclose specific numbers. He believes ad exchanges will grow in prominence because online advertising as a whole has become more analytical and sophisticated.

"Think about the dollars flowing online in search, and that has lifted marketers' attention to the benefits of online," he said. "What ad exchanges really did was bridge the gap between search and display by creating an auction-based model for display advertising." (Of course it's not just the auction that makes search special but consumers' expressed desire inherent in the channel. But that's for another day.)

Able to set floor price
ContextWeb is also focusing on premium inventory with a different model, more akin to a futures market: It lets publishers set a floor price for reserved ad space. If the exchange can't get that price for the inventory, then it doesn't sell it. If it can, then everyone wins, said Jay Sears, senior VP-strategic products and business development for ContextWeb.

"We have become a clearinghouse for premium, not remnant, inventory," he said. Publishers in its exchange include Sports Illustrated and Belo Interactive, and agencies involved include WPP Group, Omnicom Group and Ogilvy & Mather. "Our proposition is there is no downside. You control the price and the advantage, and there is only a match when it works for everyone."

Ad network AdBrite has added an exchange component to its business, and while VP-Marketing Paul Levine called it "a bit early" to incorporate premium inventory, he thinks it can be done.

"When you see what's available and how it performed, that doesn't commoditize [inventory]," he said. "That creates value." So far, AdBrite's exchange reaches 85 million users per month and counts 50,000 sites in its exchange, up from 20,000 at launch in 2006.

The inventory in Microsoft's ad exchange, AdECN, still tends to be on the remnant side -- inventory that's located deeper in a site or inventory that's overpriced. But not everyone likes the term "remnant."

Rethinking 'remnant'
"We think remnant inventory is a Web 1.0 concept," said Michael Rubenstein, general manager of the DoubleClick Ad Exchange, which enables auction-based pricing and matching of ads and content by context and category, geography, type of inventory and other options. "There is no such thing as remnant. There are just ads that haven't met their buyers yet, so an exchange is about finding those buyers."

DoubleClick launched its exchange eight months ago for that reason: to monetize impressions that otherwise would be difficult to sell via a traditional selling process. The exchange attracts small sites, but also has some major publishers such as The Wall Street Journal Digital and brand advertisers on board.

"Around 40% to 50% of publishers' ad inventory is unsold," Mr. Rubenstein said. "Publishers recognize there is an opportunity to create a new incremental revenue stream without cannibalizing their existing relationships."

An exchange isn't designed to replace traditional buying and selling between media experts, but it is designed to connect targeted buyers and sellers, Mr. Rubenstein said.

Others see ad exchanges having a broader reach. "I do believe all advertising could be bought and sold on an exchange," Mr. Wise said. "Ad exchanges don't eliminate the need for creative selling. We want to free up time so brand advertisers have more time to sell, and that will be delivered through an ad exchange. Ad exchanges can enable that ecosystem for traditional ads."
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