Advertising Exchanges – The New Digital Ad Marketplace

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Advertisers have come to understand that online advertising is an ever-changing industry. In fact, the only constant is change itself — whether it’s new ad models, changing regulations or new targeting capabilities. As advertisers have become familiar with the nuances of various online advertising models and the vendor platforms that offer them, the world of digital advertising is changing yet again. And, it seems, very much for the better.

The technologies that support online advertising are evolving — right now. This is no more evident than in the rise of advertising exchanges. What makes exchanges so important to the advertising ecosystem is that they provide the best possible opportunity to improve the efficiency of every advertiser’s campaigns. As one might imagine, that simultaneously thrills and terrifies advertisers and publishers alike.

The value in advertising online today, as it has always been, is that advertisers pay only for performance. Advertisers are poised to derive even more value from their Internet advertising campaigns, however, courtesy of these ad exchanges that act as a digital advertising stock market for both Internet advertisers and publishers. In short, an ad exchange works by aggregating the available inventory,
enhancing it with data to better inform buyers, and then selling impressions to the highest bidder based on supply and demand. Ad exchanges capitalize on the need for a model that identifies supply in the form of excess advertising inventory, and demand in the form of additional impressions.

One of the reasons ad exchanges are so efficient is their ability to create an environment in which optimal message performance is achieved in real time by targeting specific groups, customizing messages to that group’s members and tracking the performance of each element to a finite level.

With all new technologies, however, the use of advertising exchanges has been somewhat limited to advertisers with big budgets. When it does trickle down to every advertiser, understanding how exchanges operate will be important — whether going solo or using the services of an advertising or marketing agency.

Say ‘So Long’ to Advertising Networks
Most online advertisers are familiar with advertising networks. They connect advertisers to websites/publishers that want to host advertisements in hopes of monetizing unsold inventory (advertising space). The network aggregates ad space supply from publishers and matches it with advertiser demand — essentially packaging impressions for eventual sale to advertisers.

The problem is that the ad network model tends to be inefficient, particularly for advertisers. Networks place ads based only on what is known about the inventory and the advertiser’s goal. In the case of cost-per-click (CPC) advertising, for example, what is known is the context of a user’s intent (the keyword). In the case of a display advertising network, what is known is only the general theme of a particular website or page (not the user’s actual intent).

Another problem with the ad network model is quality. As the ads are placed, networks collect data and apply optimization technologies and techniques which aim to place more ads in high-performing locations and fewer where performance is low. However, networks cannot guarantee the audience quality that advertisers are increasingly demanding. Up to this point, a website publisher paid on a cost-per-thousand (CPM) basis has had little to no motivation to focus on acquiring quality visitors — just a high volume of visitors.

The advertising network model is made far worse by the sheer number of available opportunities. From buying CPM display ads, CPC ads or even cost-per-action (CPA) ads, options abound and they require teams of dedicated staff to manage campaigns efficiently. Combined with the variety of advertising networks, a perfect storm of inefficiency emerges.

Say ‘Hello’ to Ad Exchanges
Ad exchanges represent a field beyond, and very different from, advertising networks. To maximize exposure using ad networks alone it would be necessary to use many networks — each with their own publisher groups, platforms and policies. Advertising exchanges present an opportunity to promote messages on a far more grand and comprehensive scale, using a single platform.

Digging Deeper into Exchanges
So how do advertising exchanges really work? Through these real-timebidding (RTB) platforms, the exchange receives a request to display an advertisement from an Internet user’s browser. The exchange then presents the advertising opportunity to “bidders” (advertisers) while simultaneously sending them important information regarding the user and that user’s visit — time of day, location and available demographics and psychographics, for example.

Each of the advertisers receiving the information will make a decision in real time whether or not to accept and display their ad to that user. When they agree to accept, the advertisers will also submit the price they are willing to pay for that impression (typically CPM). The RTB platform receives the bids and selects a winner based on its decision algorithm — most often price-based but quality signals such as click history do play a role in some exchanges. When the winning bid/advertiser has been selected, the advertisement is served.

As you might expect, this is all taking place in a matter of milliseconds. What ad exchanges offer is the ability for advertisers to establish rules and parameters to identify ideal audience sets to which an ad impression can be served. This ultimately speeds up the entire process, making advertising exchanges far more efficient than networks.

The major ad exchanges are AdECN, which was purchased by Microsoft in August 2007; Right Media, purchased by Yahoo in April 2007; AOL’s Advertising.com; ContextWeb’s ADSDAQ Exchange, the leading independent exchange, and DoubleClick Ad Exchange, which is owned by Google.

There are, of course, others players in the market. Opera Software launched its Open Mobile Ad Exchange (October 2010) recently; mobile exchange MobClix is a serious contender to Google-owned AdMob, and Brightroll is betting that its video ad exchange is a viable option for advertisers, too. With so many options available, it is as important to understand the value proposition presented by advertising exchanges as it is the challenges.

The Exchange Challenge for Advertisers
If the ad exchange model requires a unique skill set for technology providers, it demands an equal shift (some would argue, upheaval) for advertisers and agencies.

Traditionally, those responsible for advertising success have had a love-hate relationship with research and analytics — such is the case when the sole performance metric is “mindshare”. Ad exchanges add a new dimension to the level of analytics that can be applied to the creative process.

While it is common for agencies to use a test-and-learn approach — where multiple creative elements and concepts are tested against different media properties — ad exchanges put the whole process into hyper-drive. What ad exchanges provide is the ability to test and learn against actual audience segments, making performance data and how particular demographics react to specific ads increasingly important.

Perhaps most disruptive, however, is that ad exchange technology could shift the makeup of your entire creative department, thanks to dynamic ad content optimization.

Based on a user’s location, language, the content of the website, time of day, the past performance of different ads or another factor, a machine-learning algorithm will be able to generate a customized ad in real time, based on a database of thousands of creative elements. In action, a mobile phone company could show an advertisement with a beach in the background to someone who lives near the ocean, while someone living in an urban area might see the same ad but with skyscrapers in the background. While this technology is not yet widely used, it will be soon and might even be available now in the ad exchange of your choice. In late 2009, Google purchased Teracent; one of the companies offering a service of this nature to pair it with the DoubleClick ad exchange.

In this ad exchange environment, there will no longer be a single, perfect ad execution. Nor will there be a handful of successful targeted ad variations. Rather, display ad builders will need to develop a database of creative elements that a machine can cut and paste into an infinite number of highquality ads. Designers will need to read, understand and react to the tenet of return-on-investment (ROI) — a very different way of thinking about creative and one requiring designers to adapt to a data-based way of doing things. Now, more than ever, designers, marketers and decision-makers need to be on the same page.

The Final Word on Exchanges
Clearly, the way online advertising is bought and sold is changing. Whether you think this is good, bad or bewildering, to take advantage of the change requires a better understanding of how to leverage all parts of the buying and selling equation(s).

Ad exchanges are, in essence, a very powerful enabler. Under their influence smart companies opting to use the exchange model will see greater growth and benefit from more automated control over every audience, media and creative decision.

About the Author: Peter Prestipino is Website Magazine's editor-in-chief.

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