In October 1994, Hot Wired ran the first Web banner, an ad placement for AT&T carrying the promise of a new era with the message, "Have you ever clicked your mouse right here? You will." In the ensuing time period, the banner has generated billions of dollars in revenue but has also come to be seen as a symbol of failure. Its place as the pre-eminent form of Web advertising was eclipsed in 2000 when Google borrowed the paid search advertising system pioneered by Overture and turned it into a moneymaking machine. Since then, the display advertising business has played second fiddle to search, despite the fact that search pages make up only a fraction of Web traffic.
That situation is slowly changing. A new Web ad architecture is developing that promises to remake how advertising is bought and sold, borrowing the best of paid search auction systems while going beyond their targeting to allow advertisers to show each ad only to the audience they want. The automated exchanges, fueled by vast amounts of Internet user data, provide promise and potentially peril to all parts of the industry, from clients to agencies to publishers. "It's going to facilitate a lot of brand dollars coming online because they'll be able to buy audience -- and right now it's really hard for them to do it at scale outside of a few portals," says William Morrison, an analyst with ThinkEquity.
The promise of digital display advertising has always been that it would allow marketers to put the right message in front of the right customers at the right moment. For the most part, it's fallen short. Display is hampered by the fact that it doesn't have a clear intent signal like search. Instead, display advertising has looked for signals elsewhere, with mixed results. Content is still the top proxy used for finding the right audience. The clear drawbacks to this are that site audiences are far from monoliths. What's more, a travel advertiser might want to reach not just male sports enthusiasts, but male sports enthusiasts who are interested in traveling to Las Vegas.
Contextual ads, which key off specific content, have also come up short with their relevance. The same goes for behavioral ad systems, which were thought to be the next big thing in helping display close the effectiveness gap with search.
Instead, advertisers want to directly target audiences. Publishers and networks have long promised this but generally failed to deliver, at least at scale. Now, thanks to advances made in advertising exchanges like Google's DoubleClick unit, the promise is becoming reality. Advertisers can hook into a half dozen or more exchanges with a set price they are willing to pay for a particular audience -- i.e., that male 18-35 who is interested in traveling to Las Vegas. In the snap of a finger, when a user arrives at a page, an exchange makes a critical decision based on the data available about a user. It trolls through the bids to find the best match for the user. These computations are done on a banner-by-banner basis, in real time. The user on the page might not fit the profile of a Las Vegas traveler, but other data could indicate a female looking at SUVs, triggering a bid from an automaker.
"What's happening is that you as a buyer will have the opportunity to make a decision about which ad impressions are most valuable across a gigantic swath of impressions," explains Nathan Woodman, svp of corporate development at Havas Digital.
For now, only a small portion of Web advertising goes through such systems. Forrester Research, however, forecasts that 30 percent of online advertising will flow through such marketplaces by the end of 2010.
Google has placed a big bet in the area by making it a core part of its effort to be as big of a player in display ads as it is in search. Last September, it relaunched the DoubleClick Ad Exchange with real-time bidding to act as a spot market to bring together Web publishers and ad buyers. The exchange is meant for what Google calls "nonguaranteed" impressions -- the ad inventory not sold via a direct sales force. "While the display ad industry is quite large today, we think it can be substantially larger," notes Neil Mohan, vp of product management at Google. "Our goal is to grow the overall pie."
Google is just one player working to build an exchange. Yahoo is retooling its Right Media ad exchange to offer real-time bidding. Microsoft is expected to launch its AdECN real-time exchange in the coming months. In addition, a crop of players has arrived on the scene to act as de facto exchanges. So-called yield optimizers like AdMeld, The Rubicon Project and Pubmatic are working with publishers to better manage their unsold inventory. In the past, publishers have often given that inventory over to ad networks for small change, having little insight into the amount the networks were reselling it for and to whom. The yield-optimization players promise to help publishers get more money for that "remnant" inventory.
On the advertiser side, agencies are scrambling to adjust to the changed environment by building their own bidding desks, which use demand-side platforms (DSPs) from tech providers like Turn, DataXu and MediaMath. The major holding companies all have DSP projects in the works, including Interpublic Group's Cadreon, which has more than 40 people and 20 open jobs; WPP Group's B3; Havas' AdNetik; and Publicis' VivaKi Audience on Demand network. Thanks to the DSPs, agencies can hook into ad exchanges to bid on inventory, in effect playing a role that it formerly outsourced to ad networks.
"Agencies were slow to search," recalls Curt Hecht, president of VivaKi Nerve Center. "In the display space right now, holding companies have said, 'We're not going to be behind this time.'"
Underpinning all of this is the outsized role played by data in digital advertising. It is the fuel that makes the audience-targeting systems run. The more data, the better targeted (and successful) the ad. "Advertising is a matching problem," explains Zach Coelius, CEO of Triggit, a DSP provider. "For every user and moment, there's a perfect advertisement. In search, Google solved that matching problem because the user types in what they're looking for. In display, that matching comes from data."
Not all data, of course, is created equal. Some advertisers like eBay are using their proprietary data and DSP AppNexus to bid directly on exchanges. For the most part, marketers' own data is the gold standard. This allows the company to buy on exchanges for people who have bid in certain product areas. The end result is the company sees returns on par with search, according to Daphne Liska, senior manager of display and paid search advertising at eBay.
Yet while eBay has data on tens of millions of customers, it's the exception; not all advertisers are so fortunate. That's led to a rise of data providers like BlueKai and Exelate. Their role is in decoupling audience data from media. This simple distinction represents a sea change for advertising, which has married media and audience data. What the decoupling allows is sites to sell data on valuable customers -- in-market car buyers, for instance, as determined by visitors to a car-comparison site -- to help other marketers find their customers. The information is all anonymous, but its value is great.
In some instances, marketers pay more for the data than the inventory -- a situation that turns media on its head as publishers act mostly as a vessel for ads while others reap greater value by pinpointing the consumer. In a typical BlueKai buy, an airline can obtain information on users who are flying from San Francisco or Portland to Boston, based on data collected through travel search sites, then show them offers for that exact route. "That looks more like a search business than a banner business," says Omar Tawakol, CEO of BlueKai.
The data underpinning these marketplaces is its greatest strength but also its greatest weakness. The climate in Washington, D.C., has turned skeptical of the vast amounts of consumer data collected in Web advertising.
Industry leaders like the Interactive Advertising Bureau warn that regulators could soon put restrictions on how consumer information is collected and used in advertising, potentially putting such emerging systems at risk.
The ad exchange model promises to bring needed automation to the Web media landscape. The dirty secret of Web advertising is the actual process of buying and selling ads isn't very efficient. Compared to the TV industry, where a few dozen players can move billions of dollars, the legwork it takes to execute a Web ad campaign is laughable. According to ThinkEquity, administrative processes eat up 28 percent of the costs in Web advertising versus 2 percent in TV.
Resource-strapped agencies have leaned on ad networks to aggregate the Web for large parts of client buys. For years they've chafed at the lack of transparency with many networks, which typically earn high margins on the buys run through them. DSPs are seen by many at agencies as a way to level the playing field and lessen the reliance on networks, particularly as a vehicle for aggregating audiences.
"It cuts out the middleman, which the ad network represents," says Bill Demas, CEO at Turn, a DSP that works with agencies. "I think the ad networks' best days are behind them."
Agencies are faced with a conundrum. The rise of trading desks would seemingly open the possibility for them to find new ways of making money, imitating what investment banks do by trading on their own accounts. While a few agency executives have hinted at going down this road, others have ruled it out, saying to do so would jeopardize client relationships. "In the services business, more complexity allows us to go to clients and bring value," explains Hecht. "If we bring value, it's a new revenue stream but from a services perspective."
For publishers, the shift to audience-based buying is less a choice than a necessity. They have typically packaged audiences for advertisers, who can now do the job themselves. The risk is this approach will allow advertisers to cherry-pick a site's best users, possibly raising ad prices on a small piece of inventory while depressing the bulk of it.
Yet many plan to make the best of it, hoping talk of the rising tide lifting all boats comes true with a more effective ad system. Theoretically, they could themselves use ad exchanges to extend buys elsewhere on the Web.
"I don't think it competes with the direct buys," says Quentin George, managing partner of Cadreon. "I want to reward publishers as much as possible. I want to incent them to find and replicate the audiences that are valuable to me."
Brian Morrissey, Adweek. February 15, 2010
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