Ad Exchanges are the future

(Originally published in ClickZ, July 2007) by Eric Picard

Advertising is one of the last significant business markets that remains opaque, manual, archaically complex, and requires a large relatively skilled set of humans to perform each transaction. It’s a market ripe to embrace technology for automation, liquidity of inventory, pricing transparency, and simplification of business process.

Today, every ad campaign can be traced back across a host of human driven processes. The final cost of the inventory is calculated through an opaque process that smells more like 1907 than 2007. The vast majority of hours spent by media buyers and media sellers are related to process and nailing down the minutiae of “the order.” The buyer ends up with inventory that had no clear price when the discussion began, and frequently contains inventory they really didn’t want or need tacked onto the package in order to meet the seller’s sales goals. The seller ends up spending most of their time putting the package together and meeting the requirements of the order-taking process rather than working on strategic relationship sales.

A few years ago, a friend complained that moving to an exchange for advertising would reduce inventory to a commodity status. I argued then, and even more strongly now, that inventory is already a commodity – one with an explicitly time-sensitive shelf-life. Selling an ephemeral commodity through a complex, time intensive process doesn’t make sense. Additionally, as technology evolves and gives us the opportunity to evaluate and enrich the value of inventory (through various types of targeting and optimization), the complexity moves from content associated inventory to audience attributions evaluated in real-time. With all this complexity we must simplify the buying process, and things are only going to get more complicated.

An advertising exchange creates a transparent, automated clearinghouse that will enable publishers to get maximum yield (highest price per impression) while enabling advertisers to buy each impression with complete transparency regarding the value of that impression, evaluated against their own buy criteria. Bidding in these scenarios would occur in real-time, but unlike the current auction environments, there’s no reason why the activity couldn’t replicate the reserved (guaranteed) buying that happens in display premium advertising today.

To accommodate this new world, we require a variety of new functionality that not offered in the current market, particularly much more interoperability across the various tools. For example, in real-time the agency side ad server could customize the offer based on targeting data available from an outside vendor, and the bid optimization system could alter the bid based on targeting attributes offered by the publisher. The exchange sits in the middle and simply acts as a clearinghouse, ensuring the highest bid wins the impression. This scenario isn’t technically feasible today.

In the short term, ad exchanges are relegated primarily to the remnant ad market, where they optimize yield for the publisher by ensuring the highest bid always wins a real-time auction. This isn’t terribly different from what happens in other real-time auction environments such as search. But this is display advertising. The inventory owner can set a minimum for the impression to be accepted by the exchange.


The future of advertising via ad exchanges is the place where advertising’s promise is met. To illustrate, let’s drill into a single ad impression on a news Web site.

The page that the impression sits on is an article on anti-lock brake technology. Some amount of inventory bought against that page is explicitly a buy against news. Additionally, some inventory is booked against this page and also the auto section of the news site. Audience-based buys were also made against various targets as run of network buys.

How does this play out in the future advertising exchange?

1. Person visits a Web page with an ad call sitting on it.
2. Ad call is made to the publisher’s ad server.
3. Publisher shares the impression with the ad exchange.

  • The publisher’s ad server enriches the impression data with anonymous targeting attributes owned by that publisher
  • Publisher sets a minimum price of $5 CPM on the impression because they already sold inventory on that page, as described above

4. Ad exchange exposes the impression to a variety of bidders in real-time

  • Bidder 1 has a pre-set bid for the targeting criteria delivered by the publisher system set for $8 CPM
  • Bidder 2 uses a bid optimization system that evaluates both the publisher’s enriched data and uses its own set of targeting capabilities. They determine an exact match between the browser behind this impression and past visits to the advertiser’s site and bid $20 CPM
  • Bidder 3 is a contextual network that scrapes the page the impression is sitting on. It determines they’re willing to take a risk and bid $1.85 CPM on the impression because there’s a high likelihood of a click.
  • Bidder 4 has a pre-set bid for news pages at $.50 CPM.
  • Bidder 5 has a pre-set bid for auto-related news stories at $1 CPM.
  • Bidder 6 has a pre-set bid for any content at $.10 CPM.
  • Bidder 7 uses a bid optimization system integrated with their own database of behavioral targeting data. He knows the user behind this impression is searching for red SUV Hybrids, and has visited several automotive Web sites that day shopping for them. They have several advertisers with creative that show red SUV Hybrids. They bid $35 CPM.

5. Ad exchange reviews the bids in real-time and determines Bidder 7 has the best bid. It connects them back to the publisher ad server, which redirects to Bidder 7’s system for ad delivery.

This brave new world scenario isn’t far away. In some ways, this is how exchanges could function with current technology (the Bidder 7 example is a bit extreme). Within a few years ad exchanges and the various technology components needed to serve this need will be able to deliver on a scenario exactly as I’ve described. And there could be thousands of bidders on every impression.

So what happens to the media buyer and seller roles? They evolve.

Media buyers will move more to an analyst role. They’ll create business rules that match their advertisers’ campaign goals and that will function in the bid-management/optimization system of their choice. Their work will be somewhat automated, but much more technically complex. It will require more skills and knowledge than a junior media buyer may be able to handle today.

The sales roles will move away from order taking to focus on relationship sales, educating media buyers on the value their inventory may have beyond the simply quantifiable. That means fewer but more senior sales people. New technical roles that involve higher scale will arrive on the publisher side. Bear in mind some portion of inventory will always be sold directly, and super-premium inventory (home pages, site takeovers, etc.) are unlikely to move into auction environments any time soon. But for the vast majority of inventory, auction based sales and exchanges that act as clearinghouses for inventory, will be the norm. This future is coming. For some companies, it’s already here.

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