Understanding Ad Exchanges

These days, you can hardly have a conversation about ad networks without also discussing ad exchanges. These online advertising marketplaces only emerged a few years ago, but already the space has burgeoned to include a handful of major players and many more smaller alternatives.

Ad exchanges have become a particularly hot topic in recent months, due in part to some newsworthy industry developments. In July, vertical ad network Glam Media launched the first vertical ad exchange, called GlamX. Meanwhile, Yahoo revealed plans to merge its ad exchange Right Media with its ad management system, AMP, and ad exchange ContextWeb closed another round of funding to the tune of $26 million.

How do ad exchanges differ from ad networks? Ad networks act as middlemen, brokering inventory on behalf of site publishers. Ad exchanges, however, don’t actually sell any ads. Instead, they provide an environment within which advertisers and publishers can buy and sell inventory on an auction basis.

This is similar to the online auction structure Google applies to its AdWords marketplace. Buyers bid against each other for inventory supplied by the publisher on an ad-by-ad basis and have their choice of targeting options as they do so.

Advertisers’ primary benefits of utilizing an exchange include placement transparency and the assurance of fair pricing. Not all ad networks are able (or willing) to reveal all their publishing partners, but advertisers will normally know exactly what they’re getting when purchasing through an exchange. And because inventory is sold based on publisher supply and advertiser demand, there’s no need for anxiety about elevated pricing, which is a possibility when rates are controlled by a single source.

While their role within our industry is still relatively small, their potential is huge. According to data from economic research firm ThinkPanmure, about 15 percent of all remnant ad inventory and 5 percent of all online display advertising were sold through exchanges in 2007. At the same time, Google, Yahoo, and Microsoft have all recently acquired ad exchanges, helping to solidify ad exchanges’ stability.

In some ways, exchanges don’t have it easy. Some media buyers attached a stigma to them, simply because they believe exchanges deal exclusively in remnant inventory (and we all know what a dirty word “remnant” can be in a world where premium content rules with clients). In reality, many of today’s exchanges deal in premium inventory, with some even displacing ad networks as the first stop for publishers looking to sell the quality content they aren’t able to unload directly. Others employ a complex process for vetting the quality of placements and weeding out inappropriate and irrelevant content.

Although most advertisers use exchanges to purchase IAB-approved display advertising, often including rich media like interstitials and video, some exchanges are also branching out to offer e-mail inventory as well as to support CPA (define) or cost-per-acquisition pricing. Some have plans to begin supplying in-game advertising and other less conventional forms of online media, if they aren’t doing so already.

With every new targeting capability offered and each fresh publisher they sign, ad exchanges are becoming a more appealing option for media buyers.

Next week, I’ll look at some top players in the space and what makes them worthy of your campaigns.

Join us for ClickZ Presents: Online Marketing Summit, September 25 at the Sheraton San Diego.