There are three kinds of ad networks: rep firms, aggregators, and arbitrageurs. Today, I'll focus on the second two; I have an issue with the way those two types of networks function within the advertising ecosystem.
Ad networks, especially arbitrageurs, take advantage of market inefficiency and strip dollars out of the ecosystem. Ad networks take between 20 and 60 percent of the ad dollars that flow through their hands. Dollars that, were they returned to the advertiser, would be spent on more media. Or that would be paid to the publisher for providing inventory to the advertiser.
Ad networks do often take risk, paying upfront for inventory they may not be able to sell. And they do provide a valuable service. But they take too much money out of the ecosystem for their services.
The primary value an networks provide is liquidity. They help publishers clear inventory that would otherwise go unsold. They provide low-cost inventory to advertisers. Some ad networks provide additional value through technology, sometimes using targeting criteria to increase the value of inventory that would otherwise be sold for a pittance. The main problem from a publisher's perspective is that the ad network in most cases uses that targeting information to increase its margins, not the publisher's.
Ad networks essentially perform many of the same functions as a media agency, buying an immense amount of inventory from publishers. And they do this much more efficiently than the media agencies. Beyond buying for a low price, which network buying teams are very good at doing, they're able to buy much more inventory from many more publishers.
The average media-agency buying group of 100 buyers can support buying from as many as 200 publishers in any given year. Yes, the math is simple: each buyer is supporting as many as two publishers during the course of a year. At the same time, the average ad network with 100 buyers is buying media from as many as 20,000 publishers in any given year. They're somehow finding a way to be much more efficient in their buying processes than media agencies are.
It's only a matter of time before media agencies start learning new techniques from the ad networks and adopting the same media-buying techniques as the arbitrageurs. But agencies are not arbitrageurs; they act (as the name implies) as the advertiser's agents. In fact, it's illegal in the United States for an agency to mark up inventory it has purchased on behalf of an advertiser. Most agencies these days negotiate with a major advertiser's procurement office to lock down the margins the agency will profit on from the work it performs for the advertiser.
With fixed margins negotiated with the advertiser, there will be an immense amount of pressure applied to the margins ad networks can take. After all, as an advertiser, why would you buy from an ad network that can mark up inventory to any amount it likes when you can negotiate a deal with an agent whose only job is to spend your dollars as efficiently as possible?
Between business models and technology, it's going to change. Those networks that survive the ecosystem's shifting priorities will be those with exceptional technology, those that can add incredible value to the inventory they're buying. Technologies like targeting and ROI (define) optimization for those networks that adopt a primarily media-buying focus will be critical. And for those acting more on behalf of publishers, increasing their yield will be the primary value -- with yield optimization technologies and, again, targeting on the forefront of the model.
And then there are the ad exchanges, which bring another model to the mix. They offer a big change in the way the market clears inventory. It should be an interesting few years as this all sorts itself out. The only certainty is that change is coming.
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March 19, 2014