Creating Value in Real Time

  |  June 8, 2010   |  Comments

Two reasons why real-time bidding can potentially create value for buyers and sellers simultaneously.

There's been talk about whether real-time bidding is just an expensive technology that creates marginal efficiency in a zero-sum market, but I'm inclined to challenge that notion. After all, it's not overly expensive to implement real-time bidding, especially when you realize the inherent value. It's fairly straightforward for the sell side (publishers) - the more bidders or bids you get, the higher the fill rate and selling prices. For the buy side (advertisers), the value is straightforward as well - in real time you can hone targeting and reduce waste with data-driven decisions on the value at the impression level.

So, all things being equal, how could real-time bidding inventory receive more bids (read higher price) than the same inventory without real-time bidding access? Let's say a brand is interested in only reaching a female audience. In that case, the media planner certainly would not buy run of site on a sports site with an 80 percent male audience. Instead, through inventory accessed via real-time bidding and a demand side platform, the planner can easily purchase 20 percent of female impressions. Of course, this is an oversimplified scenario. In reality, real-time ad decisions are made on dozens of different factors, many of which can only be bound to the ad call in real-time from the databases of each bidder.

A common meme has risen on both the vendor and agency fronts that compares real-time bidding to the financial market and Wall Street debacle. This raises an assumption that if it's a zero-sum game, someone has to be a loser, right? I say wrong.

The financial market analogy doesn't add up for me. First of all, the media industry is not a place of traditional goods. Google's success in search advertising is a better analogy. Google created tremendous value from scratch by creating an efficient search and search advertising marketplace. Remnant display advertising is beginning to use a similar storyline with real-time bidding technology. Within an auction marketplace, remnant inventory can achieve tremendous value as buyers bid on only the impressions that are relevant to them. The most important thing to note here is that the advertising inventory differs from traditional goods and services in two very important aspects:

  • Inventory has an extremely short shelf life.
  • The nature and value of the inventory cannot be determined until the actual ad is shown.

These two important differences lead to the very reason why a technology like real-time bidding can potentially create tremendous value for buyers and sellers simultaneously. First, the extremely short shelf life dictates that if left unsold, an ad spot vanishes in value within a few seconds. Real-time bidding can create more value for both sellers and buyers by facilitating more match-ups for previously unsold inventory.

Second, when the very nature of the ad placement changes with the ad it carries, so does the value it represents. It could change from an apple to a diamond in mere milliseconds depending on who wins the bid. This is one of the exhilarating parts of online advertising.

Consider the fact that the average click rate of a display ad is around 0.1 percent. Now assume for every clicker there are 10 people who are interested in the ad, but did not click. That still makes 99 percent of the ads either irrelevant or uninteresting to viewers. So, it's fair to say that the majority of ad inventory traded today is being undersold in value. With more bidders, more data, and better optimization enabled by real-time bidding, we can eventually increase ads relevancy from 1 percent to 10 percent, that's a 10-times increase in value creation! This means both sellers and buyers can take a larger slice of the pie. Keep in mind that people spend 95 percent of their time online browsing on various pages, and only 5 percent around search engines. Next, consider the fact that display advertising is still only 80 percent the size of search advertising.

Clearly, it's fair to say that display advertising is under-monetized by a wide margin and we can definitely all use a stimulus plan to address that. So, let's stop using a misleading financial market analogy and get down to the real business of value creation. Through real data and real value, players in the real-time bidding space can prove to advertisers that real-time bidding is not expensive and on the contrary, is saving money and creating significant incremental value on a daily basis.

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ABOUT THE AUTHOR

Xuhui Shao

As Chief Technology Officer at Turn, Xuhui Shao focuses on the power of optimization, machine learning, and advanced analytics solutions in driving new business models, products, and services across all industries. Xuhui is responsible for architecting the machine learning and optimization technology to deliver the most effective data-driven digital advertising in the world. He is passionate about the dynamic online advertising community and works closely with industry leaders developing data transparency and consumer privacy protection.

For the last 12 years, Xuhui has practiced research and development in machine learning, statistical theory, and computational intelligence for Fortune 100 companies in various industries from banking, finance, online retailing, healthcare, insurance, marketing, and online advertising. As the lead inventor and co-inventor of three awarded patents in the areas of advanced analytics and optimization, Xuhui is a recognized expert in harnessing data and transforming analytics into actionable insights and optimization strategies.

He earned his bachelor's and master's of science degrees from Tsinghua University, Beijing, and his Ph.D. in electrical engineering from the University of Minnesota.

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