Ad Exchanges: Disrupting the Digital Agency

The display-advertising marketplace is being rapidly transformed by the emergence of advertising exchanges. With exchanges, advertisers buy the specific audience member – based on the profile of the person visiting a particular Web page – as opposed to a general advertising buy on a media property. The transaction occurs through a system of real-time bidding that’s more similar to Google AdWords than a traditional display ad sale. For advertisers, the potential benefit is clear: precise targeting and no wasted spend because everyone who sees the ad is a part of the target audience. For creative and media agencies, ad exchanges are a different story: ad exchanges promise to completely transform the digital agency business.

Let’s start with media agencies. A media agency’s bread and butter is media planning and buying. Advertisers need planners to choose the appropriate media through which to reach their target audience. Then they need buyers to negotiate the best prices and administer the transaction. Now think about the process of using an ad exchange. Because advertisers buy the specific audience member rather than the specific type and brand of media, the media outlet is irrelevant, and planners aren’t needed. Buyers are just as redundant: in a real-time bidding environment, no negotiations take place. Instead, buying happens through auctions, where software automates the process. It takes skill to effectively leverage an ad exchange, but it’s a different skill than buying and planning.

So as ad exchanges take off – and given the upside for advertisers, they will – media agencies will need a specialist to manage their ad exchange programs, just like they already have search and social media specialists. The result is that core media agency competencies – buying and planning – become less important. The good news is advertisers will always want custom advertising packages and unique sponsorships that don’t fit the standard units available through an exchange. For this, planners and buyers will be needed. Planners and buyers are at risk of becoming marginalized, but there will always be some role for them.

Ad exchanges promise just as much upheaval for creative agencies. Creatives have long held a love-hate relationship with research and analytics. While it can yield great insights that can spark creative inspiration, it’s also a great excuse for companies to avoid taking a bold leap and trying something truly unique and innovative. Ad exchanges add a whole new dimension to the level of analytics that can be applied to the creative process.

It’s already common for agencies to deploy a test-and-learn approach to creative, where multiple banner variations and concepts are tested against different media properties. With ad exchanges the same thing can happen, but now we can test-and-learn against actual audience segments. Performance data will flood in about how particular demographics reacted to the ad – a much more granular level data than is being leveraged regularly today. Imagine knowing that male car shoppers in Texas click an ad more often than female car shoppers in Texas and being able to adjust the ad accordingly.

Another disruptive facet of ad exchange technology is dynamic ad content optimization. Based on a user’s location, language, the content of the website, the time of day, the past performance of different ads, or another factor, a machine-learning algorithm will be able to generate a customized ad in real time based on a database of thousands of creative elements. In action, this could let someone who lives in a rural town see a car ad with a wheat field in the background while someone who lives in New York City may get the same ad but with an urban skyline. While this technology is not yet widely used, it will be. In late 2009, Google purchased Teracent, one of the companies offering this service, to pair it up with DoubleClick’s ad exchange. Another service provider, Tumri, provides dynamic ad content optimization to brands such as Nike, Sears, Lenovo, and HP.

In this ad exchange environment, there will no longer be a single, perfect ad execution, nor will there be a handful of successful targeted ad variations. Rather, display ad creatives will have to develop a database of creative elements that a machine can cut and paste into an infinite number of acceptably high-quality ads. They will need to read, understand, and react to ROI (define) numbers. This is a very different way of thinking about creative.

These sea changes to media and creative agency fundamentals aren’t necessarily a bad thing. Reacting to change is always a challenge, but if agencies can stomach embracing these innovations, they will come out stronger.

On the media side, agencies will need to hire ad exchange experts. Ultimately, the media agency of the future will have groups focusing on the three primary ways media is purchased: search, social media, and ad exchanges. Then, digital planners will focus on premium, custom sponsorship solutions.

In the creative agency, copywriters and art directors will still be required to produce innovative, custom sponsorship solutions. But a new crop of creatives will need to join the ranks: someone who is one-half analytics guru and one-half creative. They’ll need to analyze information and think about how to develop an advertising system that automatically creates tailored ads based on demographics, as opposed to a single, perfect advertising spot. As this happens, low-cost, mass-produced banners will go by the wayside and dynamic, real-time advertising generation will take over.

Ad exchanges are yet another example of digital’s relentless transformation of agencies and the expertise they need to win. Agencies must make the transition or risk getting left behind.