Pros and Cons of Ad Exchanges

An ad exchange is a marketplace in which publishers and advertisers can participate in an auction-based system for buying and selling online display advertising from a large group of participating sites. Publishers place their unsold inventory on the exchange, and buyers place bids to purchase the leftover inventory through an easy-to-use interface (kind of like paid search).

This auction system creates a competitive environment in which each bidder has equal access to the media, so relationships and budget sizes typically have no bearing. Ad exchanges are generally open to all ad agencies, advertisers, publishers, and ad networks. (Although publishers do have the right to reject ads they don’t want to run on their sites.)

Basically, I’d consider an ad exchange buy like a network, except that ad exchanges cut out the middlemen (ad networks) by connecting the publisher directly with the advertiser or media buyer, while CPMs (define) and costs are controlled through a bidding system. However unlike a network buy, you know exactly where your ad will be shown.

For now, there seem to be a few players in the space who either refer to themselves as ad exchanges or technically could be classified as exchanges. They all sell display ads, text, or both. They include Right Media Exchange, DoubleClick Exchange (in beta until sometime in Q3), ContextWeb’s Adsdaq, AdBrite, Ads-click, Quigo, Turn, and the Google Network (which is basically an auction-based exchange without the “ad exchange” title). In addition to already Google having the largest online network, its pending DoubleClick acquisition will have an interesting affect on the forthcoming DoubleClick exchange.

Right Media has emerged as the most prominent open-trading community for online advertising. Yahoo’s acquisition of Right Media for $680 million certainly validates that assertion. Michael Walrath, Right Media’s founder and now a Yahoo SVP, said for this column, “The now-complete Yahoo acquisition will bring even more supply and demand, targeting and other technical capabilities, and exposure to the Exchange.”

Though the exchanges are a great source of super-low-cost impressions, using them exclusively can have downsides. One drawback to buying from the exchanges (and networks, for that matter) is their inventory typically comprises unsold impressions from their participating publishers. So the placements you get are rarely on premium real estate.

Some ad exchanges differentiate themselves by offering buyers the option to bid on high- or low-end inventory. For example, Adsdaq positions its ad exchange as a system for premium inventory. Publishers are required to set an ask price, and the system ensures each publisher receives its desired price. Some exchanges let you do page and even site targeting, but in those cases CPMs go way, way up.

Overall, this automated bidding system for buying and selling advertising is efficient and cost-effective for both publisher and buyer. Publishers can offload remaining inventory and approve ads before they’re launched, and buyers can choose the publishers they want for the price they want. Michael Rubenstein, GM of the DoubleClick Exchange, said, “Buying on DoubleClick Advertising Exchange is like booking your campaigns directly into the publisher’s ad management system: bid on only the inventory you want.”

He added, “Experiment with the system at your own pace, and on your own terms. The system lets you explore and try out campaigns with limited exposure and maximum flexibility.”

Sounds pretty good, right? So what are the pros and cons of ad exchanges? Let’s explore a few of them.

Pros

Low-cost CPMs, for a start. For the most part, most inventory on ad exchanges can be purchased for very low CPMs, often below $0.50. Even banners with a low click rate can deliver a very low CPC (define).

A big draw is transparency. With some ad networks, advertisers don’t always know which sites are serving their ads. With ad exchanges, advertisers can see the sites, and sometimes the pages, they’re running on.

Some ad exchanges offer a transparent bidding landscape that lets advertisers see their competitors’ bids.

Advertisers also have various targeting options, such as day-parting, geographic locations, site category and rating, language, user demographics, and more, letting you create the optimum online media mix for your client.

Last but not least, ad exchanges offer standardization and efficiency. Ad sizes are uniform; the ad buying and selling process is simple. There will only be a single bill. And everything is done in real time.

Cons

Ad exchanges typically won’t provide premium real estate. Sites tend to save those placements for direct sales. Sure, some exchanges have premium inventory, but the CPMs go up so much that you’re better off doing the buy direct so you can lock in your CPM.

Ad exchange inventory is most often for low-value, nonpremium/unsold placements. It’s possible many impressions are at the bottom of the page, below the “fold” of a typical monitor screen. So a served ad that counts as an impression may not have been seen by a consumer. (This also applies to network buys.) Of course, simply tracking performance and weeding out nonperforming placements can quickly remedy this problem.

Sellers can hold private auctions or host restrictions that filter out some unfortunate advertisers. How can advertisers be part of the select few? Product relevance, a strong brand name, ad quality, and past performance could be factors. But in the end, the ad networks have the power to choose their preferred advertisers.

Ad exchanges could also trigger bidding wars between advertisers due to the pricing structure’s nature. Price volatility is unavoidable and ad inventory will sell at fluctuating prices, as opposed to the set CPMs advertisers negotiate for and expect to pay for the duration of their online media campaigns. The bidding system also means the highest bidders win the impressions, so buyers with smaller budgets (or those who are unwilling to pay high CPMs) are at a disadvantage. This can really get in the way of delivering on your plan.

Conclusion

As opposed to a direct buy between the media buyer and the property, or the media buyer and the ad network, an ad exchange adds another layer of transactions and fees. More important, it stifles critical communication. It disregards the working relationships where both parties (reps and buyers) get to know the advertiser’s brand, marketing message, and goals and work together for customized solutions that achieve those goals.

Where media planning and buying has largely been about cultivating relationships between buyers and sellers, with an automated system like ad exchanges, the human component and skill of negotiation is more removed from the media-buying process, and so are possibilities for value adds, customized placements, and many premium-placement opportunities.

All in all, I give the ad exchange system a big thumbs-up, despite its drawbacks. They’re essentially the same drawbacks you’d encounter with an ad network buy. An ad exchange should be treated like a tightly managed network buy and be a part of a media plan that includes specific site buys and network buys. You want premium real estate at fixed costs? Go direct. You want low-cost CPMs, pricing flexibility, and control? Layer in an exchange buy.