Supply and Demand in Online Advertising

There isn’t enough competition when it comes to buying and selling online display advertising. This causes much lower prices in general and causes a wide variance in prices advertisers pay for the same inventory.

Today, a media buyer contacts a salesperson at a publisher, asking for inventory matching a general set of criteria to meet a campaign goal. Often an RFP (define) is sent over to the publisher by e-mail, and the salesperson is expected to present a package of inventory to meet the buyer’s goals. A negotiation takes place, and the buyer and seller haggle over price and inventory. A few changes to the package are made to better match the advertiser’s request, and the buyer drives the package price down as far as possible to get the best price.

Unfortunately this process makes it very hard to actually create competition between advertisers, and it’s completely opaque. The seller has no idea how much the buyer is paying for similar inventory on other publisher sites, and the buyer has no idea what the seller is charging other buyers. If there were only one seller representing the inventory, the problem wouldn’t be so bad because she would understand exactly what the market for her inventory looks like, and there would at least be some consistency.

Most publishers, however, have a pretty broad set of inventory to offer to a buyer. Some is expensive, some is inexpensive, some has value to the advertiser, and some doesn’t. By creating a package, the seller can bundle high value with low value and push up the price on the lower-cost inventory. But in the end, this practice isn’t ideal, because it muddies the water around supply and demand. It’s difficult to understand the true value of inventory always bundled into a package.

If every inventory sale had five buyers competing with each other, a truer price would arise. Certainly some buyers would pay more for inventory, but others would pay less. Today, the buyer gets the best price he can negotiate with the salesperson. This actually has very little bearing on the inventory’s value, because different salespeople will sell the exact same inventory at widely different prices. Some buyers are overcharged, others are undercharged.

The good thing about the television upfront is that multiple advertisers compete for primetime inventory. In general, the upfront process ends with the buyer getting a discount for betting on a show far in advance and the networks reduce risk a bit that they won’t be able to for shows closer to their run time. At the very least, everyone involved gets the correct price for the inventory, because the process effectively creates a closed-door auction. All the buyers know that other people are negotiating for the same inventory at the same time — and all the sellers know the buyers are negotiating with multiple parties simultaneously. So the buyer and seller achieve their best price relatively quickly.

Another problem with the online model is we end up selling the inventory in relatively broad buckets. As a buyer or a seller, when was the last time you attached more than five parameters to a buy? Things like the content associated with the inventory, the creative’s dimensions, the targeting criteria you requested. The vast majority of media buys cover very few parameters — and this ultimately is a tragedy. Every sale should include hundreds of parameters, thousands, even millions of parameters applied against each impression. But nobody has yet built systems to support this level of complexity — because the media buy is always relatively simple. Nobody would make use of such a system unless she could bid on every impression in real time. And this obviously means automating the bidding process, since a human isn’t capable of performing real-time bidding against thousands of nearly simultaneous impressions.

Some type of auction mechanism should be used to sell advertising inventory. In a perfect world, we’d have the technology to allow real-time bidding, with bid management systems providing mechanisms to evaluate each impression against the advertiser’s campaign goals — and bid appropriately against impressions with dozens, hundreds, or even more parameters attached to them. Nobody yet has technology that enables this to happen. But there are less-sophisticated methods that could optimize the pricing.

It would be relatively easy to move to a standard inventory auction, even a closed-door auction like the upfront. But this would be less than ideal and would only sell some of the inventory, leaving the rest to a process unchanged from the current one.

If every publisher sold its advertising in a cascading auction, in which inventory were offered with a reserve price several times over the course of the year, we’d end up with the best situation that current technology allows.

Imagine that for November inventory, the sales process began February 1 with an auction that closed March 1. The publisher sets a floor price for the inventory, and anything that goes unsold is then offered in a second auction, running April 1 to May 1. Further auctions would cascade out through the end of September. The remainder would be sold in a real-time auction.

In such a world, the seller would always have multiple buyers competing for the same inventory, and the sale would achieve a best price for both parties every time. This model would also provide opportunity for buyers to participate in auctions for multiple publishers in a cascading method as well. If November inventory is needed to achieve a business goal, buyers would be able to ensure that they win inventory at some point.

This method would also reduce the amount of remnant inventory floating around in the market, and we’d likely see prices increase as we got closer to the inventory’s run date.

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