Why Ad Exchanges Need Transparency

When people talk about factors that limit the growth of online advertising, you often hear complaints about ad formats that don’t deliver enough impact.

While larger, more engaging ad units will likely bring more dollars into the space, the biggest barrier to growth is transparency, or lack thereof.

It’s as simple as this: too much of what we buy is too sketchy. We’ve gotten so used to operating in this fog that it might help to imagine a non-media scenario to regain perspective.

So picture this: you’re in the supermarket, doing your big weekly shopping. You walk up to the deli and ask for a pound of Boar’s Head smoked turkey.

The guy behind the counter tells you he can absolutely sell you some meat. But he can’t say for certain if it will be Boar’s Head. It might also not be turkey, if you want to get right down to it.

But it will definitely be meat, and not just any meat, but meat of the highest caliber, rest assured, because he has an intensive quality control process in place and only buys meat from the top 1,000 meat makers.

Huh? You’d probably turn around and buy your sandwich fixings elsewhere.

Because, really, who would ever buy something from a guy who can’t or won’t tell you what he’s selling you?

And yet, this is the level of transparency associated with a large portion of online media purchases. Once we leave the orderly realm of buying direct from a publisher, we too often have only a directional sense of what we’re buying, not an exact understanding.

Just how much display media is bought without transparency is difficult to know, but we can begin zeroing in on the size of the issue by examining the overall market for indirectly sold inventory.

Think Equity, the research firm that closely follows this space, calls it the “non-premium display market.” According to its estimates, non-premium (i.e., inventory not sold directly by the publishers sales force) display was responsible for 90 percent of all ad impressions served in 2008.

So nine out of every 10 impressions are transparency-challenged. Meaning, before that ad ran, the buyer probably didn’t know what site it would end up on, and probably can’t get reporting on how the site performed.

Looking back over the past few years, it’s amazing that any level of opacity ever became an accepted norm. But it’s a topic worth re-examining as the non-premium market shifts from a network model to an exchange model. As the market changes, perhaps some of the norms can as well.

Exchanges (inclusive of the ecosystem of companies emerging that add value to the actual marketplaces) represent the most interesting, important area within online advertising. The implications of what exchanges enable for the practice of media are significant, particularly when impression-level bidding is widely adopted.

In the long run, there is no stopping the shift toward exchange-based buying, but in the near future (the next two years, let’s say) anything less than total transparency will hinder the growth of the category.

Why? For starters, opacity negates the value of an exchange. The premise of an exchange is that publishers put their unsold inventory up for auction. Exchanges are often described as “eBay for display ads,” but can you imagine an eBay where the buyers didn’t know what they were getting?

No. Because that wouldn’t be a marketplace, it would be a grab bag.

There are all sorts of potential barriers to transparency on exchanges, some intentional and some not:

  • Publishers may feel that transparent listing of their inventory devalues their brand or puts their direct sales efforts in jeopardy.
  • The presence within exchanges of network inventory, which is already opaque, means that some portion of available ad space isn’t transparent by definition.
  • Because exchanges have now gained sufficient momentum, everyone wants to position themselves as an exchange, muddying definitions.

But as complicated as the exchange space may seem sometimes, the benefits of transparency are actually pretty simply stated. Buyers want it, and will pay more for it.

That increases the value of the inventory sold on exchanges, and increases the value of the exchanges themselves to the industry.

Happier buyers and more money for sellers — sounds like the right outcome. And since we’re at a crossroads, one worth taking a stand for.

Adam is off today. This column was originally published Sept. 10, 2009 on ClickZ.

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