Can Ad Networks & Exchanges Help Increase Ad Prices (Instead of Driving Them Down)?

March 4, 2010
Category: Archive

It’s generally said that advertising networks and exchanges push down the price of advertising on the Web, making it harder for publishers to get top dollar and support quality editorial products.

But there are some innovations coming that could help change the equation in publishers’ favor — at least if a couple of top executives from advertising technology companies are to be believed.

We’ll get to those innovations in a minute, but to place them in context, let’s take a look at the havoc being wrought today by the networks and exchanges that drive down prices by bringing new efficiencies into the market. Why, if you’re an advertiser, would you pay a high price to reach an audience if through an ad network or exchange you can reach the same people at a fraction of the cost?

The top networks, for example, offer billions of ads on hundreds of millions of Web pages, using targeting mechanisms to offer ads next to just the right relevant content, and just the right user. Because they have such massive reach across such a wide swathe of sites, and because of efficiencies built into technology that takes little human intervention, they can offer ad placements at rates heavily discounted from the rates publishers charge for what they consider their premium spots.

Let’s say that I, as a marketer, have to spend $35 to get 1,000 ads shown in the pages of a top-end publication like The Wall Street Journal Online. I might just as well spend $8 or even $2 for 1,000 similar impressions on an ad network that promises a similar audience of wealthy, educated businesspeople through, say, a suite of finance blogs and portals. Even if my ads are less efficient at reaching my target audience, I’m still getting a good deal if the network is delivering at least a good portion of what it’s promising. I could have a good chance to get my ads on a high-quality publisher’s site anyway; many will take network ads in spots they haven’t been able to sell on their own.

Ad exchanges, meanwhile, promise to match buyers and sellers through an auction system. They let a publisher set a price for its advertisements, then let advertisers bid on them. Theoretically, that should allow publishers to keep the prices high and not take lower priced ads. It should work like eBay: a choice ad spot, like a choice item, should create a bidding war in which the price is driven up.

But there’s so much advertising space (also known as “inventory”) all over the Web, and so many other outlets — everything from games to social networks like Facebook, search ads, and more — that it can be very hard for the publisher to hold the line. If few marketers buy at the set floor price, the ad spots go unsold, or the price comes down.

Plus, the time-limited nature of advertising skews the auction in the buyer’s favor. It’s not like a painting or a piece of furniture that can be pulled and offered at a later date, but rather like an unsold airplane seat that has no value once the plane takes off. As soon as a Web page is delivered to a browser, its ad inventory is gone. If it didn’t have an ad on it, you’ve missed the chance to make money from it. That’s why airfares can go way down when the seats aren’t selling.

Tim Cadogan, CEO of ad exchange OpenX, told me that the solution is to “limit the number of airplanes flying” when I shared the airline analogy with him at the OnMedia conference in New York earlier this year. Cadogan predicted that within the next year to 18 months, we’ll start to see technologies that let publishers flexibly manage ad inventory in real time, automatically pulling ad spots from a page when there’s not an ad of high enough value to go in. That should, by implication, increase the perceived value of the spots that remain.

“We are looking at scarcity management,” Cadogan said. “It doesn’t always make sense for every page to have 2.5 ads on it. Sometimes it’s better to have only one.”

At the paidContent 2010 conference a few weeks later in New York, JT Batson, executive vice president of revenue and global development for ad solutions company the Rubicon Project, said they were developing such a solution, one he predicted would be available in some fashion by the end of the year. “Flexible inventories will increase rates,” he said.

Batson said publishers haven’t done particularly well at managing their inventory but will eventually have systems with predictive modeling as sophisticated as the ones airlines have.

Cadogan also told me that his company aims to bring more buyers into the market, thus creating a better environment for the sellers. “What the ad exchange space can do is maximize yield by managing inventory and creating competition,” he said. “Auctions can work very well to sell high-value goods.”

I hope so. Still, I have to admit that I’m not convinced. Google, among others, has proven that massive scale puts severe downward pressure on prices. As ad systems get better at targeting users and matching ads to them and to relevant content, it’s hard to see the trend going in the other direction. It’s also hard to see all but truly premium publishers — those with original material of high appeal and those whose audiences can’t easily be reached by ad networks — resisting the temptation to make at least some money from their spots, rather than letting the pages go fallow.

I hope Cadogan and Batson are right, though, because I want to see the technology used in ways that preserve the value of an editorial environment. And I also believe publishers are becoming more innovative about creating value with custom ad packages, micro-sites, quasi-editorial copy, mixes of social good and advertising (in which, for example, contributions are made to charities on behalf of a sponsor), games, and other methods that go well beyond simple display advertising.

It will take that kind of approach, combined with technology, to help publishers in digital media survive — something that I can’t help but notice a lot of airlines have had trouble doing for years, even with their sophisticated inventory management systems.