End-to-End vs Pure-Play Ad Platforms: Contradictory Incentives Means Revenue Erosion For Publishers
The programmatic advertising ecosystem has evolved a great deal from the early days in 2006 when Brian O’Kelly, the CTO of Right Media developed the first real-time auction for digital ad media (Konrad, 2013). The initial goal of programmatic trading in the Right Media Exchange was to mediate between different Ad Networks in real-time so that a publisher to select the network willing to pay the highest price for an ad impression. The benefits of this innovation are obvious: a vastly more effective and efficient media market. Unfortunately the reality of today’s programmatic ecosystem falls far short of the promise of 2006. There are many things wrong with programmatic trading (which I will write about in this blog), and one of the biggest problems is the rise of what I call “End-to-End Ad Platforms”.
“End-to-End Ad Platform” is not a common industry term, but it is a useful way to describe technologies and businesses that both buy ad media from Publishers and sell ad media to Agencies or Advertisers. End-to-End Platforms represent both the buyer and the seller, who are the ultimate principals in the transaction. The business model of an End-to-End Platform is to arbitrage between the lower sale price of the Publisher and the higher buying price of an Agency. So why is arbitrage so bad? Arbitrage is used in all kinds of markets, what is the problem?
The fundamental problem is the structure of incentives in this business model. How can a single platform simultaneously optimise Advertiser media spend, maximise Publisher media revenue and maximise its own revenue: these are all contradictory objectives!
It is logically impossible to structure the incentives of an End-to-End platform in such a way where all parties benefit: there will be winners and losers. End-to-End platforms are venture backed profit making businesses, which need to make a healthy ROI for their private equity investors. End-to-End platforms profit most when they are able to simultaneously maximise media price to Advertisers and minimise media price to Publishers. This is a complex optimisation problem that has been pursued with many hundreds of millions of dollars of research and development. The main issue is to charge Advertisers just about the maximum price where they perceive a worthwhile ROI, and to pay the Publishers just about the minimum to convince them to continue with the sales channel. This is core of the reason why we have so little transparency of market price data from large ad tech companies.
The most effective way to operate with such a business model is when all transaction values are hidden: hence the rise of the black box. If market values are hidden, it is much easier to manipulate perceptions of value from both the Advertiser and Publisher perspective. Taking the Publisher perspective it means that they lose sight and control over of the value of their inventory. The result is that Publishers see reduced CPMs over the long-term. From the Advertiser perspective, they are paying over the odds. The only winner is the End-to-End ad platform. It seems that these black boxes literally leak money.
Naturally, the large media agencies have realised that money is to be made with an End-to-End ad platform business model. All of them, in some way or other, are implementing End-to-End ad tech stacks in order to capture as much margin as possible. Chris Smith (formerly at Digiday) wrote an amusing article, where he described how large media agencies refer to their attempts at hiding their secret margins as “Hiding The Turd”.
Another, issue with conflicting incentives, as far as Publishers are concerned, is that End-to-End platform prefer to work their own Advertisers, since they make a greater margin from them, i.e. they take a double-dip when they both sell and buy media. This means auctions within the platforms are biased against external bidders (if any exist), so that internal buyers get a first look at the inventory and other buyers get access to what is left. If Publishers really want to maximise yield they need to optimise across several End-to-End ad platforms simultaneously, in an equal access RTB auction.
The solution, as far as Publishers are concerned, is to use a Pure-Play Publisher ad platform to sell their media. A Pure-Play Publisher ad platform, focuses solely on maximising yield for Publishers and will treat all buyers equally. They DO NOT simultaneously bid the same media on behalf of Advertisers. In this way the incentives for the ad platform and Publisher are completely aligned. There is no arbitrage and there are no hidden margins.
Unfortunately, there are very, very few Pure-Play Publisher ad platforms and I am very pleased to say that AdUnity is one of them. We are a truly independent company with our own technology, developed completely in-house, our incentives are entirely aligned with Publishers.
Konrad, 2013 New King Of Ad Tech: How AppNexus CEO Brian O’Kelley Went From Fired To First Available from: http://www.forbes.com/sites/alexkonrad/2013/06/26/king-of-ad-tech-appnexus-okelley/#30fd927766f1
Smith, 2015 ‘Hiding a turd’: A look inside the murky world of agency trading desks. Available from: http://digiday.com/agencies/hiding-a-turd-agency-trading-desks/