Ad Exchanges 101

Alex Dixie in Adtech 101

in Adtech 101

Continuing our adtech 101 series explaining the fundamentals of all things adtech, we move on to consider one area of the adtech ecosystem that is still explosively growing – ad exchanges. Most marketers will have come across the term and been told that they should be purchasing from these channels but still haven’t got to grips with exactly what an exchange is and how they can be used effectively.

In a sentence, what are ad exchanges?

An ad exchange is a marketplace where publishers can sell digital inventory (whether display, video, native, mobile etc) to advertisers on an auction-style basis.

How do ad exchanges work?

Each publisher makes its inventory available on the exchange and provides an associated data stream which includes details of the inventory including various details such as page location, url, audience etc.

Advertisers can also sign deals direct with publishers to allow additional information to be accessible to them when the inventory is made available – allowing them to gain further insight as to the likely audience for the ad and hence better establish the value of that impression.

Ad exchanges make use of real-time bidding to sell inventory – each advertiser must bid their maximum amount for the impression offered and an auction is then operated to establish the winning bidder.

How does real-time bidding within an ad exchange actually work?

If a page contains inventory being sold via an ad exchange then at the point of page load for a user:

  1. a request is made to the ad exchange for the ad content and the exchange fires a bid request to all advertisers subscribed to receive requests for that inventory;
  2. each such advertiser (usually via its DSP – for more info on DSPs see our DSP 101 guide) will ingest the bid request and all associated information (this will likely include additional information about the request itself, such as user IDFA/ADIDs, geo-location information, potential demographic information etc) and query its own datasets to establish (i) whether the impression offered is of interest to the advertiser, and (ii) if so, how much that impression is worth to the advertiser (i.e. their maximum bid);
  3. each advertiser that wishes to place a bid will respond with a maximum bid amount and the location for the ad creative to be served in the event that they are successful; and
  4. following receipt of all applicable bids (or the relevant timeout period expiring), the exchange will award the impression to the highest bidder (with the price being set at the second-highest bid + $0.01) and the winning creative is subsequently delivered to the user’s device.

Why is this process called “real-time bidding”? The entirety of the above process to the point of start of creative delivery takes places in less than 50ms.

What are the benefits and drawbacks of using ad exchanges?

For an advertiser:

  • Direct connection between the buyer and the seller.
  • Greater transparency of ad performance – the direct relationship and real-time buying of inventory allows the advertiser specific analytics both at the site level and individual inventory level; giving enhanced visibility of the effectiveness of the advertising campaign. Ad networks traditionally purchased and bundled advertising to sell on to an advertiser – this often led to less favourable inventory being included with premium inventory as a condition of purchase; the transparency provided by an ad exchange allows the advertiser to decide on purchasing on a site-by-site basis, giving greater control over budget.
  • No commitments to purchase impressions at a pre-determined level; the advertiser can dynamically manage budget and react quickly to successful campaigns.
  • Popular audiences can attract higher prices as advertisers look to outbid one another.
  • Available inventory can be somewhat limited compared with the global ad networks (although this is increasingly not the case).

For a publisher:

  • Direct connection between the buyer and the seller.
  • Ability to set floor rates – publishers can set the minimum CPM that they are willing to accept for any inventory and reject any lower bids. This may seem like a brilliant solution to the constant downward pressure on CPM rates but it is important for publishers to keep in mind the balance between demand and price – a floor which is too high will result in unsold inventory.
  • Popular audiences and inventory can attract higher prices as advertisers look to outbid one another.
  • Can remove a level of guaranteed income – ad networks can guarantee a set CPM for particular ad spots; due to the dynamic nature of ad exchanges, income is more volatile (although this may actually result in higher income rather than lower).

Key Ad Exchanges

Although this is an area where a huge number of companies operate, offering everything from vast-scale, global exchanges to extremely specialist, niche offerings, we have below identified a few of the larger players.

DoubleClick Ad Exchange

Owned by Google, this is by far the largest ad exchange available. Advertisers benefit from having access to thousands of publishers of all sizes together with extremely powerful targeting tools.

Microsoft Media Network

The Microsoft Media Network is built on quality inventory from trusted sites across the web including Microsoft own and operated sites such as MSN. Its USP is the exclusive data partnerships; providing advertisers with more effective targeting solutions.

OpenX

The OpenX Ad Exchange is one of the largest in the world and includes 800+ publishers running more than 100 billion ad impressions every month. Many of the top advertisers use OpenX as part of their advertising portfolios.

So, as an advertiser, should I move all of my budget to ad exchanges?

In short, no. Ad exchanges are a great tool for purchasing inventory and, when used correctly, can be an effective method for delivering targeted, relevant advertising. However, they do have drawbacks as discussed above. Not all inventory is best purchased through an exchange, and equally much of the premium inventory held by publishers is still only sold directly. Ad exchanges are an additional string to an advertiser’s bow and should be used in combination with other buying channels (such as ad networks and direct from publisher sales) – some campaign goals will be better suited to using exchanges to a greater extent than others; the trick is to carefully consider the intended audience and type of inventory and allocate budget to the various channels accordingly to maximise ROI.

How about as a publisher? Are ad exchanges the way forward?

Selling inventory on an ad exchange can definitely help publishers to realise the maximum CPM rates for inventory which would otherwise be sold on an ad network. Premium inventory is likely to attract far higher rates if sold directly, however (or via a private marketplace – see our 101 guide here). Equally, ad networks will often provide a guaranteed CPM and ensure that inventory is permanently filled. Ad exchanges will not provide the same service and can result in unsold inventory (often due to publishers setting a floor price which is too high). Ad exchanges can therefore be powerful tools but should (as with all advertising tools) be assessed for suitability in the context of particular inventory. The vast majority of, if not all, publishers will have inventory on their sites which is very well suited to being sold via an ad exchange; the skill is identifying this suitable inventory rather than simply attempting to sell all inventory via an exchange without discrimination.

 

Ad Exchanges 101 was last modified: June 24th, 2015 by Alex Dixie