By Rajeev Goel.

The lifespan of and need for specialized technology providers in the ad tech industry, from sell-side platforms (SSPs) and demand-side platforms (DSPs) to data management platforms (DMPs) and ad exchanges, has stirred continuous debate.

As the industry evolved, the focus of many platforms started to blur and they began to look more and more alike. Whether the result of mergers and acquisitions, rushed changes in business models, efforts to build their own technology in-house or other means, it became increasingly difficult for publishers and marketers to distinguish between different solution providers.

It was not so long ago that we heard pronouncements of the “death of the SSP,” fanned perhaps by executional challenges some sell-side technology providers face. The ongoing success of companies able to evolve beyond their roots as SSP point players to technology platforms capable of meeting publishers’ ever-changing needs, for example, is clear evidence that these pronouncements were, if not outright incorrect, at the very least premature.

At the same time, it’s increasingly clear that, as the industry continues to evolve rapidly, ad exchanges are no longer viable businesses. As a result, we are now witnessing the death of the third-party ad exchange.

Why Now?

There are four major driving forces behind the death of the third-party ad exchange.

The first is the advent and success of header bidding. There’s a reason why this tactic spread like wildfire throughout the digital media ecosystem; header bidding, whether implemented directly on a page, app or via a wrapper, provides publishers with a convenient way to run and manage their own ad exchange, including auction pricing management, reporting and analytics, latency controls and more. As wrappers get more sophisticated, these individual exchanges will also deepen in capability.

Second, the industry faces serious fraud and inventory quality concerns. It’s safe to say that these concerns have reached a fever pitch, driven to new heights by news coverage of major fraud attacks such as methbot.

Concerned with the quality of inventory and the lack of transparency of their partners, buyers increasingly want to work directly with publishers rather than simply buying the cheapest inventory on an open exchange. It’s an interesting shift back toward the kind of direct relationship buyers and sellers had in the “Mad Men” era of advertising, and one I’ve anticipated for some time now.

Third, we’ve seen the rise of a new currency in digital media: data. Companies that can leverage available data are seeing great success. As publishers and marketers search for new ways to activate data, they are finding value in direct deals and transaction methods where both parties can layer additional data onto transactions, compared to the less data-rich environment of the open exchange.

Finally, there is a growing emphasis on placement and priority. With more brand advertising coming to programmatic channels, value is shifting back to placement – context – and priority within the ad server. Unlike performance-based advertising, where placement and priority can be factored into a conversion model and applied to eCPM bids, this type of conversion doesn’t exist in brand advertising. This has led an increasing number of buyers to demand the ability to both know and negotiate placement and priority as part of IOs, which they cannot do when buying via the open exchange.

What Comes Next?

The convergence of these four developments has paved the way for a new digital media transaction model. I anticipate the (re-)emergence of a model in which buyers and sellers collaborate to create value on automation-based platforms – a relationship much more akin to those confirmed with a handshake over lunch.

With the added benefit of automation, I expect buyers and sellers to work together to authenticate inventory and verify quality, negotiate placement and price to create value using both parties’ available data, and define equitable auction dynamics and distribute QPS/inventory to the appropriate buyers, which will lower costs for buyers.

This model won’t emerge overnight. The industry must overcome several hurdles before this return to direct buyer-seller relationships can become a reality.

First, we need to bring the complete set of benefits generated by programmatic automation to traditional IO deals. As some of the world’s biggest brands shift larger and larger portions of their budgets to programmatic, they’re also beginning to demand the same efficiencies for their direct buys. This will remain a hurdle until a direct relationship between one buyer and one seller can be facilitated, allowing them to negotiate audience, volume, price, priority and other aspects of IOs while also using real-time audience data against brand-safe inventory.

Second, we need to re-evaluate ad-serving technology. To succeed in a future without third-party ad exchanges, publishers will need ad-serving technology capable of managing and optimizing all of their inventory across both programmatic and nonprogrammatic inventory. Unfortunately, the traditional ad servers that most publishers continue to use today are not flexible enough to handle such a need.

And finally, even if both needs are met, the future of digital media buying and selling will still require the ability for publishers and media buyers to match people securely and efficiently using their own audience data. Doing so will allow buyers to be confident that they are reaching the right audiences at scale without being locked into a walled garden.

The third-party ad exchange, a platform designed to match homogenous impressions from sellers with buyers, is no longer a viable business model. Buyers expect to work directly with premium publishers, know exactly what inventory they are buying, negotiate price and priority for delivery and safely identify audiences. Publishers similarly wish to work directly with buyers, and they now have the technology at their disposal to do so.

It’s time for ad tech to boldly move forward in support of its key constituents: publishers and marketers.

Follow PubMatic (@PubMatic) and AdExchanger (@adexchanger) on Twitter.


By Rajeev Goel

Co-founder and CEO at PubMatic.

Sourced from ad exchanger

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