Thursday, February 28, 2008

How to fix ad exchange challenges

The investment community makes a lot of fuss over ad exchanges, yet agency buyer reaction to them has been lukewarm at best. Here are some of the top problems exchanges need to address.

It can be argued that the need for an ad seller to have its own ad exchange was one of the driving forces behind much of the recent M&A activity in the digital communications marketplace. Right Media and DoubleClick have both been acquired, and the industry trades buzzed about how exchanges were the future of buying and selling media.

I'm a big believer in exchanges myself, and at my agency, we're staying ahead of the curve by getting involved with all the major players and kicking tires as new features are introduced to exchange-based buyers. And we've had our share of difficulties. Largely, though, those problems are being addressed, and it won't be long before the tepid reaction to exchange-based buying warms up.

Here are some of the issues on the table:

Not enough transparency
An issue common among many exchanges is transparency, or lack thereof, especially where the identity of the seller is concerned. Public awareness of the fact that a premium-brand site needs to get rid of some remnant inventory quickly is not something that many publishers want disclosed. They think it cheapens their brand and presents problems with respect to comparative CPMs that various advertisers pay. Think about it -- no one wants their top advertiser to find out that another buyer who has never advertised on the site before managed to book inventory at 1/10th the rate through an exchange. It's not considered good for business.

This mentality leads a number of publishers to mask their identities. From the buyer perspective, it looks like the exchange is carrying a lot more trash inventory from undisclosed sellers than it is from disclosed branded sites. And that can be problematic. Many brand advertisers disqualify undisclosed ad deals as a matter of practice. In the case of exchanges that allow undisclosed sellers, there might be slim pickings for the brand-conscious advertiser.

Thankfully, this problem is being solved by the free market. As more publishers find regular buyers through exchanges, we have seen an uptick in the number of sellers willing to disclose their identity through the exchange. This behavior is usually rewarded with a boost to the CPM the buyer is willing to pay. The invisible hand of capitalism will solve this problem for everyone but publishers with ultra-premium brands.

Floating budgets
"If you don't watch it carefully, budgets can quickly get out of hand," was the quote delivered by one of my media supes when talking about a popular exchange. Much like a Google AdWords account, budgets need to be set, capped and watched very carefully in order to ensure allocated funds are spent fully, and that spends don't go over budget. Yes, there are mechanisms in place to keep spending under control, but the parameters don't always line up with the limits media buyers need to impose over time.

Thankfully, technology can easily solve this problem, and exchanges are working to make sure delivery stays as close to specified budgets as possible. Right now, many exchange platforms are a far cry from "set it and forget it," but we're getting there.

The stigma
Exchange inventory often has the reputation of being -- how shall I put it delicately? -- not exactly top-tier. Some clients and prospects we've talked to about exchanges initially reacted poorly to the idea but have since warmed up to the idea after we've showed them that inventory on top-tier sites can be bought through exchanges at a discount.

Again, as more publishers get aboard with exchanges and disclose their identities, the stigma will begin to vanish, particularly when agencies are able to increase efficiencies by getting better rates. Over the long haul, agency services may become more competitive (cost-wise) as agencies streamline their process and incorporate exchanges into their day-to-day media buying processes.

So, while exchanges have yet to make a huge splash, I wouldn't look at them as a flash in the pan, either. Remember that they're fighting years' worth of institutional inertia. The way to combat all that inertia is by showing significantly increased efficiency, which they are. So it's only a matter of time.

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