Leftover Ad Space? Exchanges Handle the Remnants

Chester Higgins Jr./The New York Times

Joe Zawadzki, chief of MediaMath, analyzes ad exchanges.

By STEPHANIE CLIFFORD

Published: July 28, 2008

Joe Zawadzki’s traders spend their days in front of two computer screens, feeding their systems with data and trying to perfect their trading algorithms.

Chester Higgins Jr./The New York Times

Joe Zawadzki of MediaMath is looking at the financial products that could emerge from advertising exchanges.

But they are not analyzing stocks. They are analyzing advertising.

What they are measuring is activity on advertising exchanges, where companies bid to place their online ads on space provided by publishers. As advertising exchanges gain popularity — Yahoo, Googleand Microsoft have all moved into this arena recently — Madison Avenue is borrowing tactics from Wall Street.

It is reminding some observers of what happened when technology came to the stock exchange, including the arrival of trading advisers like Mr. Zawadzki’s firm, MediaMath, that are running numbers and promising to offer sophisticated financial instruments.

For now, Mr. Zawadzki is using the exchanges to buy and sell ads instantaneously as opportunities arise — a spot market, in Wall Street lingo — but he is working on more complex trading strategies.

“Right now it’s more the in-the-moment, taking advantage of the spot market with aggressive bid management,” said Mr. Zawadzki, whose firm is based in New York. “But we’re certainly thinking about where that goes later in terms of secondary markets, derivatives, options, hedges, all the rest.”

Big publishers try to sell Web site advertising space through their sales forces at high prices. Most cannot sell all their inventory, so they send the leftover, or “remnant,” space to an ad network or to an ad exchange. These deliver an ad, but at lower prices than the publishers’ sales forces fetch — usually around $1 per thousand impressions, versus the $20 and up that top sites’ sales forces ask for.

Ad networks and ad exchanges are both in the business of selling remnant inventory, but they do it in slightly different ways. The networks, which function as middlemen, sell chunks of inventory through their sales forces, which can simplify the buying process for advertisers.

Exchanges, on the other hand, let advertisers buy ads directly, and place them one by one. Because there are usually lower fees, buying off exchanges tends to be cheaper — though more labor-intensive — than buying through networks.

In 2007, exchanges sold about 15 percent of the remnant inventory, and about 5 percent of online display advertising overall, according to ThinkPanmure, a research and financial services company. Most of the other 85 percent was sold through networks.

The major appeal of exchanges is that with some analysis, advertisers can buy ads one by one, and track the performance of each ad. This contrasts with ad networks, which roll up broad audiences for advertisers (often using the exchanges) through their own sales forces.

Ad exchanges have gotten a few big boosts lately. In 2007, three major portals announced they were buying exchanges. Yahoo bought the Right Media exchange for $650 million; Google announced it was buying DoubleClick in April, which had announced weeks earlier it was setting up what is now called the DoubleClick Advertising Exchange, for $3.1 billion; and Microsoft acquired the exchange AdECN.

Last month, the advertising holding company Publicis Groupe said it would start working with DoubleClick and Right Media’s exchange to buy advertisements. The advertising companies Havas Digital and WPP have announced similar deals with Right Media in recent months.

But it is not so much the exchanges themselves that is interesting the advertising world — it is what can be done with them.

“The exchanges are just a platform to buy and sell media, but you have to layer the measurement and data on top, which could come from different areas: some agencies will build it, some agencies will partner,” said Darren Herman, head of digital media at the Media Kitchen agency.

“We use the analogy of, anybody can trade on the financial markets, anyone can get an eTrade account, but it’s how you’re smart about how you use your eTrade account that determines how well you’re going to do trading,” Mr. Herman said.

With some Wall Street-like analysis, advertisers can find individual Web surfers, figure out how much to pay to show them an ad, and analyze how those ads have performed. Firms like Mr. Zawadzki’s are analyzing which of those users might be attractive, then tracking whether people click on the ads they see. If an advertiser wanted to reach a very specific group — say, people in Atlanta who have already visited its home page — it might bid more to get that audience.

The growth of exchanges has a clear benefit to advertisers, allowing them to test multiple ads quickly with specific groups, potentially minimizing expensive campaign testing and focus-group work.The exchanges may benefit publishers, at least short term. Most exchanges take a lower cut of ad sales than ad networks, the other option for unsold ad space, because exchanges have lower costs and no big sales forces.

And some exchanges offer additional leverage for publishers: on the exchange Adsdaq, publishers are able to set minimum prices for their inventories. (If a price is not met, the inventory is kicked to a second-choice network.) Two other exchanges, Traffiq and AdBidCentral, serve as rudimentary futures markets, letting publishers sell ad space several months in advance.

“Once there’s a market place where you can buy and sell using your own technology, you can absolutely create financial instruments or media instruments,” said Zachary Weinberg, the chief executive of Invite Media, a start- up in Philadelphia that is working on ad-exchange strategies. “I think what you’ll see is traders come in, and they’ll look to create derivatives on certain packages of media, and resell them to other guys. You’ll see a whole marketplace develop because of this technology shift.”

The auction-based pricing should, theoretically at least, set fair market prices.

“I think the exchange is really good at creating a market-based pricing dynamic,” said Shar VanBoskirk, an analyst at Forrester Research. “They’ll not necessarily guarantee higher pricing for the publisher if the publisher doesn’t provide any value. So I think the exchange will work just like we see a stock exchange work, where the inventory that is of great value will definitely go up in price because of market demands for that inventory.”

Long term, it may be a different story for publishers. If the exchanges grow, and advertisers figure out how to find their target audiences wherever they are on the Web — rather than going through a Web site focusing on motherhood or autos — they may not need to pay the high prices that publishers are asking for.

Of course, an exchange needs supply and demand to work, and the exchanges are not huge now. The largest exchange, Right Media, based in New York, says it handles about six billion transactions a day. This sounds large, but that six billion is the total number of transactions — that is, the number of interactions between the buyer and the seller — rather than the ad impressions it is serving, a much lower number. And MySpace alone showed an average of 1.7 billion ads a day just to United States viewers in April, according to comScore Ad Metrix.

“It’s still very early in the development of these exchanges and marketplaces, but there’s no doubt that they are here to stay and I think they will continue to get more influence in the marketplace and will continue to evolve,” said William Morrison, an analyst with ThinkPanmure.