In most mainstream economic theory, the free flow of goods, services, capital and labour is regarded as extremely beneficial to economic growth. It’s intriguing to consider how the concept of freely flowing value can be applied to online advertising generally and specifically through the idea of interoperability between ad exchanges.
Display advertising has long been the most fragmented of the online advertising spaces. For example, there are many supply channels: many publishers, many ad networks and now several ad exchanges. To make things more interesting, all of these partially overlap. The same publisher’s inventory can often be acquired from several supply channels.
One of the reasons display ad exchanges are important because they have the ability to reduce some negative consequences of fragmentation. They do this by creating shared platforms where supply and demand can be bought and sold. For example, exchanges can reduce the significant transaction costs of display by making it much easier for sellers and buyers of digital media to both discover each other and transact efficiently.
There’s a logical follow-up question here: is there a way to even further improve economic efficiency by connecting exchanges to one another? This is a relatively new idea that is just starting to be discussed by players within the exchange community. The concept is most often called interoperability. I’ll attempt outline what interoperability might look like, what could be good and bad about it and what it might mean for overall industry dynamics.
What does interoperability mean?
In the simplest terms it means:
- Supply can originate in one exchange but be made available for sale to buyers from other exchanges.
- Demand can originate in one exchange but flow into other exchanges. For instance, an ad buyer can express its targeting rules, bids and budget on one exchange but also be connected to and able to buy supply originating from other exchanges.
More broadly, this means supply and demand can interact — regardless of the primary exchange their owners (publishers in the case of supply and ad buyers, including networks, agencies and advertisers in the case of demand) are participating in.
To make the idea more tangible, consider a hypothetical example involving Right Media and OpenX Market (my firm) inter-operating. For instance, OpenX could have an ad impression that it makes available to Right Media demand. Right Media inspects the impression, ascertains if there are interested ad buyers and then responds to OpenX Market in real-time with its top bid (or maybe several bids). OpenX Market then factors that into the auction for that impression. And of course this can also work in reverse, with OpenX Market-sourced demand competing for Right Media-sourced supply. Then apply the same concept to the idea of Right Media inter-operating with the Doubleclick Exchange and OpenX Market inter-operating with the Doubleclick Exchange and you get the idea.
First, there are scale benefits. Scale is important for both the breadth and depth of monetization. Connecting exchanges means connecting more pools of supply and demand to each other. This increase in scale attracts more buyers and sellers to exchanges, which increases the chances of buyers and sellers successfully executing a transaction. That means fill rates, or the percentage of time buyers and sellers complete a mutually valuable transaction, increase. This can be thought of as more breadth.
In addition, scale increases the depth of competition by attracting more buyers. For example, if there are 5 bidders for an impression the chance of the impression achieving its true (maximum) economic value is generally higher than if there are 2 bidders. Scale therefore drives up effective RPMs (revenue per 1,000 impressions) by encouraging deeper and thus more intense competition.
Second, interoperability could reduce economic search and discovery costs. A larger pool of inter-connected inventory increases the chance of buyers finding the inventory or targeting the users they are trying to reach with their ads.
Third, interoperability can further reduce economic transaction costs by reducing the friction associated with using multiple exchanges. A seller or buyer only needs to participate in the exchange of its choice. Through interoperability sellers and buyers will be plugged into other exchanges, eliminating the need to sign-up and manage multiple accounts, bids, budgets, or reconcile reports from different sources. For buyers there is the added benefit of campaign controls (like frequency capping) being applied globally.
Fourth, interoperability enables a heterogeneous exchange environment. That means that rather than there being one uber-exchange there can be several that cater to various sectors of the market in different ways, whether through regional focus, particular functionality or market segment focus. This also helps keep the market open and preserves choice for buyers and sellers.
Like most things, interoperability is not a complete slam-dunk. Exchange interoperability raises some important questions and issues that need to be worked through. I’ve outlined four below and there are surely more.
One major question centres on technical performance, specifically latency. People are rightly concerned that connecting several exchanges together could increase ad and page load times. But current progress with real-time bidding systems is a promising potential solution.
A second concern is around transparency to both buyers and sellers. How will people know where their transactions are being executed? How will buyers know that the targeting parameters they used on one exchange (e.g. contextual categorization or behavioural targeting) will be applied to the inventory on a second, inter-operating exchange? And perhaps most importantly, will buyers and sellers have direct insight into who they are buying from or selling to?
A third concern centres on quality and includes both publisher quality from the perspective of the buyers and ad quality from the perspective of the sellers.
Another centres on how the auction between exchanges should be conducted. For example, should an exchange contributing demand provide its top bids to then be mixed into the auction of the exchange sourcing the supply in one integrated auction? Or should the exchange contributing demand provide the single best bid for a unit of supply and let the exchange sourcing the supply see if that trumps its own top bid?
These are serious questions. Fortunately, all of them can likely be addressed through smart execution and standards. For example, with the shift of real-time bidding from a buzzword to a working reality that’s starting to gain real traction, we now have a mechanism that can act as a very fast, lightweight and reliable protocol.
My guess is that the importance of the topic, the breadth of technical and operational implications and the raw economic potential for buyers and sellers as good as guarantees that the interoperability theme will become an increasingly real and active area of investment and collaboration over the next few months.
What do you think?