Google's Ad Exchange Should Help Boost Prices Of "Remnant Inventory"

There is a debate in the online industry about whether Google’s new ad exchange will grow the online advertising pie or just steal share from the existing exchange industry.

Google, predictably, believes it will grow the pie.  We actually agree.

We believe Google’s exchange and the exchange industry in general will likely grow the overall advertising pie by increasing CPMs on the networks. 

In addition, we believe exchanges will help sustain the controversial ad network industry despite many believing it is a dying industry. 

Here is what persuades us:

  • We spoke to an executive at a leading exchange today who estimated that 90% to 95% of publishers on most ad networks, including AdSense, make all their revenue from the networks (we wrote about this back in August).  These advertisers aren’t going to unplug networks anytime soon.
  • New York Times executive Michael Zimbalist recently said the following:  “The opportunity for publishers is that real-time biddable exchanges will help make non-premium inventory more like premium by matching unique parcels to buyers who have been heretofore unreachable via direct sales and for whom the inventory is worth more than the remnant rate. Not only will this increase publishers’ revenues—it will simplify the marketplace for advertisers.”  (We agree).
  • And this from an article in AdAge written by Canaan Ventures Partner Warren Lee: “The number of online sites and publishers continues to increase rapidly, which makes it increasingly difficult for advertisers and agencies to decide which sites to work with. Ad networks can help sort through this bewildering number of sites and target those that are most relevant and appropriate for their clients.” (We agree).

In other words:

  • Brands want (and need) the networks to reach niche sites in the long-tail (important point often missed).
  • Many sites find business models that can be supported by ad networks or are side businesses that may not make a fortune from ads, but make something that collectively with other sites amounts to a lot of money.
  • As the role of ad exchanges in the online ad industry grows, CPMs could increase (if Zimbalist is right that a lot of remnant is being underpriced). This would turn a lot of “remnant” inventory into more premium inventory.

All of this suggests that the networks aren’t going anywhere and that exchanges may help increase CPMs on their inventory, growing the overall online advertising pie.

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