Real-time bidding is probably the most powerful trend changing advertising (not just digital advertising), hence no discussion of advertising would be complete without spending some more time talking about it. RTB has only been available since late 2009, but it is rapidly attracting more spending and gaining market share because it is much more efficient than traditional forms of programmatic trading.
IDC recently announced a study that looked at RTB market growth and it was dramatic. They noted that:
RTB spend will continue its rapid growth as a percentage of digital advertising spending, rising from a respectable 14% in 2013 to a massive 41% over the next four years in the United States, and from 8% to 28% worldwide. While the United States will remain the most mature and advanced market for programmatic spending, growing at an anticipated average rate of 48% a year from $2 billion in 2012 to a predicted $14.4 billion in 2017, other markets are poised for rapid growth as well. IDC’s research predicts that the Western European market will grow from $381 million in 2012, to $3.3 billion in 2017, with RTB’s display advertising spend share rising from 5% to 23%, while Japan’s programmatic spending will grow from $218 million to $1.1 billion with advertising spend share rising from 5% to 28%.
In the past, if this media buyer wanted to buy media, they would work with a provider like Right Media, ValueClick, Google or one of the tens of thousands of publishers and ad networks out there. Ad buys were achieved by either inputting rules-based buying instructions on various fragmented interfaces, working with an account rep, or using an API to communicate with an ad server. Once these buying instructions were defined, a provider would serve an ad, and make a buy, when an impression occurred on that particular network or site fit within the defined criteria. Buyers could then log in to the exchange to run reports, optimize campaigns or make minor tweaks and changes.
Media buyers (and their clients) who needed mass impression inventory would have to perform this task over dozens, if not hundreds, of sources to achieve scale, since in this highly fragmented space no provider had a dominant share of the inventory. A big agency could work with as many as a thousand digital media vendors when you count the publishers, exchanges, ad networks, and intermediaries. Suddenly, buyers were logging into numerous interfaces, pulling and collating disparate reports and are left trusting dozens of black boxes to run their ads in the right places. Very simply, the fragmentation in the display space made digital media buying a nightmare. Moreover, the vendor was in control of where the ads actually ran, which inhibited transparency and targeting for the buyer.
As an aggregator on behalf of agencies and as someone willing to assume performance risk, ad networks were able to carve out a healthy margin (sometimes in excess of 40%). Agencies, always keen on efforts to goose margins on their notoriously challenging service businesses, saw exchanges and the birth of DSPs and realized that using DSP technology or building their own technology would allow them to disintermediate the networks and acquire the inventory themselves. This offered the promise of clawing back that margin as a “technology fee” for their own trading desk services.
But a funny thing happened along the way…
The advent of OpenRTB commoditized DSP technology. Now, looking at bid requests could be done with a few dozen lines of PHP. While agencies were busy hammering on media planners to use the agency trading desk for much of their plan (and media planners complained bitterly about how they could not necessarily do what was best for their clients), advertisers failed to appreciate the value of the technology investment by the agencies. In many instances, these trading desks simply migrated margin from the network to the agency and offered the advertiser more transparency for the same price. But advertisers live in the 21st century as well. They said to themselves, “Why don’t I call a DSP and set up my own trading desk?”
The only barrier to an advertiser building their own trading desk was the expertise. Depending on the media budget, this was easily addressed. Further, technology vendors to these agencies were generally happy to disintermediate the agencies themselves. Turn and others were eager to partner with advertisers to cut out agencies and networks and funnel those marginal dollars into more network spend (and profit for themselves).
So the next great trend is here and it is large media buyers purchasing directly on exchanges. While WPP, for example, has brokered special deals with advertisers such as Unilever in an effort to cling to this media spend, many more advertisers have already broken away.
Some have compared this to people deciding to handle their own financial planning – far better to pay a fee to have an expert help you! But I for one can comment on how some financial planners take that fee for granted. Agencies need to deliver real value in media planning to earn their fees. To the extent that an advertiser doesn’t feel like they are necessarily getting that value, undertaking their own media buying is a near foregone conclusion. The big question that remains to be seen is “Can an agency add value by providing expertise?” This is very difficult. If you look at ad networks and their evolution over time, proprietary technology and a willingness to assume risk have been the big drivers of differentiation and value for customers. Agencies recognize this as well and are making tremendous investments in big data, custom reporting, and analytics/DMP services that support more sophisticated targeting. While networks have not been successful in differentiating themselves via reporting, generally, the value of reporting at the aggregated level of the agency may prove to be more applicable.
Will agencies take on risk in media buys? I am sure some will. Already there are agencies that from time to time will share risk with advertisers. Hungrier guys will take bigger risks.
All of this contributes to the next domino in the impact of exchanges on media buying: Advertisers who spend so much on media that they can afford to have a few people embark on a trading desk experiment will almost certainly do so. DSPs will provide significant support to these customers as such large media budgets are on the line. No doubt, the margin they will save is substantial – RocketFuel had more than 60% margins last quarter – justifying further investment. This is not to say that they will move all media buying from agencies, but the focus of that media buying will be on testing and strategic acquisition. Transactional and spot media buys can be handled in-house with ease.
Now, for smaller advertisers, agencies can add substantial value: They have an ability to use aggregated budgets to test a wide variety of tools, which a smaller advertiser could never do themselves. Larger advertisers, frankly, provide the budgets upon which these tests are performed. They have the spend and the bandwidth and the interest from tool providers such as Turn and Mediamath to cut out the agency. And the Turn sales people call them every day and tell them how easy it is and offer to do it for them. You know what this means: The vendors paid by agencies to help them install trading desks at the agencies took their learnings from this experience and now package it up to sell trading desks direct. Ouch!
And they aren’t wrong: Things like retargeting campaigns are “always-on” budgets that are straightforward to configure and deploy.
No doubt, there will be a typical technology adoption process here: Some advertisers will embark on their own voyage, realize that it is complex and return to agencies, but over time, it is in their interest and in the technology provider interest to build better tools to deliver incremental value here. The result is a strong secular trend that will unplug agencies from certain programmatic bidding media planning for very large advertisers.
I am working on a long-form article connecting Pokemon competitive play to start-up growth and company building, but if that doesn’t float your boat, I will soon publish a deep dive on publisher margins in an RTB world and the reconfiguration of value taking place. Only a crazy person would not want to read that kind of content!