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The Ad-Exchange Model (Part I)

May 1st, 2007

Clearly the recent acquisitions of both Doubleclick and Right Media by Google and Yahoo respectively signal a strong vote of confidence in the ad-exchange model. Reading all the news coverage of these two acquisitions made me realize that very few people out there realize the true value proposition of a centralized exchange. Sure, “transparent marketplaces”, and “auction models” are great, but why is this better than any of the existing ad-networks — Google Adsense, Advertising.com, YPN, etc.?

The Basics — A simple publisher serving ads

First lets start with a really basic question — What is an adserver? Before we can talk about an exchange, you have to understand how adserving works today. In it’s most basic form an adserver serves ads on web pages, tracks clicks on those ads and then provides reporting on the ads served and the number of clicks received on those ads. In the online space today, the vast majority of publishers, networks and advertisers all have their own adservers.

Ok, so how does it really work? Well, the first thing you need to understand is how the ad-request actually happens. To request an ad from an adserver the publisher, or website, must place an ad-tag on their page. An ad-tag is simply a snippet of HTML, generally either some Javascript or an IFRAME that tells the browser to request some content from the adserver. Here’s an example tag:

<IFRAME FRAMEBORDER=0 MARGINWIDTH=0 MARGINHEIGHT=0 SCROLLING=NO WIDTH=468 HEIGHT=60 SRC=\"http://ad.yieldmanager.com/imp?Z=468x60&s=2948&t=3\"></IFRAME>

This little snipper of HTML, when placed on a web page, informs the browser to open a small window (460×60 pixels), and in that window place whatever content is returned from “http://ad.yieldmanager.com/imp?Z=468×60&s=2948&”. When I loaded this in a browser I got the following response (truncated for clarity):

<a target="_blank" href="http://ad.yieldmanager.com/click,AAAAAIQL[...]AOUINkYAAAAA,,,"><img border="0" alt=""height="60" width="468" src="http://content.yieldmanager.edgesuite.net/atoms/8c/21/8c21402b07a3ca60e6af42e48b09a3cc.gif"></a>

Which essentially tells the browser to load an image from content.yieldmanager.com (the ad), and then when the user clicks to send him to ad.yieldmanager.com/click. Here’s a basic little diagram that outlines this simple process:

one_adserver.GIF

Ok, so you understand the most basic implementation of a web-page with an adserver. Now lets look at reality.

Life gets complicated — the advertiser has his own adserver

In the example above, when an ad was requested the adserver immediately responded with an image. This implies that when it comes time to pay for the ads served that the advertiser is going to rely on the Publisher’s reporting system to determine how much money he owes. In reality the advertiser is interested in tracking information as well. What this means is that both the advertiser AND the publisher need to have their own adservers. Now, the publisher’s adserver can’t immediately return an ad, instead it returns a SECOND ad tag that points to the advertiser’s adserver. Here’s another pretty diagram:

Two Adservers

Now imagine that there’s an ad-network representing the advertiser that’s sitting in the middle, in which case what we get is:

Three Adservers

What’s wrong with this picture?

So by looking at the diagrams above I hope you get a sense that this isn’t the most efficient of ways to buy and sell media. Think about it, for each individual ad we have to request content from three different systems! This means three times too much work is being done. So lets dig a little deeper. Essentially, the traditional adserving model has three key problems:

  1. Pricing/Operational Inefficiency
  2. Technology Integration
  3. High latency / Slow Adserving


Lets dig into these three.

Pricing/Operational Inefficiency

One of the things I forgot to mention above is that each point of integration between two adservers is manual work. If the Advertiser wants to buy 10 million impressions at $1.00 CPM from a Publisher the following process generally happens:

  1. Publisher sales rep contacts advertiser
  2. Publisher and advertiser negotiate contract terms (e.g. 10M @ $1.00)
  3. Publisher and advertiser sign a contract
  4. Advertiser sets up the ads in his adserver and sends over the “ad-tags” for the media buy
  5. Publisher has trouble trafficking ad-tags into his system and contacts his support department
  6. 5 days later, Publisher finally manages to get the ad-tags live and the campaign starts

So what’s wrong here? First off, there’s a certain inefficiency here. When the advertiser decides he wants 10 million impressions he probably specifies a certain set of targeting parameters to ensure that the Publisher sends him users that will be likely to be interested in his offer. For example, he may want over 18 males with a maximum of 4 ads shown to each user every day. Clearly there is a problem here. Depending on the offer, 18-25 males might be far more valuable than 50-85 year old males. Also, the first ad the user sees is far more likely to elicit a response than the second or third. So what do people do? Well, instead of setting one fixed price for all over 18 users he could setup 20 difference prices. Ten different age buckets (e.g. 18-25, 25-30, 30-35, 35-40) and two different frequency buckets (e.g. first ad, second through third ads). Well, this makes life a little bit better but there are still some problems here. First off, the higher the number of pricing points, the longer the entire process outlined above takes. 20 price points means 20 different tags in the Advertiser’s adserver, and 20 tags to upload into the Publisher’s adserver, and 20 different tags for which the Publisher may need to contact his support department for help. Here’s a nice little diagram –

Many Lines

In this new digital age of APIs and digital systems, why the hell does this take so much work? Can’t we do this in a better way? Well, at some point people realized that pricing flat CPM rates for inventory wasn’t the most efficient way to do things and came up with Cost Per Click (CPC) and Cost Per Acquisition (CPA) pricing models. In these systems the advertiser simply specifies how much he’s willing to pay per Click or Acquisition (generally a purchase, or lead form) and lets the publisher’s system determine the best users to deliver ads. Although this system is better than the above it introduces another set of problems. The advertiser now becomes wholly dependent on the Publisher’s optimization/prediction algorithms, which may or may not be any good! I can continue here for ages, but I’m pretty sure you are getting a sense of how inefficient the current system is.

Enough for one post. Stay tuned tomorrow for Part II — Tech issues and how the exchange model helps.

Update: Part II is ready, read on here: The Ad-Exchange Model (Part II)

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Digg this story Posted by Mike Filed in ad-exchanges, doubleclick, google, right media, yahoo
21 Comments »

  • http://newspeedwayboogie.blogspot.com/ Weissman

    Great overview into what can seem like a mysterious process to many.

    What do you think about more “open source” ad serving solutions like OpenAds and how they fit into this infrastructure, and the value they might have to publishers or advertisers?

  • http://www.mikeonads.com/2007/05/02/the-ad-exchange-model-part-ii/ Mike On Ads » Blog Archive » The Ad-Exchange Model (Part II)

    [...] The Ad-Exchange Model (Part I) [...]

  • Mike

    Weissman,

    Great question, which probably merits more than a ‘comment response’, but I’ll try my best.

    OpenAds is a great solution for a small site, but I don’t see them lasting too long in this changing space. Right Media has already come out with “free” adserving (http://direct.rightmedia.com), and Google has been rumored to be doing the same. I doubt that in the long run OpenAds will be able to provide enough value to compete.

    Think about it in the exchange model — free adserving means access to the inventory. Google’s free adserving technology will, of course, be integrated with Adsense. This integration will allow them to cherry-pick impressions on pages that are most valuable to them. How can OpenAds compete with that?

    -Mike

  • http://newspeedwayboogie.blogspot.com/ Weissman

    Thanks Mike.

    If I can paraphrase what I think you are saying, it is that the ad server portion has essentially become commoditized, and as such its value is now as a gateway to richer services (thus the examples of what Right Media and Google are doing in this area).

    This would suggest two things to me (and I think I agree with you):

    –over time most advertising technology providers (broadly defined, to include Google and Right to name a few) will offer ad serving as part of their core product suite

    –all these providers will necessarily have to follow Right’s and Google lead, to wit: the ad server will become free.

    What do you think?

    Thanks

  • Mike

    Yet again you raise an interesting point. Adserving itself indeed will be commoditized. I don’t think that most advertising technology providers will provide adserving as part as their core product suite — this is what they do TODAY because without an adserver they cannot run their business. I believe that over the next couple years we will see most advertising technology providers dropping the adserving piece of their business and integrating their tools and services with one or more of the exchanges.

    On the ‘free’ part, this is a very interesting question. Someone still has to pay for the infrastructure (not cheap!), bandwidth, etc. to serve ads. This here is really a question of supply and demand, or the ‘chicken and egg’ problem if you will. Exchanges only work if there is a balance between sellers and buyers. E.g., if you had 1000 buyers but 1 seller then it wouldn’t be a very good exchange. Today, providing free adserving to publishers is an easy way to bolster the seller side of the equation. It’s an interesting question as to who will pay in the future, I’ll post my thoughts in another post :)

  • http://www.mikeonads.com/2007/05/04/the-ad-exchange-model-part-iii/ Mike On Ads » Blog Archive » The Ad Exchange Model (Part III)

    [...] The Ad-Exchange Model (Part I) [...]

  • Andy

    Mike – In one of your Q&A responses above, you say: “This integration will allow [Google] to cherry-pick impressions on pages that are most valuable to them.” What do you mean specifically here? Wouldn’t Google have to put itself and its AdSense network partners on the same competitive level as other potential advertisers potentially using the ad server in order for a publisher to choose Google’s ad server (now DC) over another?

  • Mike

    Andy,

    Great point. I’m not sure what Google will say when they’re approached by another contextual partner who wants to integrate with the Googleclick (or doublegoo?) exchange. Hopefully they’ll be fair and give them a shot at competing against Adsense — THAT would be interesting to watch.

    -Mike

  • http://www.mikeonads.com/2007/08/16/exchange-v-network-part-i-whats-the-difference/ Mike On Ads » Blog Archive » Exchange v. Network, Part I: What’s the difference?

    [...] in May I started a three part series on “The Ad Exchange Model” where I focused primarily on the technical benefits that exchanges bring to the online advertising [...]

  • http://all sam patel

    whenever i open any website one side a specific size of advertisement remain in any website particularly most viewed website on my screen , previously i thought the advertisement done by the website owner but later on i found same advertisement over and over to many website i open on my windows explorer the properties of that advertisement somewhat always like this (http://content.yieldmanager.edgesuite.net)…
    Can anybody tell me what this exactly is in my computer?
    is it any virus?
    how can i remove it?
    Thanks
    Raj
    raj_patel2078@yahoo.com

  • jim

    http://content.yieldmanager.edgesuite.net/
    Whatever this is has turned all of my web viewing experiences into porn! Its seems to be comming through Flash player in the place of a banner. And as mentioned above it finds it’s way onto almost every site I’m viewing. I’ve blocked the site in IE securities and in the flash player setup but no luck. Any suggestions?? Its in the registry here…

    HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Internet Settings\ZoneMap\Domains\edgesuite.net\content.yieldmanager

    and here…
    HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\CurrentVersion\policies\Ratings\PICSRules\.Default\PRPolicy\PRPPolicySub

    Should I delete or is this a result of my attempt to block with IE securities…

    Thanks anyone,

    Jim

  • http://www.lucidmedia.com/blog/ Chris Weiss

    Mike,

    Great read on the exchange phenomenon! I really think it is the transparency that the exchanges bring to the table that has created their opportunity vs. the networks.

    Christopher Weiss
    Director of Marketing, LucidMedia
    http://www.lucidmedia.com/blog/

  • http://www.adexchanger.com/online-advertising/social-media-and-ad-exchanges/ Air and Liquid: Social Media and Ad Exchanges

    [...] increasingly liquid exchange will add value to online display advertising inventory beyond the functionality of an ad server with an open auction [...]

  • SE Collins

    DO YOU THINK YOU ARE ALL SO SMART???? I AM A DISABLED PERSON LIVING ON A REMOTE RANCH. THE ONLY CONTACT I HAVE WITH ANYBODY IS THROUGH AN OLD COMPUTER. YOUR JACKASS ADVERTISING HAS CRASHED MY COMPUTER, DESTROYED MY EMAIL AND CHANGED ALL MY SETTINGS MANY, MANY TIMES. IN ORDER TO GET THE COMPUTER TO FUNCTION AT ALL, I HAVE TO SPEND MANY, MANY HOURS SCREWING AROUND WITH IT. DO YOU THINK YOU ARE FABULOUS AND INNOVATIVE? YOU ARE JUST A BUNCH OF IDIOTS OUT OF TOUCH WITH ANYONE ON THE PLANET EXCEPT YOURSELVES.

    IF I EVER SEE ANYTHING ABOUT DEVRIES UNIVERSITY (WHAT IS THIS? FOR SECRETARIES? OR ANY KIND OF CREDIT BULLSHIT, I WILL IMMEDIATELY TELL ANYONE AROUND THAT THESE PLACES AND THEIR ADVERTISING DESTROYED ANY CHANCE I HAD TO MAINTAIN CONTACT WITH THE WORLD OUTSIDE MY HOUSE.

    SHERIDAN COLLINS\
    NORTHERN NEW MEXICO

  • http://www.mikeonads.com/2009/08/30/rtb-part-i-what-is-it/ Mike On Ads » Blog Archive » RTB Part I: What is it?

    [...] Real Time Bidding is the next evolution in how we deliver ads. First, a little refresher in how the traditional adserving process works. Take an ad-request that involves a publisher, an ad-network and an agency (if any of this is new to you, please read this post first): [...]

  • http://www.rtbchina.com/?p=74 RTB China » Blog Archive » [RTB技术介绍 第一节：RTB究竟是啥?] RTB Part I: What is it?

    [...] Real Time Bidding is the next evolution in how we deliver ads. First, a little refresher in how the traditional adserving process works. Take an ad-request that involves a publisher, an ad-network and an agency (if any of this is new to you, please read this post first): [...]

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  • http://www.adservingsolutions.com/ Beatrice Walkens

    Great article on the ad exchange model.

    http://www.adservingsolutions.com has information and software on open ad exchange and real time bidding.

    Much has been improved over the years as the ad serving platforms are open and wide ranging when it comes to targeting, behavior, optimization and audience segmentation.

  • ziko