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The New Display Ecosystem — Part I: A few words on HYPE.

July 17th, 2011

It’s been four years since I wrote one of my most popular series of blog posts of all time — “The Ad Exchange Model”. Since then a lot has happened. A whole slew of three letter acronyms has appeared: DSP, SSP, DSP, RTB… Venture capital investments have exploded, we have multiple blogs dedicated to ad-exchanges and it looks like the space has gotten a lot more complicated.

Or put another way… in 2007 I described the world with a simple diagram. Today Terry Kawaja has an industry “LUMAscape” that has logos so small I can’t even read them.

FROM…
TO
Exchange Model landscape slide

Wow. What the hell happened? We used to have this easy world… publishers sold to advertisers, there was one exchange and then a lot of ad-networks with different pitches. How the hell did we get from there to the above hodge podge “ecosystem” that nobody understands.

To help bring some clarity to this world I’d like to kick off a new series… “The RTB Display Ecosystem”. This first post is will primarily be musings on hype… as before we can talk about what’s really happening we all need to step back for a second and realize 90% of what we read is… well… bullshit.

How VCs and Bankers brought hype to the industry

I’m sure by now you’ve seen the below diagram. It’s confusing, cluttered and supposed to explain to the world how the new Display ecosystem works. 100s of companies have incorporated this slide in their presentation. I haven’t gone to a single conference where this hasn’t come up multiple times.

DISPLAY LUMAscape
View more presentations from Terence Kawaja

Here’s the hard truth people don’t like to hear. The display world is actually not that complicated. Yes the ecosystem has evolved. Exchanges are core tenets of display and there certainly has been a ton of innovation in the data space. But that doesn’t make for 20 boxes on a slide. What really happened is that online advertising captured the attention of silicon valley… complete with a massive influx of VCs, $, TechCrunch posts and of course… HYPE.

You see, Venture Capitalists make money off of home runs. The top companies in a category get great exits, and after that valuations drop off very quickly. To actually be able to justify an investment a VC has to be convinced that the company has a chance at being top in it’s category. Well, this is quite hard to do if the world were simply advertisers, publishers and ad-exchanges. So what do you do? Well… you create a new category, pump millions of dollars in a company marketed as such category, and then hype up this category on TechCrunch as the next greatest thing and rejoice.

Of course VC’s have coffee with each other, hype up their investments to their VC friends (ever heard of an “Echo Chamber”?), and now they’re all clamoring to invest money in other companies who could vie to be a winner in the category and a new slew of companies gets funded.

In 2006 it was impossible to differentiate yourself as an ad-network… and thus every ad-network rebranded as an exchange. In 2007/2008 nobody could raise money as an “ad exchange” that would compete head-to-head with Google and Yahoo. But “SSP” worked out quite well… even though it’s exactly the same business model (queue funding for Rubicon, Admeld & PubMatic, etc.). In 2007/2008 you also couldn’t raise money as an ad-network, but there were plenty of companies interested in helping advertisers spend their money… enter the “DSP” category (queue funding for MediaMath, Turn, Invite Media, etc.). What’s funny is that TMP was doing the SSP business before anybody else and Ad.com has been offering “DSP Services” since .. well, forever!

VCs are also obsessed with investing in “Technology Companies” that build “Scalable Platforms”. You see, Technology is supposed to be sticky. Platforms have ecosystem effects and become $1b companies. To adapt, companies have quickly adjusted their positioning to better reflect attributes that will attract high valuations from said Venture Capitalists. Again, ad-network isn’t sexy, but a technology “Demand Side Platform” is. The funny thing is… it’s hype yet again. Most companies on the LUMAscape slide receive the majority (if not all) of their revenue from media services and not technology fees. Now this line is blurring (more on that later) but what companies are doing is saying they are “technology providers” while behind the scenes they operate exactly like a media company. An “SSP” technology provider hands out tags to publishers and then pays them a check at the end of the month together with a nice excel sheet. This is exactly the same business model of many an ad-network.

Don’t get me wrong — I’m not saying that any of the aforementioned companies aren’t or can’t be great companies. Many of the companies I mention have built terrific technologies and great businesses and some have followed that up with successful exists. But, they did all capitalize on a great marketing opportunity, at the expense of some “old world” companies who were too slow to react.

And this is where VCs and Bankers are actually hurting the industry rather than helping. They are reinforcing the importance of new categories that in themselves shouldn’t necessarily exist. Rather than focusing truly on what a company does they repeat and hence validate what companies say they do.

So what’s next?

Well first, let’s stop the hype cycle and start celebrating real successful businesses for what they have accomplished. Give me more case studies of real results and less BS!

In the coming blog posts I’m going to lay out the new RTB ecosystem and how all the different parties are interacting. Your feedback is as always invaluable so please leave comments with specific topics you’d love covered.

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Posted by Mike Filed in ad networks, ad-exchanges, adservers, adserving
46 Comments »

  • http://twitter.com/nadahalli Tejaswi

    I have been waiting for this post for the last couple of years.

    Thanks Mike.

  • http://twitter.com/jessas jessas

    Mike – really good stuff. I was getting confused lately more and more by what is happening in display world. Thanks for giving it the right perspective. Keep it coming.

  • Anonymous

    As ever, always a great see-it-as-you-see-it post. Star cafe insight.

  • Pub_licite

    “An “SSP” technology provider hands out tags to publishers and then pays them a check at the end of the month together with a nice excel sheet. This is exactly the same business model of many an ad-network.”

    Mike – a very important difference between a SSP & an adnetwork, is the transparency on fee and margins.

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  • Anonymous

    To clarify SSP isn’t the exact same as an ad-network, but it is the same as ad-exchanges like Google and Yahoo (which operate on a fixed fees).

  • Controversial

    … consequently SSP is a technology provider, since it is the same as AdExchanges like google and yahoo (which are technology providers)?

  • Anonymous

    Ah, I like it… but do wish you would put your name down =).

    So let me punt this to the next part of this series when I talk about the evolving exchange model. Even though RM was indeed a tech based model I’d argue that the ad exchange models is moving to media based ones. Google AdX certainly isn’t a “tech provider”… you sell media and buy media there, DFP or DFA can actually sell you tech.

  • Anonymous

    Mike –

    I couldn’t agree more about your conclusion regarding HYPE in the digital advertising space. Where you are mistaken is referencing “Bankers” and LUMAscapes as contributing to such hype.

    Firstly, you should reference the latest LUMAscape which permanently resides here: http://www.lumapartners.com/resource-center/lumascapes-2/.

    Secondly, I encourage you to review any of the presentations I have made at industry conferences, many of which are online at http://www.lumapartners.com/resource-center/presentations/. I often refer to the space as comprised of point solutions that have limited long term independent viability (doesn’t sound like hype to me). I have further suggested that such fragmentation does not help and believe we will continue to see consolidation (we have already seen ~40 companies get acquired in the display space since I first made the chart). Heck I have even lampooned the HYPE in several comedy videos including this popular one: http://www.lumapartners.com/videos/ad-tech-from-hype-to-stereotype/.

    Third, I have repeatedly made the point that too much VC money is chasing the space and that there is likely to be lots of investment road kill. Already of the 40 deals referenced above, over half have been capitulations where investors did not earn any substantive positive return. I have predicted that that ratio will likely rise to 75%/25%).

    At LUMA, we are working on some interesting transactions that we believe will help simplify the ecosystem. In the meantime, I look forward to reading your blog series as I support your substantive thesis about the industry.

    Terence Kawaja
    LUMA Partners

  • Anonymous

    Terry –

    Thanks for the reply — I really appreciate the detailed note and I’m glad you are willing to share your opinions here.

    Also, to clear the air, the above was in no means meant to be a personal judgement on yourself or LUMA. There are lots of VCs and Bankers that I love in the world that do terrific work and provide tons of value. The post above isn’t meant to be about any specific VC or banker, but more the general impact that fundraising and a drive to an exit has on the space. Your stats are terrific in supporting that point.

    Specifically towards your slide — I think the problem is that it has taken on a life of it’s own. Both SSPs and DSPs use it as sales tools to convince people that the space is so complicated they need help & representation. I regularly talk to people who pull up your slide and say — “Help… what should we do?”. Basically, it’s being used as a propaganda tool for companies to hype themselves out, and as such I think is good reference material for the above blog post.

    Personally I’d love to see this slide redone to better reflect the reality of what’s going on in the world. I think the biggest problem is a company with $1M in revenue can share the same logo size and space as Yahoo or Google, who have 1000x the revenue and influence. What about adding some tangible metrics to help size companies on the chart (perhaps add some animation!) to reflect funding, market cap, share of display or even better a guesstimate of revenue split between tech vs media. Even one of those stats would bring to the forefront companies that are either influential and/or actually innovating and driving change. I’d be delighted to work with you on this if you want!

    Last but not least… I updated the slide to just embed slideshare. Apologies for linking to the wrong one.

    -Mike

  • Anonymous

    Thanks Mike. I agree that the LUMAscapes have been used for all kinds fo purposes. I have thought about a few different ways to reflect the disproportion you reference. One would be to animate the slide so that the logos grow/shrink relative to their revenues (hint: most would disappear). In the meantime, I plan to post audio files to them (in the spirit of branding we’ll call them LUMAcasts) that will highlight the issues we are seeing with the ecosystem and will most certainly point this out.

  • Anonymous

    Thanks Mike. I agree that the LUMAscapes have been used for all kinds fo purposes. I have thought about a few different ways to reflect the disproportion you reference. One would be to animate the slide so that the logos grow/shrink relative to their revenues (hint: most would disappear). In the meantime, I plan to post audio files to them (in the spirit of branding we’ll call them LUMAcasts) that will highlight the issues we are seeing with the ecosystem and will most certainly point this out.

  • http://twitter.com/ayusman ayusman

    Keep these posts coming, really looking forward to the next one now

  • http://www.russfradin.com rfradin

    Terry / Mike -

    Great posts!

    I think one thing consistently missing from any analysis of the industry is the titanic role Google is playing in the ecosystem. Frankly, I think any history of the online display ecosystem should be broken into two periods: BGD / AGD (Before Google-DoubleClick / After Google-DoubleClick). They are two entirely different industries.

    When the teams were building companies like Quigo, RightMedia, aQuantive, Adify (my company), etc… they were building under a totally different economic system where companies could reap major long-term economic benefits from inventing new beneficial technologies. These companies could grow quickly, charge prices that reflected the value they added to the ecosystem, etc…

    In the AGD world the entire foundation has shifted. The new model requires growing quickly, OVER-HYPING and a quick exit (most of the time).

    I believe a huge amount of the confusion in the industry is caused by the fact that a ton of companies founded BGD have been scrambling to invent new business models in the AGD world and they are, by and large, cannibalizing each other.

    VC’s eyes continue to be wide because of the total dollars up for grabs but they continue to ignore that 85% of those dollars go through 4 companies.

    I believe this ecosystem will be vibrant again, and for the long term, once the majority of VC dollars dry-up and the zombie companies founded BGD whose businesses have been commoditized by one of the two greatest deflationary forces of the last 30 years (Google & WalMart) reinvent themselves or die.

    Russ

    Note: There are obviously a few exceptions. AppNexus stands out as do many companies in the video space (which Google has not, yet, commoditized).

  • Anonymous

    Russ – I couldn’t agree more. From May 2010 at 13:07 mark: http://www.lumapartners.com/presentations/terence-kawajas-iab-networks-and-exchanges-keynote/

  • http://www.russfradin.com rfradin

    This is great, Terry, hadn’t seen it before.

    My fundamental belief is that Google wins by owning a player in every space that they need and driving pricing to zero. The only company that can possibly compete with Google is Facebook, we shall see…

  • J_Curran

    Yes, as soon as an exchange goes outside of a laissez faire approach by:

    1. Allowing buyers to buy into exchange inventory on an arbitraged “premium” CPM, or
    2. Pumping in their own inventory they own or bought

    …it changes the model from a true exchange to a media model.

    Y! is doing both of these with RMX. Google is at least doing the first by pumping in Adsense inventory… Even making sweetheart deals with larger Adsense pubs to keep the majority of the exchange inventory flowing. That should be enough to start the shift of an exchange model to a media model. Looking forward to the next post.

  • http://www.facebook.com/profile.php?id=670282984 Julian Tol

    Thanks for the post Mike. I should point out to our industry colleagues – many of us who have become good friends over the years – that it was your early work, along with Brian, that got me engaged in the subject of ad exchange trading in the first place, and led to the foundation of Brandscreen in early 2007. I’m writing this post from Tokyo, where Terry’s LUMAscape would look very empty if anyone dared to fill it in. VCs over-inflating companies and hype over-inflating VC expectations is a particularly US problem, although I hope we’ll the same problem here at some point. Please visit us soon, and bring your hype with you.

  • http://twitter.com/ganeumann Jerry Neumann

    Mike–
    Pointing fingers might go over better if you started with a mea culpa. As the company that–despite the number of boxes already on Terry’s chart–insisted that they get their own, separate, category, it seems a bit hypocritical to point fingers at the VCs and bankers who have been comparatively quiet in the marketplace (mainly because there are so few who truly understand the ecosystem.)

    I’m a venture investor and I have and always had a pretty simple view of the space (http://reactionwheel.blogspot.com/2010/04/picture-worth-significantly-less-than.html). But I believe you let a thousand flowers bloom and see which ones flourish. If that’s hype, let there be hype.

    I’m happy to support entrepreneurs who have a slightly different take on how to make the display advertising infrastructure work better–in fact, I consider that my job. Companies that are hard to categorize are often smoke and mirrors, but sometimes they are innovators.

    Jerry Neumann

  • Louis moynihan

    Agreed.  But I would like to add, from an industry evolution perspective, manual black box ad networks need to evolve into more automated transparent platforms, with features for both publishers and advertisers.  This makes the display industry more efficient in the long run and attracts more advertising dollars.  I know this is obvious, but it deserves to be mentioned that VC’s and hype are a necessary side affect of allowing an industry to evolve and grow. Of course arguing over the details is the fun part :) so take the good with the bad, its a package.

  • Guest

    Sizing would be incredibly cool if you could get the data. 

  • Guido

    Hahaha – “90% of what we read is… well… bullshit” – true.

    Looking forward to part II!

    Best
    Guido

  • http://www.mikeonads.com Mike Nolet

    Hi Jerry –

    On your comment on AppNexus, I’m not sure what you are specifically referring to.  I can tell you that I personally have rejected the usage of either a generic chart or labels to describe our business. 

    That being said, it is fair to say that  the finance folks certainly aren’t the only cause of the hype but that there are plenty of entrepreneurs who have jumped on the band-wagon.
    -Mike

      

  • http://twitter.com/ganeumann Jerry Neumann

    Take a close look at the landscape chart in your post, between the DSP box and the Exchange box.

    I think rejecting labels is a good strategy for you. It’s also a good strategy for every other company creating new pathways or using data in new ways to buy media more effectively. That’s why that chart is so complicated. I guarantee you that every company in every one of those boxes claims that they are different than every other company in their box. This is not hype. At worst, it’s wishful thinking; at best, it’s true. Welcome to competitive destruction.

    There was a time when AppNexus was small and struggling to find a niche it could call its own in the media buying world. There were press releases, there were conference appearances, there was vast confusion over what you actually do (still is, actually.) Now that you’re large and part of Microsoft, telling everyone else to stop with the hype sounds, well, self-serving.

    As the VC that has probably written the most about our tiny little sub-industry, I’ll confess to this sort of hype: sending companies clients (including sending a couple of potentials AppNexus’ way), networking new companies for partnership (including to AppNexus), networking various people to other people in the ecosystem, educating potential clients about the strengths and weaknesses of various companies in the space (including the strengths of AppNexus), trying to tell the truth about the reality of what our companies do versus the claims, and putting my beliefs about the good we can accomplish (and how) out there for everyone to read. I’ve also spent a lot of time trying to convince other VCs that they should follow-on in the companies I’m investing in when I really believe they are contenders for greatness.

    Which of this hype should I cease producing, exactly? And should I only stop doing it for companies that are not AppNexus, is that your point?

  • http://www.facebook.com/kennygrant Kenny Grant

    Would love some insight on RTB.. specifically self inflated bids…

  • http://www.adotas.com/2011/07/the-new-display-ecosystem-part-i-a-few-words-on-hype/ The New Display Ecosystem, Part I: A Few Words on HYPE

    [...] at mikeonads.com. The views expressed in this column are those of Mike Nolet and do not represent the official views [...]

  • Nene

    Mike, I assume that subsequent posts will have to do with how to cut through the hype. The layers of abstraction between advertisers and publishers in the display ad marketplace is frightening. Being on the receiving end of said bullshit/smoke&mirrors&unicorns&rainbows/hype working with a brand publisher has taught me to me more discerning. Great article.  

  • Nene

    *to be

  • Tyler Pines

    My takeaway here is simply that the funding in this industry is helping
    to push differentiation to the point of market clutter.  We are all
    acutely aware of the lack of technical standards in the display world. 
    To me, the ecosystem shares similarities.  Lack of defined value-adding
    roles results in poor performance, budgets spread across too many
    players, and  general market inefficiencies.

    Of course, to your earlier point, Jerry, some of these businesses will
    succeed, and some will fail.  It’s a self-correcting phenomenon, and
    consolidation will happen (is happening!).

    This is all to say that at the end of the day, I don’t think Mike’s primary goal here was to point fingers.

    Interesting points all around!

  • http://www.exchangewire.com/blog/2011/07/29/five-stories-in-ad-tech-you-might-have-missed-this-week/ Five Stories In Ad Tech You Might Have Missed This Week | ExchangeWire.com

    [...] convoluted? Is display really that complicated? Mike Nolet doesn’t think so. In a recent post on his blog, Nolet argued that display isn’t really that complicated. The post entitled, [...]

  • http://judewa.com/?p=461 The New Display Ecosystem — Part I: A few words on HYPE | Judewa

    [...] Read the article on Mike On Ads’ blog. [...]

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  • http://twitter.com/giladhellerman Gilad Hellerman

    Mike,
    This is kind of a late response as I missed this post somehow but better late than never as they say…
    As someone coming from an “old world” company (a traditional ad network) I could not agree more. We keep seeing these companies formed and we try to figure out the business model and the difference between them (the DSPs, SSPs etc…) and our own business and we are having a hard time finding the differences. Eventually, they all end up with managing relationships between advertisers, publishers and data.
    As we are funded by our own revenues, we have little to do with the VC industry, and so I am thankful to you for making sense of all this (unnecessary) mess.

    Gilad Hellerman

  • steveg

    Just started recently at an online advertising based company, having no previous knowledge of the industry, that has recently started working with AppNexus.  Your posts have been extremely helpful resource for me to learn the ecosystem in a way that cuts through the crap and tells it like it really is.  Thanks.

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  • Xuehua Shen

    Same thing in China, much fewer boxes in China.

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  • http://www.facebook.com/people/Tesla-Berry/100003892763288 Tesla Berry

    I’m a bullshit artist. All I know is when I see something as complex like this, I know that there’s a whole lot of bullshit inside of it that is built on top of mounds of CHEAP money. eventually that money will disappear, and what happens after that, is that the bullshit disappears and the companies that provide value at a price that someone is willing to pay will be left. 

    i’d wager from that chart, less than 1/5 of companies will be left after the next crash. The beautiful irony of this whole cycle is many of the people who are creating all this tech actually believe all the hype and crap, and in a way, many of them MUST believe it, or they wouldn’t be putting their efforts into something they thought was mostly hopeless. 

    for the guys that don’t believe the bullshit and hype, and that are seasoned enough to understand the fundamental economics behind this—–they are mostly already rich enough not to care and don’t have to work a day job. 

    thank you wall street. 

  • Lnunes

    Hy!
    Someone knows the average CPM paid for Ad Exchanges when they are buyng the traffic for their clients?
    Tanks!

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  • http://www.exchangewire.com/blog/2013/10/08/exclusive-mike-nolet-cto-and-co-founder-at-appnexus-discusses-his-departure-from-the-company-and-why-he-is-leaving-ad-tech/ EXCLUSIVE: Mike Nolet, CTO & Co-Founder at AppNexus, Discusses His Departure From the Company & Why He is Leaving Ad Tech | ExchangeWire.com

    [...] Depends on whom you’re talking about. It certainly served bankers, trade analysts (*cough* ExchangeWire *cough*), and whoever used it as speech or marketing fodder well. As far as the small guy trying to figure out which way is up or down, it certainly didn’t help. There’s a fantastic comment exchange between Terry & I on my blog. [...]

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