Over the last few months, I have come to understand the display ecosystem a little better, specifically with an exchange oriented viewpoint. Here are some random thoughts on the issues that need to be resolved in order to make the ecosystem thrive.

Exchanges & quality inventory

The exchanges have a perception problem on their hands. They have been cast as the bottom feeders of the display ecosystem – partly for some perfectly valid reasons, partly because of limitations of the early efforts, and  partly by the incumbents who see the threat exchanges pose to the old way of doing media buying.

Exchange CPMs apparently average around $1 on average, compared to $8 - $20 the higher quality sites can command for their direct sales. This has led to the creation of branded and unbranded inventory on some of the exchanges, with some premium sites preferring to offer their inventory as unbranded to avoid channel conflict with their direct sales.

Clearly the industry needs to evolve to resolve this problem. Instead of diluting the value of their sites by hiding the brand, what are some possible scenarios for the premium publishers to capture the value that they create?

Reserve pricing

One simple option is for the premium publishers to set a reserve price for their branded inventory on the exchange. If the advertiser cares about being on quality publisher sites, they will instruct their agencies to get the premium inventory. This seems like a logical choice for brand advertising. The challenge I see with this approach is the historical market structure that developed before there was a liquid marketplace. Audience aggregation was either done by the publisher, or by the ad network. Premium inventory was purchased directly, and ad networks were used for cheap inventory. The ad networks were opaque and cheap low quality inventory was expected. In addition, the typical ad network business model is an arbitrage model maximize the margins by buying inventory at the cheapest price. They have no incentive to pay extra to buy premium inventory in that model. Now the ad networks are utilizing the exchanges to source cheap inventory, and in turn exchanges are getting labeled as a source of cheap inventory.

There are two possible solutions to change the current state of the market:

1) force ad networks to shift to a percentage of spend model, and buy the kind of inventory specified by the agency,

2) provide tools that makes it easy for agencies to buy premium inventory from the exchanges, which may or may not be the same trading desks that the big agencies are building today.

It is hard to see the justification of ad networks to perform this task. I think it is more likely that the exchanges like AdX will provide these tools that are tightly integrated with the exchange, and make it easy for the agencies to aggregate premium inventory on the exchange. When they buy premium inventory suitable for brand advertising, they will be willing to pay a price that is fair for premium content, and reduces the channel conflict for the premium publishers.

One related issue is how high does the exchange price have to go before publishers do not feel threatened about channel conflict? And what would be a fair price for the premium inventory? The sales & administrative costs will be significantly less for the inventory sold on the exchange, so the publisher could afford to sell the inventory at a lower price and make the same net income. But is the inventory worth as much on the exchange as the direct buys? This is a difficult issue. In the direct buy model, a huge part of the value is the audience the publisher aggregates. On an exchange, additional data is being used to aggregate a specific audience across multiple publishers. Are the advertisers willing to pay a higher CPM for this aggregation such that the publishers still make the same amount of money? Even if the industry moves in this direction, it remains to be seen how the pricing and revenue distribution works out.