"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
It has become fashionable in media circles to compare the programmatic media market to the high-frequency trading described in Michael Lewis’ “Flash Boys.” The analogies are easy to come by: The open RTB exchange is similar to the New York Stock Exchange and Nasdaq, while private programmatic exchanges resemble Wall Street’s “dark pools.”
It’s a tempting but facile comparison. To be sure, programmatic and open RTB have driven huge efficiencies in media trading, smarter data-centric targeting and better analytics. And the advent of programmatic is a hugely important event in the evolution of media trading. It is the future.
But in our breathless, enthusiastic embrace of programmatic, which is often a source of amusement to those outside media, we need to remember that RTB exchanges are still evolving and currently lack some key characteristics found in financial markets. Chief among these is a clear view into all price and volume information. In other words, they lack true market transparency.
For example, as a buyer with a seat on the open RTB exchange, I don’t know the prices of all of the bid requests that come my way. I only know the prices of the media I buy. If I am a typical demand-side platform, I may see 5 billion bid requests per day in the open exchange, but if I end up buying only 5 million, then I only know the prices of those 5 million. This gives me insight into only 0.1% of the market, which is hardly representative. And the average cost per mille (CPM) my bids clear is often well below the stated maximum CPM I am willing to pay. A market in which this kind of disparity exists is often said to be lacking liquidity.
This is an important observation because broad transparency and liquidity are key components of any efficient market. In their absence, market information will be asymmetric and market participants will focus on the limited pricing information they do have, to the deleterious exclusion of other market data.
Hammering On The Wrong Nail
Broadly speaking, there are three main ways RTB media get priced. First, it’s as a percentage markup over the direct cost of the media. That’s typical of self-serve DSPs, which often command a 10%–15% markup.
The second way is the flat CPM, which has a variable margin built in. This is typical of managed service deals, whether they are with DSPs, networks or trade desks.
Finally, there is the SaaS model, which is a monthly pricing based on a platform’s higher-end features, such as data quality and breadth. There is no markup on media, but it requires monthly minimums. Overall, SaaS models are still rare in practice.
Each approach has its respective merits, but it is the flat CPM model that is often singled out for scrutiny, since it appears to be the least transparent. Indeed, most conversations about RTB “transparency” tend to focus only on CPM margins, as if by overemphasizing the point one might hope to elevate the issue into the sphere of business ethics, when really it’s just an old-fashioned conversation about price.
A disciplined marketer knows that a true overall picture of media effectiveness requires many data inputs, of which CPM is just one. Paid media should always try to attain maximum performance, against well-defined campaign goals, at maximum efficiencies. When that happens, the question of CPM margins is moot. When it doesn’t, then it becomes a question of price, not margin. This is how most mature businesses work.
Asymmetric Information And The Emergence Of ‘Bright Pools’
As a buyer on the open RTB exchange, if I am unable to see any pricing data whatsoever prior to executing a trade, then the market isn’t truly open to me. It is partly obscured and the result is information asymmetry – publishers and SSPs see all price data, while buyers see relatively little.
In this context, private exchanges emerge as an attractive alternative. Prices are negotiated beforehand, as well as other data desired by the buyer. Information parity is restored. To call them “dark pools” is a misnomer. Transparency exists inside them, and the fact that pricing information does not pass from private exchanges into the open exchange is negligible, since the latter do not possess full price transparency in the first place, as we have seen.
Achieving this parity in the open RTB market is important and will require that both sellers and buyers are economically motivated to participate.
Bring on the Bloomberg terminal for open RTB. We’re ready.
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