Inside The AppNexus Machine

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AppNexus is an object of some fascination in digital marketing circles, and why not?

Led by former rivals from Right Media and DoubleClick Ad Exchange, the privately held company has grown up to become perhaps the only scaled "pure" technology company in the real-time bidding landscape. It provides no managed services, accepts no insertion orders, and wants to keep it that way.

CEO Brian O'Kelley tells AdExchanger, "Everyone is working with everyone else. It's gotten to be this really vibrant thing, which I enjoy, because it means we do less work, and our clients get tons of benefit from each other."

In this interview O'Kelley sounds off on a range of subjects, including AppNexus' revenue and funding prospects, innovation outside the U.S., competitors, and video.

You have said European innovation is moving faster than in the U.S., where much VC money is going to marketing and sales.  Could you talk more about that? 

VC money is part of it. People have to be scrappier. In the U.S. there's a playbook. Somebody's figured out how to unlock dollars for the DSP, investors flock. Now, everyone is fitting into a box. It's almost like a collusion between the bankers and the VCs and the entrepreneurs, and now each box gets five companies, and then you're done. In the U.K., because there's no bankers, and there's no VC money, people just experimented. It feels in some ways like the Galapagos or some other far away island chain where things evolved in their own way. So, you have these really interesting guys who are like, "Well, what works? Nope, that didn't work. Let's try something else." I don't have a board to report to. I don't have to worry how people perceive me. I'm just going to figure out what works. That's how the U.S. was back in 2003 to 2005 or '06, when Right Media was formed. Right Media made lots of mistakes. No one remembers Yieldmanager 1.0. It was only Yieldmanager 2.0 that that became really successful.

I think that's where we're just seeing less formed companies have more ability to innovate with less pressure from VCs, and with an agency trading community that's much more interested in experimenting. That's all really conducive to innovation.

How does AppNexus leverage that experimentation in Europe and elsewhere?

It pushes us. These guys will call us up and say, "Hey, your platform can do 90% of what we want. Could you just add a hook for this cool thing we want to try?" This company called Skinected figured out that custom skins have been expensive to execute for publishers and for agencies. They said, "We can trade this. We'll just drop some JavaScript that does the skin background, and then we'll make this a programmatically traded thing." Really smart. So, we did it. They said, "AppNexus, can you do a few things in the platform to make this a little more efficient?" We said, sure. Now, people love Skinected. The idea of trading skins real time ... they get incredible CPMs. You can do targeting now on sponsorships you couldn't do before. It's not going to work for every site, or every case, but man, what a great business.

It's creative innovation, not necessarily scale-your-plumbing innovation. We get to stick to our strengths, but innovate as an ecosystem more. Google has a disadvantage. They don't have that kind of innovation around the fringes, because in their world, they innovate and other people use the innovation. In our world, we build a platform other people innovate on top of. Our very first investor had this slide which was like, "We're going to build a bunch of stuff, and then we're going to leave white space," and the slide literally showed the white space on the slide that we were leaving for partners. I've always thought that was a compelling way of explaining our business.

What can you say on revenue growth?

We've had 190% revenue growth year over year. We're not giving out actual revenue numbers today, but if you saw it you'd be impressed.

What's your current funding picture?

We're one of the best-funded companies in this space. We have our powder pretty dry. We've been very conservative how we've spent money. Obviously, building a big platform is expensive. Expanding internationally is expensive. So, we're not hesitant to invest.

I guess the short answer is just we are open, as is almost any company, at the right price to raise more money, because you can never have too much money. But, there's no reason to raise money if you don't need it.

So, you're only interested in funding at a certain valuation, as Business Insider reported earlier this fall?

They said it in a negative way.

I believe that story pegged your target valuation at $800 million. Is that in the right ballpark?

Would we have taken money at $800 million dollars then? It wasn't an option that we had. Would I have raised money at a multi-billion dollar valuation? Yes, any day. But, again, why raise money you don't need? Even if you raise at a multi-billion dollar valuation, it's still dilution. Why dilute for money we don't need? Also, who cares about the valuation? It's not an exit. I don't get anything at that valuation, right? Why does it matter?

I think it's a great source of drama. I don't mind the articles being written, but at the same time, it's just companies raise money when they need it, and we didn't need it so we didn't raise it.

Did you ever work with Sambreel, the browser plug-in company that allegedly rearranged website inventory and monetized on exchanges to the tune of billions of impressions per month? (AdExchanger story)

They reached out to us like six months ago and said, "Hey! Let's do a deal!" and I said no. I have an email thread that you could look at and laugh. They were basically like, "You don't understand. You're turning down money!" I said, "Yes, we're turning down money!" They said, "But it's lots of money!" I said, "Yes, it's lots. I don't care! What you're doing is wrong!"

I've learned that most of the time if something feels wrong, it probably is.

Do you think the industry has gotten better at self-policing? Gator/Claria was in business for six years doing basically the same thing Sambreel is doing.

That's the benefit of venture [backed] ad companies, actually. If you aspire to be a public company, or to ever get bought, you want to avoid having your name associated with that stuff.

Where are we at right now with the privacy issue?

One, we're on top of it. We have a really strong legal group looking at every law being passed everywhere, and doing everything we can to abide by it.

Two, where possible we're trying to influence policy makers, whether that's a government entity or a working group, to be thoughtful about what really we're talking about. Advertising isn't implicitly bad. Using personal information isn't implicitly bad. It's all about disclosure. There's a couple of big players who have a vested interest in making this a question about the first party versus third party. I think that's not fair. If you're saying, "Hey, we're Google, and we have a hundred million people using Gmail," that's first party data, they trust us. Why is that any different than if I, following every single best practice in industry, do exactly what they do? Is it explicit that when I use Gmail, I was signing up to get cookied across the Internet? I just worry that there are some big companies with a lot of influence and different assets, and they get a disproportionate voice. We feel like the law, or the policy, or the self-regulation [program] needs to protect advertising as a whole. Not what your relationship is for first, or third, or second party data.

The third point is not getting stuck in cookies versus Do Not Track versus Apple's new [UDID]. There's all different ways of trying to achieve the same thing, which is give the consumer some control and some influence in how their behavior is being tracked and monitored, which seems completely reasonable. I think what Apple did is exactly right, which is to say, we're going to be thoughtful about this. We're going to give people a way to control how their information is used. We're going to make sure the ecosystem follows those guidelines, and we don't need the government or anybody else telling us what to do. We'll just do the right thing. That's a great model for the rest of the industry to follow.

Could this all end up with individuals getting micro payments for their data?

I don't think so. I love the idea, but I just don't this data is transactionally relevant in the way people make of it. This whole micro targeting thing, it's not really what drives spend. How much will it cost you to find out that I run barefoot? You're going to pay me for that? Seriously, send me like a penny.

Let me ask about holding company trading desks. Do you see them retaining power, or do they become part of the fabric of the operating agencies?

I think it's reasonable to say that they are part of the fabric of the agencies today. They have never had power so much as influence. They don't get all the money that the agencies spend. I think it's a reasonable idea that agencies and holding companies should bring some targeting optimization expertise in house. If ten years ago we'd said, "Hey! Wouldn't it be smart for agencies to get really good at optimizing media?" everyone would say yes, that's great. If you went to clients, they'd say, "Yes, I'll pay for that." If that's really what's happening, is agencies are developing a new competency to trade, and clients are saying, "Yes, this is great. I trust you with my data. I know you'll use it on my behalf," everyone wins. When you see a win-win like that, it tends to stick around.

Now the idea of "You must buy through us," that doesn't seem to have really become a reality.

There are anecdotes of clients rejecting holding company trading desks, and working through in-house trading desks at their agencies instead.

That goes into expertise though. If you believe this about bringing expertise into the agency, or the holding company, I guess I'd ask the question, can those people in the agency trading desk at the agency really compete with the people at that the holding company agency trading desk? It's still a trading desk.

It's a baby desk.

What's the difference? Well, the difference might be that the big one has proprietary technology or people who could really aggregate learnings and train the team. Inside the smaller agency, you can't.

Or the big one is taking margin.

Could be, but then it's a question about margin, not who owns it.

For AppNexus we've stayed pretty pure play. We've never really gone to the agency. We've never really gone to the marketer. We've never had that kind of business. We've stayed sort of right where we were, and that's allowed us to partner with the agency holding companies and trading desks in a very noncompetitive way. We don't feel pressure to go around them. We don't feel pressure to go above them. I don't think that's the case for some of the companies that are more traditional DSPs, and that's where some of the pressure comes from. They're incentivized to push money out of the holding company trading desk. I don't think the holding companies want to see that happen, nor do I think it's good for clients or agencies. It's taken what, three years for agency trading desks to get good at what they're doing? At the point they get good is when you start moving that out? That doesn't make any sense.

There was a strong reaction from agencies when DSP MediaMath spun off an agency, Kepler Group.

Exactly, and that's an interesting market shift. I'm proud that AppNexus has always been just a technology company, that we've never taken an IO. We've never had media sales people. We've never been in the managed services business. In fact, we considered it this summer. We had clients begging us to do managed services. We did an experiment, and before we even kicked it off, I just nipped in the bud. We've never done it. We never will.

What are your plans for mobile and video?

We turned on video earlier this year. I'd say we're still learning. We have fairly rudimentary support for the video marketplace. We've seen clients use it, but from a transactional perspective it's much, much lower than display. So, we'll keep investing. We'll keep being part of that, but there's some really strong players there that we have a lot of respect for. We don't see the same kind of market demand for video right now that we see elsewhere.

With mobile, we've had a toe in the water for two years, since we launched with Microsoft with Windows Phone 7, in 2010. We continue to add incremental features. I think we're seeing more growth in that market. It's interesting, certainly, but we don't have any big announcements or big road map right this second. We're still saying, "Where does our business fit into the mobile ecosystem?"

Could Atlas have a home with AppNexus?

It's hard to talk in a lot of detail about discussions. We've said before that we've talked to Microsoft a lot over the past year about the fate of Atlas and what it means. I'm curious to see what happens. I don't know what's going to happen with Atlas. I hope something happens, whether that's Microsoft making a big investment, or putting it in good hands. I'd love to see Atlas in a place to be the strong player it was five years ago.

Are you planning anything specific around "guaranteed programmatic"?

There's lots of talk in the industry about this. We're still trying to figure out what it means. You hear people talk about Deal ID [Deal Identifier, read more in The Make Good], and it's programmatic. But it's two different languages. This is a screwdriver and a nail. You can pound a nail with a screwdriver. It's just not particularly easy or pleasant.

There's this private exchange idea from three years ago, which has never really worked. It's never achieved scale or real value. I think agencies thought they could use private marketplace as a way to say, "If you buy from our trading desk, we have 'First Look' inventory." But then the publishers went and sold First Look to three or four different people. To this day, I can't quite figure out what that means exactly. It's almost like one of those things where it sounds good, and the concept is marginal, and the implementation is poor.

The reason everyone is talking about this is there's less organic growth in the pure RTB market. It's becoming higher stakes. It's harder to compete on the core plumbing, on the core platform. Because, how do you differentiate? So you can't innovate anymore on RTB. Everyone's desperate for that next big thing. Unfortunately, the marketplace is not even close to ready. So, it's hard to invest in something that is right now either opportunistic or aspirational.

I think we will see some majors tackle this. Yahoo has been working on this for a few years. Microsoft's working on this. Google's working on this. These guys may be the ones who drive it, or there may be companies like isocket.

What are you seeing from a demand standpoint around private exchanges? How are buyers behaving?

When the Wall Street Journal says, "We're starting a private exchange," my question is, what can I do in that private exchange landscape that I couldn't do before? How many impressions are on it? What's the pricing differential? Am I paying a premium for that? What's that premium give me? All those questions are the same about RTB versus buying the old way. This is why I don't see a lot of attraction from private exchanges.

It just feels like we're solving the wrong problem. We should be simplifying things, not adding complexity. When something is invented that doesn't get a lot of adoption, I don't care how compelling it is to do a press release, if it doesn't actually increase the value of the inventory or increase the ability sell it, or buy it, it's likely not to be that relevant.

We at AppNexus struggle with it. We keep asking our partners, "Why do you want a private exchange? What does it mean to you?" You say, "Hey! I want to give Xaxis a discount." I get that. So let's just give Xaxis a discount, and not call it a private exchange… It's not what you say you do, it's what you actually do.

How's your personal life?

I don't have enough time with my family, so that's actually one of the hard things about the stage we're in, but they're supportive.

I think one thing that's been really fun is just watching the organization grow. We're hard to pinpoint, and that's because we're not a DSP. We're a really complicated organization. We support a lot of diverse, innovative companies. So, because we're so flexible, it can be hard to put a finger on us.

That's a really incredible asset, that flexibility. But, it's also a challenge, because there's no one like us. Some day, through some series of articles, we will explain what it is that we do.

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