Home Agencies While Exchanges are Hot, It’s Actually Not About the Exchange

While Exchanges are Hot, It’s Actually Not About the Exchange


“The Provocateur” column is intended to incite discussion on a variety of topics around the evolution of digital media.

The Provocateur: Darren Herman of Varick Media ManagementLots of conversation and buzz around advertising exchanges (and exchange-like players) such as the Google Advertising Exchange, Right Media at Yahoo!, AdECN at Microsoft, Pubmatic, Rubicon Project, FIM Serve, etc., as they are popping up around the world and are attracting some serious venture investors with deep pockets such as Mayfield, Venrock, and DFJ.

The number of exchanges or exchange-like players is increasing at a higher rate than at any other time in history, and the overall advertising ecosystem is going through a renaissance period. Just this week, Google announced their release of the Google Advertising Exchange which was once called DoubleClick AdEx.

While exchanges are fascinating, they in themselves are not the transformative part of the industry.

Transformation is coming from the following:

    1. Real-Time Bidding: while exchanges allow for real-time bidding, eventually, you do not need to be on an exchange to real-time bid. If you view technology as an enabler (which I’m a firm believer in), then owning real-time bidding is not the part of the value chain that’s going to create ultimate shareholder wealth. If we mirror the financial markets (lets pretend the financial markets are in a positive state), then the trading houses and financial instrument players are going to create maximum wealth due to their risk/reward tolerance. With real-time bidding in the advertising exchange ecosystem, I’d argue that having the smartest media/audience trading team that understands quant is going to be where the big payouts occur.

    2. The Black Box: Since exchanges are inherently “dumb,” meaning that they do not optimize for you (some can if you let them), then the “black box” of optimization is going to be what drives optimal or sub optimal results. Using a black box does not mean that inventory and audiences need to be opaque, but how optimization occurs using real-time bidding and assigning value to different attributes is where many firms are going to focus. Why is this transformative? This has generally always been a human-led process at many media agencies and we’re starting to see this turn to black box algorithms. Recently, I sat in a meeting with a vertically-integrated advertising exchange player where they mentioned that one holding company sent consultants in to review their black box.

    3. Inventory Access: At VMM, we use the word inventory as a meta word which includes media and audiences. Inventory needs to be vast and in some cases, proprietary, as with access to as much inventory as possible allows real-time bidding and black boxes to find inefficiencies and powers the various exploitations. Being a singular exchange is great, but we do not see any one exchange becoming the singular. I believe that history repeats itself, so if we look at paid search marketing, Google controls 67% (approx) of the worlds PPC landscape which is not 100%. There will be room for many players and with a volume of players, more opportunities can be recognized.

    This even plays out in the data marketplaces and exchanges, there will potentially be many players (BlueKai, Exelate, Acxiom, IXI, Bizo, etc).

Do not get me wrong, exchanges in themselves are fascinating and for many people, wealth will be generated. The transformation, though, is going to happen with real-time bidding, the black box, and inventory access, amongst many others. The position I’m looking to take is to be the Goldman Sachs of the industry (bold in these economic times). I do not need to own the Nasdaq or NYSE, but what I do want to provide is structured advertising products to my clients.

Exchanges are not everything to everyone, but are providing a spark of evolution to the advertising ecosystem.

If anything, this is an exciting space.


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Till next time,

Darren Herman
President, VMM

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