Is it a Mountain or a Molehill?

Data-Driven Thinking“Data-Driven Thinking” is a column written by members of the media community and containing fresh ideas on the digital revolution in media.

Today’s column is written by Ajay Sravanapudi, CEO at LucidMedia.

Since I run a venture-backed company, I spend more time with venture capitalists than any sane person should.  Of late, one topic keeps coming up in our conversations when we discuss demand-side platforms (DSP). In fact, there is a set of inter-related questions.  Let me throw them out there:

  • Isn’t a DSP just a “feature” on an exchange?
  • Should Google buy a DSP?

I’ll let someone from Google (current or former) answer the second question.  The first question is much more interesting and one can make both cases depending on their motivation.

It is a Molehill

Yes, a DSP is really just a feature on an exchange.  Here is the reasoning:

  • The exchange provides massive scale of impressions and data.
  • A DSP simply uses the real-time bid (RTB) application programming interface (API) of an exchange to buy media and run campaigns more effectively.
  • The exchange has an ad server that can deliver campaign pacing, frequency capping, targeting, etc.
  • All that is missing is some intelligence to “auto-magically” buy media on behalf of the campaign.
  • Dozens of ad networks have done this for years on things like YieldManager  on the RightMedia Exchange (RMX).
  • If we can simply layer this “auto-magical” intelligence on the exchange then there is no need to pay for a DSP.

Using this logic, a DSP is merely a feature looking for a business model.  Insert a smug VC smile here while he or she dismisses the entrepreneur pitching a newfangled DSP.

It is a Mountain

You can surely lather some intelligent buying onto an exchange and every exchange inevitably will do so to differentiate themselves from their competitors.  But the previous analysis is based on many faulty assumptions. Let me list just a handful to start with:

  • All the exchanges will interoperate seamlessly.  Therefore, a seat on a single exchange will let you buy media from any of the others.  Yeah, good luck with that.
  • One can seamlessly blend premium placements with non-premium inventory on the exchange while fulfilling the full disclosure requirements of publishers.  Sure, and pigs can fly.
  • Universal frequency capping across all exchanges and publisher sources will be possible because data is fungible.  If you believe that one then I’ve got a bridge in Brooklyn to sell you.
  • Special technology like content and audience targeting will be similar enough on all sources to match up audiences.   Right, and I’ll be the 45th President of the United States.

I could go on.  Now insert a truly obnoxious VC smile here while he or she tells you why all the other VCs are just sheep.

Obviously I feel strongly that it is a mountain and not a molehill.  It is far from some itty-bitty little thing.  In fact, it is a huge thing.  And, here are a few reasons why…

  • The scale and reach of a DSP spans multiple exchanges and can therefore deliver unmatched efficiency
  • Optimized contextual and demographic targeting—secret sauce of the differentiated DSP—provides a significant performance lift.  But it is impossible to layer any secret sauce onto the exchanges’ ecosystem without overcoming major technology and business-related hurdles.
  • Off-exchange DSPs are more nimble and can bring new capabilities to market far quicker.
  • Off-exchange DSPs can respect the rights of premium publishers, while giving agency clients the control and efficiency they need.

What do you think?

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  1. Well said Ajay. I would add an additional argument around conflicts of interest. One the most important differentiators for the clients when it comes to a DSP vs exchanges or ad networks is that DSPs don’t have a yield management problem to solve. Exchanges and ad networks have an inherent conflict of interest of needing to maintain inventory supply in order to stay in business. As a result they need to fill as much of their inventory at as high a price as possible to keep their publishers happy. This creates scenarios where the client’s ad dollars are being allocated not just in the best places for the client but also in ways that solve for yield. DSPs don’t have this problem at all since we have no responsibilities to publishers and only buy media when we think it is good for the client. Our goal is to buy the best media as cheaply as possible in order to drive performance so the clients keep buying from us. Yes, exchanges, and ad networks also want to drive performance, but it is called a conflict because performance and yield are both problems they must address. By being able to act as agents free of conflicts for our clients, DSPs can succeed where others have stumbled in our space.

  2. Nice one Ajay! One additional tidbit – DSP’s are not just built for exchanges in the long term. There are quite a few today but many DSP’s are going to plug into or build pipes directly into certain pubs.

    • Very true. Exchanges simply enable platform companies to “break into” the sector, without going thru the publisher development portion of growth phase of a typical “ad network”. I think I should run our future roadmap plans by you 🙂

  3. As a former Googler (ads/monetization product team for 5+ years), I’ll bite on the second question.

    Google AdWords _is_ a DSP which already plugs into the world’s largest pub ad server, largest ad exchange, largest ad network (by imp volume) and largest pubs/properties (YouTube, G Images, G Shopping, etc.) — all of which Google happens to own.

    The targeting strategies available via AdWords – keyword/contextual, location, interest-based/behavioral, site-specific, retargeting, etc. – are executed as bids on inventory that directly compete with all other exchange bidders. With only minor caveats, Google is not unfairly advantaged in the Doubleclick Ad Exchange (believe it or not.)

    So no, Google will never buy a DSP. It may (continue to) buy incremental targeting or optimization components.

    • This is my conclusion as well. I think I just won a free dinner from an overpaid VC 🙂

  4. It’s a good thing I didn’t offer any wager!

    I forgot to consider the fact that Google might pick up a team for its talent rather than its traction/technology. That, and the fact that Google makes enough in free cash flow to buy an Invite Media every two days. 😉

  5. A lot of us didn’t see this one coming. I have another more insidious theory about the duel between Google and the holding companies, but I will save for later.

  6. That post is already written and sadly it will stay unpublished. Maybe some time in the future. Though I have a new column being written about why RTB will eventually see every impression on the internet that is coming soon.