Programmatic: A Series Of Cascading, Interconnected Contracts

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

Today’s column is written by Tom Triscari, co-founder and managing partner at Labmatik.

While in-housing is often positioned as ramping up headcount, it is first and foremost about rearranging contractual relationships such that external parties can get better at servicing the marketer’s unmet needs.

However, moving from the current tangled contract state toward a hub-and-spoke system, with the advertiser playing the centerpiece control role, means marketers are undergoing a contractual unraveling process. This is the heart of the in-house movement.

Contracts basically state how each party promises to do something for the other in exchange for a benefit. And in a supply chain, each party has a contract with at least one other party. With this interconnected setup in place, let’s take a journey through the current linear sequential state and the fundamental changes it is creating. 

The marketer

The supply chain starts with marketers who want to spend their employers’ programmatic ad budget to reach an audience of consumers that buys its product or service. By doing so, they hope to gain revenue, market share and expand profit margins.

The marketer’s employer is made of many connected contracts across many supply chain vectors. For example, its contract with the government allows it to be a corporation in return for abiding by laws, paying taxes on profits and so on. Among many other contracts, the company also has a social contract with consumers promising to be a good corporate citizen as well as a privacy contact with website visitors.

In the marketer’s contract with the company, the marketer promises to buy the best ads possible, define reasonable marketing objectives and try to meet them in exchange for a salary, bonus, benefits and career opportunity. This has never been an easy job and seems to be getting more difficult with technology changes and consumer shifts.

The media agency

When the marketer contracts a media agency, the agency promises to steward the brand’s ad budget in the company’s best interest. Just like the marketer’s promise to buy the best ads possible, the same expectation cascades down to the agency.

Before programmatic, the client-agency contract was more straightforward and perhaps encompassed a greater sense of interest alignment than today. As the agency holding-company construct grew up and technology and other factors changed, incentive alignment seemed to follow suit.

Everyone has a role to play and holding companies have their own operational, profit and investor pressures to manage. However, from a contractual perspective, the marketer-media agency contract today is one in which the agency is also a principal. This means the agency now promises to buy the best ads possible on behalf of the marketer, so long as the agency can seek profits as an ad seller to its clients.

I suppose if the performance-to-value exchange is transparent and the marketer is aware of all contractual nuances, all is well that ends well. However, it seems impossible to get around the inherent conflicts of interest in this kind of agreement, particularly regarding rights to “grade your own homework” and accessing the underlying data used to grade the homework.

The demand-side platform (DSP) and other ad tech

For most big advertisers, the media agency typically plays a hands-on-keyboard role vis-à-vis a dedicated programmatic business unit or by allocating programmatic budget to a trading desk. In either case, the agency has (or had) a contract with a DSP to connect to its ad inventory, data sources and bidder engine.

In this contract, the DSP promises to buy the best ads possible on behalf of the agency. In return, the agency promises to pay the DSP a tech fee and, in some cases, an extra support fee. These fees are typically based on percentage of media spent via the DSP, so the more the spend, the better.

Again, there is a serious and potentially expensive conflict of interest because buying the best possible ads is not the same as buying the most ads possible. The same goes for spending ad budget, which is not the same as creating and serving ads that matter to consumers. For these reasons and others, marketers have been negotiating and in-housing direct contracts with DSPs and other key ad stack components, particularly data, measurement and verification vendors.

The supply-side platform (SSP)

SSPs have contracts with DSPs, which process bid requests and return bid responses to SSPs (internal auction), which then decide auction winners (external auction). In turn, the SSP has contracts with publishers that rely on SSPs to monetize their ad inventory.

In these contracts, the SSP promises the DSP that it will sell the best ads possible on behalf of the publishers it represents. The SSP also promises its publishers to bring the best possible buyers and prices in exchange for a tech fee, which again is based on percentage of media sold.

In return for quality bid requests, the DSP will participate in the SSP’s ad auctions. When the DSP wins bids and buys ads from the SSP, it will pay the SSP at a future date. During this payment reconciliation process, the DSP and SSP must reconcile how many impressions were bought and how much is owed.

Since the numbers never balance, the DSP will likely overestimate to ensure that it bills the agency or advertiser the correct amount, thus avoiding overage risk. If the DSP overbills its clients prior to the SSP reconciliation process and then pays the SSP less than originally estimated, the marketer is likely paying higher effective fees than stated in the contract. Not surprisingly, the ambiguous contract language between the marketer or agency and the DSP might actually give the DSP the right to do so. Caveat emptor.

The trend for marketers not only points to new rights in their direct DSP contacts, but marketers are also leaning into direct contracts with select SSPs. Such a strategy maximizes transparency, enhances data access as a strategic asset and reduces risk from intertwined third-party data providers.

The publisher

Last but not least, the publisher has contracts with users that visit its site and consume content. These end-user agreements typically stipulate things like user behavior on the site, data privacy and cookie agreements. In this last-mile relationship, the publisher promises to protect the consumer, while the consumer promises to respect the content rights of the publisher and follow community engagement rules.

Above all else, this contract allows the publisher to curate, select and present people with the best ads possible. The publisher’s goal is to turn the contract into a profit-making endeavor. Just watch Mark Zuckerberg’s straightforward explanation at the Senate Judiciary and Commerce hearing for a great journey-ending example.

As the marketer’s contractual journey continues to unfold, the work of putting useful and creative ads in front of the right consumers must go on. It begs the question, “You’ve got your contracts. Now what?” Marketers still need someone to activate the contracts, put hands on keyboards and eyes on data and turn it all into intelligent buying, real measurement and news that marketers can use. Evolve.

Follow Tom Triscari (@triscari) and AdExchanger (@adexchanger) on Twitter.

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