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The Coming Inventory Supply Crunch

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neilsweeneyData-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 Neil Sweeney, president and CEO at JUICE Mobile.

The media, mobile and ad tech industry is playing a game of musical chairs with supply. While everyone is enjoying the game right now, the music is about to stop. Many will end up without a chair.

The increasing amount of media buys transacted via real-time buying (RTB), combined with the mistaken belief that supply is infinite and cheap, will create a supply crisis this year that will leave many exposed to unprecedented delivery, quality and cost risks.

The upside? After the tears dry, brands and agencies will diversify from RTB to mitigate their risk, splitting the market into a spot market (RTB) and a futures market (programmatic direct). The two markets will work together to effect the right balance by combining real-time and future buying.

The signs are clear that a crunch is coming – and almost no one is prepared. Why? It starts with confusion about supply.

Underlying Problems

Supply is split into two pools. One pool is provided via exchanges and the other represents the direct supply held by publishers.

These two pools are often managed by different groups with no visibility in to the other. This is the first problem. The left hand does not know what the right hand is doing and there is no technological bridge connecting them. The industry is making decisions on only a percentage of the total supply. Publishers hold back certain inventory that they feel they can sell directly, while the reliability of a specific supply source in the biddable real-time pipe is uncertain due its dynamic nature.

The second (and third and fourth) problems? The perception that supply is infinite, cheap and that all supply is equal.

None of these views are accurate.

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Supply falls into two types. There is basic or standard display inventory, such as banners. There is also higher yielding inventory, including video, interstitials and native.

Mobile is pivoting away from traditional display to richer formats, such as video and interstitials, to better leverage the device’s screen. There’s plenty of basic inventory but even this inventory is trading at a higher rate due to the influx of people who are embracing the real-time pipe. Compounding this is that brands are increasingly looking to differentiate via richer formats, of which there is even greater disparity around supply.

Three Choices

The success of RTB has hastened this pending supply crisis. The RTB exchange is great when you want to buy an impression for “right now,” but when you are buying for the holiday season or Black Friday, for example, everyone wants the same inventory as you so the price goes up and supply gets scarce.

To further the musical chairs analogy, more people join the game as more chairs are removed, thus making it much harder to get a seat when the music stops. Don’t believe me? Just wait until the Olympics crosses over the back-to-school buying season and the US presidential election bumps up against Black Friday in November.

When faced with this scenario what will marketers do? They have three choices. They can stop buying because they cannot afford the increase. They can increase their price, which itself has limits, or they could also open up the inventory, which is code for buying that nasty stuff that nobody wants to admit they are buying.

No. 1 and No. 2 are not realistic options, and the industry is doing a much better job of eliminating No. 3 via fraud and viewability tags.

So, I lied. Marketers have no choices. There will be some that managed to squeak by in their delivery, a group that will underdeliver and a group that will exceed their budget. Which group are they prepared to be in? If marketers cannot afford to be in the second or third group – meaning the group that can’t afford to overpay or underdeliver, they will need to take steps to mitigate this risk.

Here is where the futures market will begin to gain momentum.

Other Issues

Adding to the scarcity problem are viewability and fraud issues. If advertisers are paying increasing dollars for inventory, they will demand that those impressions are actually being viewed by real people.

Here are a couple facts: Only 50% of impressions are viewable online, and, while mobile viewability is significantly higher at 80%, that still represents a 20% cut in an already limited supply of what people want (viewable impressions).

There actually is more quality inventory out there than people are bidding for, but, since people don’t have full visibility of the entire supply funnel, they are unaware of it and end up occasionally paying more in a RTB pipe than they could if they purchased it directly.

Yes – before you jump to the conclusion that this means everything should be in a biddable pipe, remember that it works both ways, hence the need for both strategies. Exposing all inventory to the real-time pipe fails to understand the concept of risk. Those who suggest all inventory should be in one dynamic real-time pipe fail to acknowledge that in doing so they are forcing all of the risk back on to the advertiser and the “spot” market. This is why people buy oil, commodities and orange juice on a futures market – they simply do not want to bear the risk of the future cost of these materials. This is exactly where mobile inventory is going and it is being driven by the success of the real-time pipe. The more successful the real-time pipe, the more a futures market becomes a foregone conclusion.

Publishers expose some inventory in the RTB pipe but reserve the rest to sell directly. When people are bidding up the price of inventory in the RTB pipe, more often than not they are forgetting about or don’t have visibility on the direct supply channel. The RTB and direct silos need more interactivity and connection with one another.

The disconnect between these RTB and programmatic direct creates artificial scarcity and inefficient pricing. Publishers are not going to give up control over all of their premium high-demand inventory but they still need to sell it, preferably at the best price.

Why will 2016 will be the year when all this comes to a head? It is an Olympic year and a US election year. Coupled with regularly occurring tentpole events, such as Black Friday and back-to-school, July to November is going to be tight. The overall growth of RTB and the march into Q4 will exacerbate this, setting the stage for publishers to take back control of some of their inventory and negotiate from a position of power. That’s something that has been lost since the emergence of RTB.

While ultimately the solution to the high-quality inventory problem is the addition of more high-quality inventory, in its absence blending the two disparate pools of supply via RTB and programmatic direct will help marketers weather the upcoming crisis and find a chair when the music stops.

Follow Neil Sweeney (@NEILatJUICE), JUICE Mobile (@JUICE_Mobile) and AdExchanger (@adexchanger) on Twitter.

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