How Can House Ads And Oversupply Of Display Work Together Effectively?

One QuestionOften, a question doesn’t have an easy answer in the digital advertising business. This is a column devoted to an answer to a single question or topic – and providing a bit of space for it.

Today’s participant is Jeff Green is Founder and CEO of The Trade Desk, a demand-side platform technology company. He recently answered one question in a conversation with Using your buy side perspective, how can the concept of house ads and oversupply of display work together effectively?

JG: First, I don’t think most players in the space understand the economics, so that’s where we should start. We have to explore the oversupply problem first. Then we can address the house ads portion of the question.

At a macro level, there is much more supply than there is demand. And as a matter of economic fact, that creates a buyer’s market.

While many publishers don’t understand that, some do. Many of those that get it have in the past been worked hard to prevent RTB and exchanges from ever being successful.

More generally, they’ve been avoiding the enablement of price discovery. They’ve been avoiding ever becoming open and transparent. There are a lot of publishers that are terrified that the world will find out that there’s a massive discrepancy between supply and demand, and that there’s a massive discrepancy in terms of CPM clearing prices between premium and remnant inventory (or “discretionary inventory”, or whatever they call it next). And of course, the performance divide between premium and remnant may be quite a bit smaller than the CPM prices would indicate.

Admittedly, publishers have been rightly and justifiably concerned about rate cards, data protection, channel conflict, hurting their own sales teams, and most of all hurting revenues and margins that are already tighter and lower than many businesses can tolerate.

The publishers who resist transparency, openness, exchanges, and RTB are making a mistake. They are lingering on the wrong conclusion.

Instead of rehashing all of the reasons why they should be embracing the openness and transparency of RTB, let’s bypass that debate — because it doesn’t matter at this point. Large publishers like MSN, Yahoo, and AOL have spent thousands of hours debating whether transparency and RTB will be good for them as publishers. And the debate is focused on the wrong question; “Should we as publishers become transparent?”

A faster way to create strategic resolve is for publishers instead to ask themselves, “Can we successfully resist transparency?”

This is the key question for publishers. Because it is difficult to look at the rapid growth of the RTB space and disagree that greater transparency is inevitable. Buyers are going to demand transparency, so you’re going to have to be open. You can’t stop it. Resistance is futile, because buyers and RTB traders aren’t going to buy from publishers if they don’t know what they’re buying. Smart buyers demand transparency and price discovery. Buyers are more in control than ever and they’re smarter than ever. Many agencies and buyers will ask, “Why won’t this exchange or this publisher tell me what site I’m buying on? How do they expect me to buy it without knowing?”

In response, the financial markets analogy might be appropriate, but no hedge fund trader in his/her right mind would ever buy a stock this way. “Oh, okay, the shares I’m buying are part of the S&P 500, and that’s all you can tell me about it?”

I think there is actually a much better outcome than even today’s status quo, because the world is getting better for most of the smart publishers too. Transparency should actually improve clearing prices. A lot of great audience data has been on the sidelines of this ecosystem for too long. In some cases this is data that the publishers are sitting on top of and should be seeking to monetize.

Publishers, there will be a time when there is a meaningful amount of impressions that go for $200 CPMs because of the data and hyper-targeting that is on the horizon — largely fueled by RTB, data, and transparency. When we have new levels of targetability, control, insight, and understanding of exactly we are buying, of course buyers will pay a $200 CPM. On the horizon is the most targeted and informed marketing ever achieved at scale, and that efficiency will benefit the publishers with good content, good experiences, and good brands.

Of course, publishers are already becoming much less tentative than they were in the past, even 1 or 2 years ago. I estimate that premium RTB will still double this year from last year. There’s not that much fear holding them back anymore, but few publishers are all in the way they will be and the way they need to be.

The way things work today is still too clunky and labor intensive for the average buyer/trader. The demand for premium inventory in RTB exists today; it’s waiting for the publishers to meet the call to action.

For publishers, and for the ecosystem, if we can change the “I-don’t-want-to-be-fully-transparent-yet” mindset, we can make this ecosystem really thrive and grow exponentially, because publishers will have figured out how to finally monetize their audiences in a sustainable way.

The future is not the 2004 way to grow revenue, which was to just throw another tag on every page and add 25% to your inventory.

The future is about making your inventory more desirable than other inventory. Bottom line, expensive products in any marketplace are sold with lots of details about why they are the superior products, not by selling the unknown item behind door number two. And RTB is the only way to get price discovery at scale.

Now, to get back to the original question about house ads…

In a world where there’s much more supply than there is demand, in the short-term, a publisher can take some of their ads out of circulation, use them for their own monetization, and actually increase the scarcity of their inventory as a result.

By creating some amount of scarcity, publishers can increase their CPM rates, perhaps so much so that they can compensate for the impressions that they took out of circulation. Those same house ads let them market their own product or their own brand, or cross-promotions of their own sites. Publishers could still make the same amount of money with the other impressions, which is a step in the right direction toward a world with slightly less supply.

In the long term, consumers need to see fewer ads per page in order to make the ads more effective. It may seem sort of strange for somebody on the buy side to be saying that we want fewer ads. Nevertheless, in order for us to get to the place where RTB and price discovery is at the center of the online advertising universe and publishers are not as afraid as they are today of exchanges, we have to create the ecosystem of higher CPMs. We, as an industry, have to make the digital advertising the most effective advertising ever…not just the most confusing.

Once we’ve trimmed the inventory a bit, become more transparent, and welcomed more demand, I think we’ll see the sell-side begin acting a lot more like the buy-side, where publishers can do a much better job of assigning a value to every impression they sell, and better understand the opportunity cost of running a house ad vs. selling the same impression on the open market. And house ads will be expensive, deliberate marketing—not just a filler, default ad.

Follow The Trade Desk (@thetradedeskinc) and AdExchanger (@adexchanger) on Twitter.

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1 Comment

  1. Diego Panama

    Nice post, Jeff. I’m not convinced that we are “in a world where there is much more supply than there is demand.” That may be true if you consider all impressions to be equal but I don’t think buyers see it that way. In the content vs audience spectrum, I believe the majority of marketing dollars lean towards content and I don’t think there is necessarily a lot more quality supply than there is demand for it (define quality by the fact that a marketer would be willing to pay a premium to know that it will run there). This could get really interesting if we would measure supply by the number of “quality cookies on quality content” out there. I would bet that kind of supply is even more scarce.