Beyond the money they mint with their owned-and-operated inventory, Google, Facebook and Amazon are, each in their own way, bidding into nearly every programmatic auction that takes place across the open internet.
Although programmatic is growing year over year, independent ad tech players are increasingly fighting over the remaining crumbs while the walled gardens cut themselves larger slices.
Here’s how Facebook, Google and Amazon are tapping into the ad network model to beat ad tech at its own game.
Numbers don’t lie
Ad tech consultancy Jounce Media estimates that global programmatic ad spend on the open internet (not including walled garden O&O, which industry reports often do) will hit $49.8 billion in 2019.
Together, the top walled garden ad buying platforms – Google Ads (formerly AdWords), Display & Video 360 (Google’s DSP), Facebook’s Audience Network and the Amazon Demand-Side Platform – will claim the lion’s share of that, around $33.6 billion.
In other words, the combined spending power of every independent buy-side platform and ad network out there is just a smidge over $16 billion – and shrinking. The non-walled garden share of RTB has declined by roughly $1 billion a year for the last three years.
"If one DSP grows by $1, that means another DSP is declining by more than $1,” said Chris Kane, founder of Jounce Media. ”That will remain the same as long as the walled gardens keep growing the way they’re growing.”
Facebook, Amazon and Google each enjoy certain advantages when they participate in an open auction.
They have direct integrations with thousands of publishers, so they can access programmatic impressions without having to transact through a third party. There’s almost always a middleman – an exchange, for example, or group of resellers – between any DSP and the publisher. (Criteo, which has direct-to-pub integrations, is a notable exception, Kane pointed out.)
More important is how these platforms price inventory before they resell it. Most DSPs price on a CPM basis, whereas the big three usually sell on clicks or some other performance-related outcome.
"The fact that the walled gardens can charge advertisers on a CPA or CPC basis and pay publishers on a CPM basis gives them extra leverage in terms of arbitrage,” said Lizzie Chapman, VP of media at VaynerMedia.
Say a marketer pays Facebook for a 50 cent CPC and Facebook buys impressions from a publisher at a $5 CPM. There’s no guarantee that the people who visit the publisher will click on the ad, so Facebook is taking on a small amount of risk. But when clicks do happen, Facebook makes its money back and then some.
And because Amazon, Facebook and Google have “an immense amount of data at their disposal,” Chapman said, they’re good at understanding yield and knowing who will take a certain action or click on an ad, so they don’t mind paying high CPMs, which keeps publishers happy.
On top of all that, the walled gardens are in a position to spare buyers the ad tech tax, said Ben Tregoe, SVP of revenue and business and corporate development at Nanigans.
"There’s a lot going on in the supply path from a DSP, which means I can only bid so high, since I have to factor in other costs,” Tregoe said. “The only factor that impacts a walled garden’s ability to price is how much margin they want to make.”
Undisclosed margin, of course.
Facebook makes the bulk of its revenue on its O&O – more than $50 billion last year and likely in excess of $60 billion this year primarily through Instagram and the core Facebook platform – but its ad network is a growing business.
Audience Network will net around $4.8 billion worth of programmatic ad spend this year, up from $4 billion in 2018, according to Jounce.
Reach extension through the Audience Network is a simple affair. Advertisers only have to click a button within Ads Manager to participate, chiefly on a CPC basis, in nearly every header bidding auction across Audience Network’s roughly 50,000 mainly mobile publishers.
Every time an impression becomes available on a Facebook publisher, Facebook evaluates the likelihood that someone will click on the ad. If Facebook judges that a click is likely, it buys on a CPM basis betting it will earn a hefty CPC from an advertiser willing to pay for that particular impression at just that moment.
Facebook is very good at making these calculations, and its seven-million-strong advertiser base – many of them small businesses – gives Audience Network an edge, Kane said.
He explains it this way: “Facebook isn’t using its buying power to push down prices, it’s just that Facebook often can pay the most. They have the scale in order to have the opportunity to offer hyper-targeted ads.”
Facebook explains it slightly differently: “We find the right advertiser for the right placement across our family of apps,” a spokesperson told AdExchanger. “This doesn’t necessarily mean the highest bidder’s ad will be placed on a publisher’s site or app, but the one with the right bid combined with an ad most relevant to the site or app visitor will win out.”
Regardless, the average eCPM is on the rise for publishers that sell their inventory through Audience Network, where the median increased more than 91% year over year in Q1 to $7, according to AdStage.
Facebook’s margin, however, is a total mystery.
Matt Burgess, manager for business development and programmatic partnerships at PCH/Media, the digital advertising arm of Publishers Clearing House, asks his Facebook reps roughly once a quarter for a little clarity on the margin front, but “they’re very buttoned up,” he said.
"There’s no transparency around the revenue split, which seems to be on a sliding scale, and any time we try to have a conversation with them about this, it’s awkward, to say the least,” Burgess said. “I would love to know, but the performance is so strong, we’re willing to sweep that question under the rug.”
For the record, AdExchanger also asked Facebook if it would ever share its Audience Network margin. “This is not something we disclose,” the spokesperson said.
Publishers are only inclined to push so hard. Audience Network isn’t the best option every time – an SSP like Rubicon or OpenX performs better on mobile web, for example, Burgess said. But when PCH/Media is looking to sell in-app inventory, Facebook blows the competition out of the water.
"That’s an easy story for us to tell internally to the folks that matter, even though we assume Facebook is making a healthy margin,” Burgess said, “and it gives Facebook leeway in terms of not being transparent.”
Google’s upper hand
The same thing is happening at Google.
Within its stack, Google’s enterprise-grade demand-side platform, DV 360, is mainly used by larger advertisers that demand extreme transparency, limiting the opportunity for arbitrage.
Although Amazon’s ad revenue growth rate is starting to level out as the platform matures, it’s still growing, and Jounce expects Amazon DSP to make $4.4 billion in open programmatic ad spend this year.
On the surface, Amazon’s ad network functions like Audience Network or GDN, because it has direct integrations with publishers. But Amazon will also bid into exchanges for off-platform reach, and it’s got a big advantage in Transparent Ad Marketplace (TAM), its highly-penetrated server-side header bidding solution, which means it doesn’t have to work with an exchange to get into the wrapper – and it doesn’t need to pay an exchange fee. Amazon saves even more in tech fees by using its own homegrown DSP.