The Failure Of Innovation In Ad Tech

The Sell Sider” is a column written by the sell side of the digital media community.

Today’s column is by Paul Bannister, co-founder and executive vice president at CafeMedia.

In our industry – one of the most digitally advanced, according to McKinsey Global Institute – you would expect massive innovation. However, you’d be disappointed.

Venture capital investment has indeed poured into a litany of companies, but those companies have by and large used the funds to extract more money from their core customers – advertisers and media companies – rather than to actually innovate.

Much has been written about the lack of transparency in digital media, but that’s really just a symptom of a larger problem. The ad tech industrial complex thrives in opacity because many of its players provide very little differentiated value to their customers. A general lack of transparency masks this, making it harder for customers to understand how little they provide in exchange for their sometimes-considerable fees.

Pricing Innovation

In a mature industry, pricing innovation happens when a service provider finds a new process or methodology that lets it be more efficient, pass that efficiency onto its customers and gain market share. That’s a win-win where the service provider gains market share, and the companies it serves enjoy greater revenue or pricing power. In other words, the service provider extracts more value for the same money.

At its core, almost all pricing for programmatic buying is based on a percentage of revenue transacted. For instance, a supply-side platform’s take rate may be calculated at 15% of revenue or spend flowing through its pipes. This creates perverse incentives for ad tech firms to drive up pricing even when no additional value is being created.

It also doesn’t accurately reflect the value being created. In almost all scenarios, ad tech firms’ costs scale with the number of transactions, but the value of those transactions has absolutely no bearing on their costs. So, a remnant mobile banner with a $1 CPM has exactly the same costs as a pre-roll video reaching a high-value audience with a $35 CPM – but the ad tech firm makes 35 times as much money!

Ad tech firms that “innovate” on pricing may lower their take rate, but almost never do they move away from that percentage-based model. And this pricing structure is one of the main reasons so many companies have duplicative products. If you can get your product launched and scrape a few clients together, you can get significant revenues without actually innovating at all.

Product Innovation

Much is made of all of the new ad products that are constantly appearing on the market. Ad tech firms that create these units claim to advertisers that they have cracked the code on user engagement and that their creative format truly will cut through the clutter and make users pay attention.

When speaking to publishers, these same firms promise huge CPMs and high-performance ads that improve the user experience. In reality, they are creating more invasive ad units that encourage ad blocking. In the long run, this leads to overall lower revenue for publishers. These custom units also have completely nontransparent models, allowing the ad tech firm to pocket extremely large margins as there’s no other way to transact on this particular unit.

The Power Of ‘No’

As sellers, we collectively must take control of our destiny and the future of our industry. The only way we can do this is by working together with our buy-side counterparts, the advertisers and agencies, to tell these companies “no.” Our collective desire to “try new things” has cost us dearly.

Going forward, let’s resolve to demand true innovation in pricing and creative capabilities, and push our partners to actually meet our needs.

Lest this column appear all gloom and doom, some ad tech firms are innovating. Firms like Index Exchange, OpenX, Vemba and Celtra are building products that are in the best interests of their customers and differentiating themselves from others. These firms and others are truly pushing forward to help their customers, drive additional value and improve the marketplace.

And unsurprisingly, they’re the same companies that are singing the gospel of transparency. They know they have nothing to hide and want to shine a light on the dark corners of the marketplace so their superior products and innovation come to the fore. We need to focus on our partnerships with these companies – and others like them – and say “no” to the rest.

Follow Paul Bannister (@pbannist), CafeMedia (@CafeMedia_) and AdExchanger (@adexchanger) on Twitter.

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  1. Thanks for the strong article, Paul. Continuing to provide innovation and transparency should be our daily goals!

  2. Paul, you make some insightful observations in this piece. I agree with your positions, but I would like to point out a flaw, in the publisher vendor mentality, that I saw first hand.

    Publishers would rather receive a check knowing that there is a 15% take out rate, than write a check to the same ad tech vendor for, say, 7% of revenue earned. Ad tech vendors know this and build their technology pricing model around a publisher’s willingness to close a deal (quickly) and continue the monthly relationship.

    Pricing innovation is over due (cough…SaaS), but it will take financial discipline on the part of pubs to change legacy thinking about the costs and value provided from ad tech vendors.

  3. @Dan Lawton – Exactly. SaaS is there as an option and honestly, I think *premium publishers* are now in the best position since the 90’s to demand flat rate CPMs from platforms.

    As you said, It will take the financial discipline on the part of publishers… to demand a FLAT SaaS or CPM rate amongst their partners to change the format.

    If the pub pay is always on the reporting of the buyer (which it always will, per IAB Standards), then the buyer can adjusts Pub payments to make the buy work, making discrepancies to account for Viewability, Fraud and 3rd Engagement Metrics standards.

    Pubs with real content and real visitors have the ability to ask for flat rate CPMs under long term deals now.

  4. I’d argue this is why Facebook is eating the world (as it relates to digital advertising). DR advertisers have fewer and fewer places to turn that have favorable unit economics, outcomes and engagement. In short, people actually see the ads on Facebook and respond to them. The display world for DR has eaten itself alive.