Friday, October 9, 2009

Ad networks, exchanges, and auctions

§         Display advertising: ad formats – videos, images and interactive ads
§         Reach: of all unique Internet users, the percent that an ad network encounters. Pay attention to whether this is reported in terms of US or globally when comparing one network's reach to another's.
§         Maximum yield: from the publisher’s perspective, the highest price he can get for each impression.
§         Direct sales: the publisher sells his ad space directly to the advertiser, in contrast to an ad network, which serves as an intermediary between publishers and advertisers. Note that direct sales has been the prevailing model for selling premium publisher space – e.g., the front page the NYT etc.
§         Ad slot: defines the size of an ad and the specific location where the ad will appear on a particular page or on a group of similar pages. The name of an ad slot might incorporate: the site name (ESPN), the section within that site (Football), the subsection within that section (e.g., NCAA College Football), page position (e.g., Top, Middle, Center combined with Left, Right, Center), and dimensions (728x90).
§         Placement: a set of ad slots. It lets you group together slots that a single advertiser (or ad network) might want to simultaneously target.
§         An insertion order (IO): an agreement between an ad seller and a buyer that specifies the details of the campaign. Contains one or more line items. Serves as the purchase order and contract between the parties. Often includes info such as pricing, impression goals, delivery options, and targeting details.
§         Line item: an advertiser’s commitment to purchase a specified # of impressions, clicks, or time (CPD) on certain dates at the specified price.
§         Ad trafficking: done by an ad server; entails providing the code – which downloads and tracks an ad – to the publisher to embed in his site (so that when a user executes that code, the ad will be served to him). I.e., delivery of the ad.
§         Forecasting: a challenge for publishers. The act of predicting what inventory – in which ads can be placed – you will have in the future.
§         Ad operations: handles fulfillment of online ad sales. Entails trafficking (the day-to-day execution of campaigns; including ad delivery), inventory management (inventory forecasting), sales, web development (produce and develop the advertising activity).

See also: Google’s “Introduction to Ad Operations”

What’s an ad server?
Ad serving refers to the tasks involved in storing an ad and delivering it on-demand to the specified user. It also entails keeping track of how many times each ad was served, where an ad was served to, how many times the ad was clicked on, and so on. These are all reporting-related activities. An ad server may also perform targeting – wherein the server decides which ad to serve based on the user who will view the ad. In this case, the ad server might store a cookie on every user’s computer (for users who interact with this ad server at some point) and use that cookie to figure out stuff about the user – age, sex, marital status, education level, household income, and so on. That info – along with more mundane facts, such as what operating system a user is running, which browser he’s using and so on – is used as input into the decision about what ad to serve the user.

What are some more specific features involved at the various stages of ad serving?
§         To make the size of a bid depend on an ad’s past performance.
§         To cap the frequency with which an ad is served, the pace at which it’s served, the targeting (to whom it’s served).
§         Dynamic selection: target only the impressions you want
§         A centralized clearing system – don’t have to interface directly with each publisher.
§         Provide targeting, which in this context means: advise the advertiser on which sites he might like to display his graphical ad on. So the ad server doesn’t necessarily facilitate this transaction but he provides guidance into identifying placements that make sense, given the advertiser’s target audience segment, geography, time of day, website content, browser, OS, keywords, …

There are a number of ways for a publisher to access this functionality:
1.      Run his own ad server (machine) on his own site premises; e.g., OpenX is an open-source ad server implementation (in the same way that Apache is an implementation of a web server) that a user can download, install, run, and manage in-house. The publisher controls every aspect of ad sales, storage, delivery, and reporting – as well as manages the physical hardware used to perform these tasks.

2.      Run an instance of OpenX in the cloud. In this case, the publisher retains total control over all aspects of ad serving (sales, storage, delivery, reporting) but doesn’t have to run and maintain the actual physical ad server in his own equipment room.

3.      Contract with an ad server who provides everything but sales for a fee. That is, the ad server does storage, delivery, and reporting; the publisher takes care of sales. The ad server may provide info about the type of users that a publisher attracts. This info can be used by the publisher in identifying advertisers that are a good fit for his visitors.

4.      Finally, a publisher can contract with an ad network. In this case, the ad network runs its own ad server (which does storage, delivery, and reporting) as well as handles ad sales. Ad networks were developed to enable an advertiser to simultaneously have his ads shown on various Web sites without having to contract individually with each such site. Google, Yahoo, Microsoft, AOL, Fox Interactive Media, AdBrite, ValueClick and so on are all examples of ad networks. Note that when people talk about ad networks, they generally mean display-ad networks. That is, an ad network is an interface between people who want to show display ads to users and sites who have space available for rent for just that reason.

This is probably the most common model – in terms of what the highest number of publishers do. It may not be the most common model in terms of revenues; that is, high profile publishers together command the lion’s share of display advertising revenues. And these high profile (or premium) publishers have historically done direct sales of their advertising space – rather than relying on an ad network.


Background on Ad Networks
§         Definition: an intermediary between publishers and advertisers.
§         Primarily associated with the graphical or display advertising space, rather than the search advertising market.
§         Ad Networks provide a way for an advertiser’s content to run across the Web – i.e., on lots of websites that are not necessarily under the control of the same administrative domain.
§         Provide a way to mitigate the effects of evermore audience fragmentation.
§         An ad network may also serve or host the actual ads that run on these publisher pages; that is, visiting the publisher page causes a request to be sent to the ad network and the ad content to be downloaded from (i.e., served by) that ad network.
§         Tracks ads.
§         Reports on the distribution of ads.
§         Handles the transaction between advertiser and publisher.
§         Frees publisher up from having to maintain a sales organization (in order to monetize his inventory).
§         Gets paid on a revenue-sharing basis.

How do ad networks vary?
§         What audience they reach: size, demographics, …
§         The ways in which they can target: vertical, contextual, behavioral, demographic, re-targeting, geographic, site-specific
§         Type of compensation they accept: CPM, CPC, CPL (Lead), CPA
§         Ad formats they support: display, text, in-text, video, mobile, in-game, blog, RSS, email, audio/podcast, widgets
§         Their business model: revenue share, arbitrage, rep firm
§         The extent to which they provide related services to publishers and advertisers.
§         The amount and quality of user information they possess.
To the extent that behavioral marketing takes off, someone like Google has reams of information that they can deploy to better perform such targeted marketing. This is in contrast to an entity such as Microsoft that doesn’t have as much of this kind of info.

Background on Ad Exchanges
§         What’s an ad exchange? A trading exchange for display advertising in which website owners and advertisers can reach deals on prices and placement of ads.
§         A stock exchange for online display ads; i.e., a real-time marketplace with an auction-based system and open bidding process – sells impressions in real-time or on-the-spot (auction platforms are associated with impression-by-impression purchasing).
§         They can also be used as a futures market – to acquire reserved inventory.
§         A web site puts up ad space for auction and ad agencies bid for those spots.
§         What problem does it solve? Managing co-ordinated, large-scale display advertising campaigns across the net is a logistical nightmare. Given that an effective campaign has to span a multitude of display ad formats and thousands of sites, it takes ages to plan and manage campaigns.
§         Who are the players in the exchange?
§         The large online publishers participate in the exchange to sell their inventory.
§         Ad networks (and agencies) are the buyers. So an advertiser contracts with an ad network or ad agency which maintains a network of properties (placements) where the advertiser’s ads can be placed.
o       The buyer will likely have his own ad serving technology.
§         You can also buy space on the AdSense publisher network via the exchange.
§         Similarly, if you’re an AdWords customer (i.e., advertiser), you can buy ad space on the exchange – via your AdWords interface (you accomplish this by electing to have your ads shown on the Google Content Network).
§         And if you’re an AdSense customer (i.e., publisher), you can sell display space on your site on the exchange – via the AdSense interface (check this out).
§         “On an exchange, publishers can choose to sell their inventory blind, private, or branded. Which they choose will differ from publisher to publisher, but obviously branded inventory will still be able to command a premium, taking it out of the commodity area. Publishers can also disqualify particular advertisers from whom they do not want to accept advertising (for competitive or other reasons), or make positive qualifications regarding the type of advertisers they will accept (e.g., women's interest only). On the buy side, marketers or their agencies are offered similar control.”

Benefits of Ad Exchanges
§         Transparent, dynamic pricing; open bidding.
§         Simplified, standardized business processes (ad sale/purchase) makes things easier.
§         Better liquidity for ad inventory.
§         Smaller advertisers have equal access to exchange inventory as the Big Guys – with bigger ad budgets and better relationships – do. A leveling of the playing field.
§         Can use technology to automate things such as: bid on any ad space that has properties X, Y, Z and is available for less than $N.
§         Eliminates intermediaries and their margins.
§         A publisher gets access to many more advertisers while still retaining control over who can advertise on the publisher’s site.
§         Buyers can use technology that lets them bid in real-time (based on various criteria and via an automated agent?).

How do ad exchanges vary?
§         Their inventory
§         Their targeting methods
§         Their placement options
§         Their pricing models

Does a publisher usually have an exclusive relationship with a particular ad exchange – so that the publisher cannot offer his space on multiple exchanges simultaneously? Also, are the ad exchanges themselves connected in any way – so that a buyer on one ad exchange can purchase through it property that is listed on another exchange?
I think a goal is certainly to interconnect the ad exchanges (if this isn’t the case already). Also note that a publisher may have generic deals with advertisers – not for any specific impression but for impressions which match certain criteria. Those generic deals can be compared with real-time bids (obtained in the ad exchange auction) to see which is best and make the sell decision then. In this way, a publisher reconciles an advertiser’s desire to make a futures buy (reserve inventory) with the benefits of a per-impression sale.

Incorporating AdWords bids into the DoubleClick Ad Exchange
OK, we’ll walk through an example to hopefully illuminate at least the auction process itself, if not the entire context. Let’s say that there is some slot (i.e., impression) being offered on the DoubleClick Ad Exchange. And that slot has been explicitly targeted by an AdWords advertiser (via a site placement for his display ad) or the slot contextually matches the advertiser’s graphical ad (or industry, whatever). And actually let’s say that the slot matches several AdWords advertisers’ bids: ad_1, ad_2, ad_3, and ad_4.

# clicks/M
Ad Rank

eCPM is the effective CPM rate and is calculated by identifying the # of clicks per 1000 impressions that an ad is expected to obtain (# clicks/M) then multiplying that value by the cost per click bid. Quality Score is multiplied by eCPM in this case in order to get AdRank (rather than by the CPC). Then we can see that ad_4 wins and ad_3 comes in second place; only these two bids will be considered by the Ad Exchange.

Ad Exchange bid
>= minCPM?
Publisher’s cut
Ad Exchange cut



First we have to take out the AdWords cut so that the bid represents: what the publisher will make plus what the Ad Exchange gets for the trouble (transaction). Let’s say (HYPOTHETICALLY) that the AdWords revenue share is 8%. Then we have: ad_4 == $630 * 0.92 == $579.60 (let’s call it $580) and ad_3 == $600 * 0.92 == $552. Naturally, taking out the AdWords revenue share doesn’t change the relative ordering between these two ads – because we assume that revenue share is the same (rate) for everyone. Now let’s combine those bids with other Ad Exchange bids and with the publisher’s min CPM.

So now we’re considering the most lucrative AdWords ads (ad_3 and ad_4) alongside of the publisher’s minimum CPM and any Ad Exchange bids for that slot (impression). The next thing we do is subtract the publisher’s cut from each bid (which we’re assuming to be 85% across the board; rumor has it that 50% is a more likely estimate) – so that we’re left with what the DoubleClick Ad Exchange stands to make on the deal. THEN we take into account that the publisher may have other bids for this space – that were obtained by his own ad-sales team. You can think of these as commitments that the publisher has made to various advertisers – but these commitments can be fulfilled within a time window (rather than being a real-time thing –specific to a single impression). So the publisher could always use one of those bids. And, if one of those bids is better than all of the bids from the Ad Exchange (including the AdWords bids) – which are all represented as what the Exchange stands to make on the deal – then the publisher should place serve this in-house ad in this impression.

So the DoubleClick Ad Exchange interfaces with the publisher’s own ad server to obtain that ad server’s bids for these slots. Those bids are specified in terms of what the Ad Exchange would make on the transaction and hence can be compared (apples-to-apples) to the values in the final column of the above table. So then we’re looking at:

DoubleClick Exchange cut

So in this case, the winner of the slot was one of the bidders from the Ad Exchange. If the publisher has “dynamic allocation,” then this transaction will complete automatically (without requiring any approval) and the ad from the adExch_3 advertiser will be shown to the Web site visitor whose impression triggered this whole execution cycle.

Note that a publisher doesn’t necessarily have any in-house bids (i.e., bids from “the publisher’s own ad server) – i.e., its direct sales channel is empty for this slot. Note also that it appears then that the final decision about which bid wins is made in order to optimize the DoubleClick Exchange’s cut. But – so long as the publisher’s cut is the same across all advertisers – this is the same as getting the maximum cut possible for the publisher. The rate is the same across all advertisers and hence the winning bid will be the one with the largest principle – of which the cuts are being taken.

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