A couple of hours ago, Google officially confirmed the acquisition of Admeld, an advertising optimization platform for online advertisers. Admeld is part of a set of highly innovative companies in the rapidly developing space of real-time ad bidding.
There has been a lot of buzz about real-time ad bidding in the last weeks – with full length analyses in the Financial Times on 22.05.11 and The Economist on 05.05.11. This is justified, since real-time ad bidding represents a milestone in advertising innovation.
The question I ask myself is: Is ad bidding merely a continuation of a trend towards ever more targeted advertising, or are they something fundamentally new?
The term “ad bidding” alludes to something beyond advertising. Bidding takes place on exchanges and marketplaces. Individual buyers and sellers are matched to generate a transaction. The marketplace recieves a commission from the sale, in the event of a successful transaction. An agent brokering a sale on a marketplace accepts sales risk, but in turn receives a nice reward: A cut from the sale.
In part, this is what ad exchanges do: They match up individual consumers with very specific advertising offers. But they are information brokers only. What they don’t do is take on sales risk for the actual sale of the advertised item.
Ad exchanges do take targeting to the next level. A consumer is identified according to the clicks he or she carried out in the past couple of weeks. The individual could, for example, have looked at hiking boots on a web site selling hiking equipment. While he or she is surfing many days later, an auction runs real time in the background, selling advertising on these sites to interested bidders. In this case, the most interested bidder for this individual consumer may be the hiking equipment online retailer. If the hiking retailer wins the auction, the consumer will see hiking boots displayed on the web sites he or she is looking at, perhaps even in his or her favorite style or color and even at the appropriate price.
Real-time bidding has revitalized internet banner ads (which were beginning to be relegated to the dinosaur cabinet). It is a nice example for a business type that was thought dead, only to be revived by a new technology.
Real time ad exchanges are incredibly sophisticated, from organization, process and technology perspectives. Apart from Google, the 800 pound gorilla, there are many highly specialized companies. The data handling and analytical capabilities of these companies are impressive. There are players focused on the supply side of advertising, such as the recently acquired Admeld. The Supply Side Platforms (SSPs) are focused on publisher yield management. On the demand side, one of the leading companies is AppNexus. AppNexus manages data from its clients, which are the advertisers. In Germany the leading DSP is Sociomantic Labs. Sociomatic Labs has many of the most active ecommerce companies in Germany as its clients.
Ad exchanges therefore facilitate these brokered, real-time deals between different specialist agents, representing the publishers on the one side and the advertisers on the other side.
The deals are about one thing only: The individual consumer. On the one side, the individual is surfing on some web sites. On the other side, this specific individual has been identified as a potential customer and a price has been set for the value this customer brings.
One consequence of this type of deal-making is that the context of the advertising inventory itself is not so important as it was in the past. A potential customer may surf on the expensive home page of The New York Times but also on relatively cheap pages like a mountain camping site. Real-time bidding thus whittles away at the power of these big web sites. It is all about the individual customer and his or her purchasing intentions.
In a way, the capability real-time bidding brings to banner ads is long established in search advertising, which carries out individual targeting according to individual intentions. It also is a forerunner of what advertising will increasingly be like on Facebook. By its very nature, Facebook ads are about individuals and their preferences, too.
The price paid per brokered ad approaches a percentage of the potential sales ticket size, rather than reflecting the value of the ad inventory. This means that individually targeted hiking boot ads may cost less than individually targeted automotive ads. Wow. Imagine Super Bowl ads priced according to the product sold.
This is a huge step away from the traditional advertising model, for sure. It is too early to tell if is good or bad for the owners of popular, expensive domains – it may lead to revenue growth (due to elastic pricing) or decline (due to ads moving into the long tail and away from the big domains).
The more targeted advertising becomes, the more pricing will tend to reflect ticket size (of the product) and pocket size (of the individual customer), instead of the advertising inventory and the content itself. Performance pricing based on actions such as clicks is commonplace in this environment. Facebook ads will be priced like this, too.
But, search ads, social media advertising and real-time ad bidding will shy away from taking on sales risk (and being paid only in the event of a completed sale). As such, they are part of a proposition that involves customer acquisition and reach and motivation, instead of transaction facilitation. There is a reason for both and for both business models to exist. Marketplaces will stay marketplaces. Advertising will stay advertising.