Value Chain Consolidation

by Arthur Coleman, Sep 25, 2012, 1:34 PM

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At a recent OMMA show, Jeremy Woodlee of Doubleclick quoted a statistic I found incredibly interesting. Publishers only gets 18% of the total revenue on premium display advertising sold through programmatic buying. That means if the average CPM paid by an advertiser is $4.50, after it passes through all the intermediaries in the value chain (trading desk, DSP, ad network, exchange, SSP) the publisher gets, on average only $0.80.

That number is fascinating for two reasons. First, it shows that the current distribution chain is unsustainable. On the one hand, no publisher in their right mind is going to settle for 17% of the revenue split with an advertiser at any level of inventory quality. Publishers will thus seek ways to reduce the steps in the value chain, bypass the middlemen, and claim more revenue for themselves. On the other hand, with that many steps, no intermediary earns a large enough share of revenue to survive, long-term, against parties who will seek to merge portions of the value chain and thus grab a larger revenue share with more defensible margins.

Two competing forces are attempting to grab as much as possible of that $3.70, currently shared by the middlemen. The first is the profit seeking publishers, wishing to maximize their revenue. The other is the competitive instincts of the technology providers and ad networks, who are jockeying to acquire as much of the value chain as possible before consolidation makes their positions untenable.

Publishers will always need technology providers, as they provide capabilities and profit opportunities that the publisher cannot achieve alone, especially in RTB. These technology providers are “market- makers” that can help publishers find arbitrage opportunities across the entire market. For example, when publishers sell via RTB in an exchange, they can acquire a second bite at a client’s budget if their exchange integrates with multiple DSPs. If advertisers change DSPs, the publisher can still get the campaign, because another DSP partner will likely get that budget. Publishers have neither the skills nor resources to develop and maintain these services on their own. Nor should they – their only strategic focus should be on creating great content for their customers.

These two competing forces will reach a steady state where a publisher’s minimum required revenue for an impression equals the cost of acquiring that impression + a “brokerage fee.” As in any competitive trading market, transaction fees will be squeezed from the system as arbitrage windows close- which is exactly what RTB causes to happen. And we can hazard a guess at the approximate percentage thattechnology providers will achieve when that steady-state occurs, based on other RTB market examples, such as paid search which averages 32-35%.

The real question isn’t if this is going to happen, but when. Guess right and structure your business accordingly, and you may just win a Kewpie doll.

Arthur Coleman, Chief Scientist, 4INFO

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