Let's Debate: RTB's True Cost Of Goods Sold
I’m a big fan of debates.
In fact, they were my favorite part of the 2012 election season. After watching both presidential candidates dance around the issues for months on the campaign trail, seeing them discuss policy in a one-on-one forum was a welcome change. Over the course of three 90-minute debates, both Obama and Romney confronted more tough questions than they had in the past year -- and, in some cases, actually answered them. The debates pushed the candidates out of their comfort zones, cutting down on the say-nothing vagueness that, unfortunately, today’s campaigns are built on.
That said, I think real-time bidding could use some debate, too. There's plenty of talk about the RTB ecosystem but, for the most part, discussion about the toughest, most critical issues is avoided. Having an honest debate can help RTB grow, dentifying its problems and creating momentum to solve them.
Instead of calling for debate and walking away, I want to get the discussion started. In the space I have left, I’d like to offer up a debate prompt and some context to get the ball rolling. Then it’s up to you figure out what side you come down on and make the case for your view.
Resolved: RTB will overcome its true-cost-of-sale (TCOS) problem
TCOS Defined: The true cost of sale (TCOS) is the spread between what an advertiser paid and the revenue the publisher nets after all costs are considered.
Context: Here are the two main problems publishers have with RTB:
1. It bundles their good inventory together with others’ crap inventory, making it difficult to sell their ad space for its true value.
2. The different actors in the ecosystem get so much value that little is left for publishers by the time the check comes in.
For this debate, let’s assume the “programmatic buyer’” pays the true value for the publisher’s inventory. While I’m skeptical that the situation regularly occurs, the assumption will allow us to concentrate on the issue: RTB’s true cost of sale.
To understand RTB’s TCOS, it’s helpful to first examine direct selling’s TCOS, which is made up of the costs a company must pay a sales force to sell ads, an ad operations team to traffic the ads, and a finance team to bill. Add an ad server into the mix and the direct seller’s TCOS comes out to about 10%-12%. The costs, of course, are visible on the publisher’s P&L and can be painful numbers to look at.
The RTB ecosystem, on the other hand, removes the costs from view. The process is simple: a publisher plugs its inventory into the system and waits for the check. But, the fact that the costs don’t show up on a P&L does not mean they don’t exist.
The TCOS for RTB can be found in all cuts taken in the middle. A typical RTB scenario may have a trading desk, DSP, exchange and SSP all taking 15% cuts. After all those cuts, a publisher whose inventory sold for $4 may only end up with 70 cents. The TCOS for that transaction: over $3.
So, can RTB solve its TCOS problem? Will vendors ever be willing to take a smaller cut of the pie? Let's debate it. Without getting to the heart of this issue, and fixing it, RTB won’t ever amount to much more than a slightly better version of an ad network.