Evaluating RTB's Extendable Core
I have previously argued that RTB is a disruptive innovation in advertising -- even going so far as to say that RTB represents the “Death of Advertising.” Many viewed the title and read my words as condemning the advertising industry. They were not. In retrospect I could see why the article could be perceived as “wishing” for the death of advertising, but I was simply making the point that RTB is a disruptive innovation.
I would like to do my best to channel the esteemed Harvard Business School Professor Clayton M. Christensen and Michael Raynor, a director at Deloitte Consulting, to tease out my thesis. Let’s begin with the definition of disruption recently used by Christensen in a piece in the December issue of Harvard Business Review, as “less a single event than a process that plays out over time, sometimes quickly and completely, but other times slowly and incompletely.” This is an interesting notion of disruption, one that seems to fit where RTB currently finds itself.
RTB is largely a display advertising innovation that has crept “upmarket” into mobile and video, and is beginning to show itself in some out-of-home formats as well. We have yet to see any significant RTB incursions outside of these formats, but my belief is that eventually all ad-server-generated advertising can potentially be delivered via RTB, and that all digital advertising (including television) will be ad served. To be clear, I do not believe that all advertising will be delivered via RTB, just as those who championed air cargo did not believe that cargo ships would cease to exist.
Raynor has suggested that all disruptive innovations stem from technological or business model advantages that can scale as disruptive innovators moving upmarket in search of more demanding customers. Raynor illustrates this point using the hotel industry as an example, notably the differences between the cost, customers and comforts of Holiday Inn and The Four Seasons. In short, the Holiday Inn would not move upstream into the territory of the Four Seasons because it would be forced to adopt the same cost structures, and therefore suffer from shrunken profit margins. A disruptive innovator is one that can maintain its advantage while maintaining its performance.
Christensen’s term for the ability of the innovator to move upstream while maintaining its advantage and improving its efficiency is the “extendable core,” well-discussed in the article referenced above. RTB provides several advantages over standard delivery of digital media but the question becomes, Can these advantages be sustained as RTB moves upstream? A common measuring stick for upstream advertising movement is the ability of a format to attract dollars from so called “brand” budgets, as opposed to budgets that are generally regarded as direct response campaigns. Observers of the advertising industry suggest that brand-advertising dollars have failed to move meaningfully into the digital format. So will RTB be able to move upstream and capture brand dollars?
It is important to first consider the disadvantages that can be associated with RTB: 1) the cost to deploy RTB effectively is significant, both from a hardware and human resource capacity and 2) RTB deployed without prophylactic computing power can lead to corrupt behavior. In the first case RTB explodes the amount of data available to the parties in the transaction. This makes it more complex to use that amount of data effectively, be it for screening for brand safety, predicting outcomes, or optimizing for yield. The second disadvantage is exhibited by an overwhelming number of poorly placed media purchases on formats precisely designed to take advantage of the computing cost problem and poorly informed sales decisions. This leads to ill-advised yield decisions, such as selling exhausted user sessions for incremental revenue, or designing content to maximize page views.
Getting back to the extendable core, I am a strong believer that RTB has benefits that far outweigh its disadvantages, and has the capacity to move upstream and capture additional dollars. I have previously suggested that RTB’s greatest strength is the deconstruction of the CPM and its ability to transform mass channels into direct communication, closing the gap between the consumer and the brand. This is made possible because RTB enables the media seller and buyer to present and evaluate each individual impression rather than the traditional CPM block. In this instance, each impression should represent the opportunity to address the media to a specific consumer, or to a better defined representation of the consumer based on the information that defines the user. This increase in information available to both buyer and seller can allow for a more efficient valuation and distribution of advertising impressions. The result is that the right consumers will see the right ads and brands will pay the right price.
If you agree with my theory of RTB’s extendable core being the ability to convert mass channels to direct consumer communications, and that television advertising will someday be ad-served, you will also agree that the potential disadvantages of cost and expertise can be overcome, and RTB will allow advertisers to move upstream.