It’s been almost 10 years since the ad exchanges that would really make an impact on digital advertising were formed. AdECN, among others, pioneered an online advertising market that drew comparisons to the financial markets. Now, a decade onward, the association between the two industries has taken on deeper connections. Whether the association draws similarities or differences, there are plenty of points that can enable us online ad players to learn from the financial guys.
My next few posts will focus on how the financial markets can be -- and are -- a guide for what we do in ad tech, and what will happen in online advertising in the future.
Let’s narrow in on commodities to start.
One public perception of ad exchanges and real-time bidding is that we’re like NASDAQ or electronically traded stocks on Wall Street. While there is some truth to this idea, still a bunch of differences between RTB and Wall Street deserve our attention.
First, in the stock market, every share of MSFT, FB or YHOO is exactly the same as another share of the same company. However, every impression on any of these company’s sites is unique. A share of Microsoft is the same as any share of Microsoft -- they’re all worth their given amount on any given day. But if you take an online ad, any given ad on MSN.com is worth something different. There’s an intrinsic value difference between an ad on the MSN homepage, above the fold, at the bottom of the page, or on a random landing page within MSN.com.
This is just the tip of the iceberg. What about the user? The time of day? The frequency and timeframe with which that ad had already been issued? Online ads, as commodities, present a new frontier for cost evaluation. This is because we’re pricing human behavior. When you mine steel and place it on a commodities market, the steel is good for a lot longer than 10 milliseconds. Online advertising is much more like energy or perishable goods; it’s a resource that has a very short shelf life, to say the least.
I was given a stark reminder of online advertising’s often singular place in the commodities market after speaking with a Ph.D. student who studies markets. He had been studying the habits of corn pricing on commodities markets. He informed me that there were essentially over 125 variables that make up the value of corn. All of these variables are priced in, so that the price of corn can be standardized. But online advertising isn’t standardizable to the same degree, and there aren’t “only” 125-plus variables. We’re establishing a price based on a particular human’s click on an ad three weeks ago, to name one situation. With human behavior in the equation there are virtually an infinite number of variables.
The ad ecosystem is one of the most complex in the world, but that actually creates opportunity for all of us in the space, with a greater spread between the buyer and seller that can be captured by the people who want to bring fairness and a uniform system to the ad buying process. This is what RTB does. Certainly any given publisher feels it has its own reasons for price differences, but RTB addresses this through its own abilities to place the right bid at the right time, as well as create demand in the market.
In online advertising, the only ecosystem that thrives long-term will be one that accounts for the fact that every impression is potentially different from every other.