Commentary

Two Dirty Little Secrets Of Demand-Side Networks

by Cory Treffiletti , Featured Contributor, December 9, 2009

Ad networks are not new, and they aren't going anywhere anytime soon. They provide a viable solution for buying mass audience at an efficient price, along with optimization opportunities that don't exist on smaller, stand-alone sites. That being said, what I find interesting is that a number of agencies are building their own versions and selling them to their clients. Still, if I were one of those clients, I'd have some questions to ask.

At first pass these demand-side networks seem like a good idea; they allow for the agency to retain more control over the inventory their clients are purchasing, thus stewarding their brands in an environment that can be risky at the very least. This is a strategic reason, one that I believe in wholeheartedly. Being something of an agency purist, I believe that strategy -- not technology -- is what should drive the relationship between client and agency, not technology.

Unfortunately, many agencies are developing these solutions for revenue reasons. Many media buying shops have identified the volume of dollars they spend with the ad networks and have theorized that if they create the same solution, using existing ad exchange technology, that they can avoid passing these dollars along.

In doing so they are gambling with their clients' dollars. Most of the ad networks, at least the reputable ones, have spent millions of dollars refining their algorithms and developing technology that makes their solutions work. In many cases they will happily open the kimono, so to speak, and share the breadth of this technology with you to prove the point that this is simply not easy.

The first dirty little secret of most of the demand-side networks is that they're staffed by two to three employees working some spreadsheets and balancing loads to optimize inventory for their clients. This methodology simply can't rival that of an investment in the scaled solutions offered in the marketplace. Trust me; I tried it and it simply doesn't work that well.

The second little dirty secret is that many of the agencies building these solutions are including them on all their clients' media buys and getting paid on both sides. When an agency buys media, it typically charges a media commission of from 5% to 15%. Many agencies are applying that commission to the media they buy on their own demand-side network.

This would be OK, if it weren't for the fact that agencies are also making money on the arbitrage buying on the other end, which is the way these networks make their money in the first place. As an example, that means the agency can buy the inventory at 50 cents, sell it to its client at $1, and keep the 50-cent difference. This would also be OK if agencies weren't charging commission on the media buy, thereby double-dipping.

If I were a media-buying client, I would demand in my contract that my agency not charge commission on any media run through the agency's demand-side solution. If the agency can achieve my objectives and make money through the arbitrage, that would be acceptable -- but the client's needs come first and should be the driving decision for using that platform, not the agency's desire for more revenue.

And of course, what goes without saying is these advertising buys on the demand side networks should be held to the same -- if not higher -- goals than the rest of the media buys. It's arguable that they should be held to a higher metric since the agency does indeed have a stake and does have stronger control of the inventory.

So if your agency is creating and spending your money on a demand-side network, don't be afraid to ask the hard questions and understand what their goals are with the platform. Ask to meet the team working on that solution and understand the technology behind the solution. But understand, also, that that solution is no different than the rest of the marketplace. There are other solutions that can work for you.

There is no silver bullet in online advertising. Beyond search, there are few scalable solutions that can rival ad networks and their targeting capabilities, so don't overlook them. Just be sure to ask the right questions before you spend your dollars with any solution that presents itself.

ad network, advertiser-agency relationship, commentary

8 comments about "Two Dirty Little Secrets Of Demand-Side Networks".

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Brian Murphy from TruEffect, December 9, 2009 at 1 p.m.
Hi Cory-
I understand what you're saying, there is an inherent risk in agencies owning the media. A level of market control is removed in the model, leaving only the advertisers to keep them honest.
Working with agencies though that are looking at these models, I have to say that data plays as big a roll as revenue at this point (I know it's silly to say, but true!). Truth is, there may not be that much difference in inventory quality between an agency network as compared to a more established player, but that verdict is still out.
Take care,
Brian
Reply

Mike Einstein from the Brothers Einstein, December 9, 2009 at 2:20 p.m.

Here's a novel idea...what if advertisers controlled their own networks and used licensed video content, not ads, to drive visitors to themselves?

Under such a scenario, visitors would be qualified through self-selection of video content thumbnails they encounter across a vast publisher network. Then, after clicking on a thumbnail of their choice, they'd be transported directly to a paying advertiser's exclusive branded surrroundings to view the video. The net effect would be like having Bob Hope perform on Texaco's stage.

This would eliminate the middleman media agency entirely, and save us all from the dirty little secrets we keep hearing and writing about.

The good news is, such a model already exists, replete with a publisher network of more than 20,000 sites; generating nearly 10 billion page views per month, and scalable to more than a million guaranteed and qualified visitors a day...all at a fraction the cost per visitor of any other pure PPV model.

Curious? I'll be happy to share the details with anyone who contacts me.

Next question: Only two dirty litttle secrets?

Adam Day, December 9, 2009 at 2:21 p.m.

Thank you Cory for a breath of fresh air! Agencies developing their own networks, a conservative 5% to 15% media commission closer to 20% billed to the client for placing media buy. Then there are the agency slamming techniques with commissioned sales reps of media companies placing ads at 15% less than quoted rates for a spiff from both sides of the fence. Can we say obvious conflict of interest? I agree with you on strategy but it is transparent technologies that will give advertisers accountability in their media spend and justify advertising ROI especially if we tie technology to driving consumer traffic and track the generated sales.

Jeff Pugel from Essex Digital Platform, December 9, 2009 at 2:22 p.m.

I can see both sides of this argument.

From the agency side, they are in business to make a profit. With clients, and their procurement departments, continually pushing agency compensation to lower and lower levels, agencies have been forced to continually find new revenue streams, this being one of them.

From the client side, they may view it as that the agency isn't being entirely transparent. However in most instances the agency is hired to act as a buyer to get the best possible price and placement and as long as those conditions are being met, placements aren't being placed on questionable sites, and there is no click fraud going on, then there is very little reason for concern I feel.

Paula Lynn from Who Else Unlimited, December 9, 2009 at 5:55 p.m.

When a client finds out that the agency is charging them more, more than an agreed upon prior contract, than the price the buy they could make directly what do you think happens? Who do you think could find out about an underhanded deal? whooooops

Matthew Greitzer from Accordant Media, December 9, 2009 at 9:22 p.m.

Cory,

You raise some good points in this article, though I think a few are misguided. The value of an ad network is marginzalized when inventory can be acquired in bulk in a spot market (ad exchanges) and optimization technology can be licensed (the ones on the market today are as good as anything the ad networks built in house - some are even former ad networks themselves). Agencies got into this space because they saw they could replicate some of the value add networks provide with better service and transparency while pushing more client dollars to "working media" by taking less of a cut for their services than ad networks have taken historically.

Many of the demand side platforms, mine included, are totally upfront with clients about their pricing model. It's not a "dirty little secret." At Razorfish, in fact, we make clients sign a seprate contract independant of an insertion order specifying our fee structure. And we have to compete for our planners' dollars just as any other ad network. We win out by delivering better performance, or we lose the buy. In this model, I don't see any conflict of interest, and I feel strongly that seprate fees for the planning function and the demand platform function are warrented.

If an agency is explicity directing planners to buy through their demand platform and taking a markup on both sides then I agree, there is an obvious conflict. I don't see how that model is sustainable long term.

Matthew Greitzer from Accordant Media, December 9, 2009 at 9:27 p.m.

(Sorry about the spelling errors in the last post, I hit submit too soon. Here's a cleaned up version):

Cory,
You raise some good points in this article, though I think a few are misguided. The value of an ad network is marginalized when inventory can be acquired in bulk in a spot market (ad exchanges) and optimization technology can be licensed (the ones on the market today are as good as anything the ad networks built in house - some are even former ad networks themselves). Agencies got into this space because they saw they could replicate some of the value add networks provide with better service and transparency while pushing more client dollars to "working media" by taking less of a cut for their services than ad networks have taken historically.

Many of the demand side platforms, mine included, are totally upfront with clients about their pricing model. It's not a "dirty little secret." At Razorfish, in fact, we make clients sign a separate contract independent of an insertion order specifying our fee structure. And we have to compete for our planners' dollars just as any other ad network. We win out by delivering better performance, or we lose the buy. In this model, I don't see any conflict of interest, and I feel strongly that separate fees for the planning function and the demand platform function are warranted.

If an agency is explicitly directing planners to buy through their demand platform and taking a markup on both sides then I agree, there is an obvious conflict. I don't see how that model is sustainable long term.

Matthew Smyers from RedShift, December 10, 2009 at 9:37 a.m.

I agree with Jeff Pugel on this one. A good agency is going to do exactly what they were hired to do; act as an agent with a fiduciary duty to provide their client with the best possible solution at a price that is competitive in the marketplace. Frankly, the profit margin realized by the agency should be of little concern to the client, provided the agency delivers a plan that yields results consistent with the stated goals and objectives on the front end. For example, if I'm buying a new car and Dealer A's price on the same exact car is thousands less than Dealer B but Dealer A is making a greater profit on the sale, I'm buying the car from Dealer A, regardless of how much money he makes on it.

It's unfortunate that the focus has turned to the agencies profit margin over the effectiveness of their services. If agencies aren't earning their keep, advertisers will go elsewhere, either direct to networks or to another agency. For many, there's true value in an agency who understands this complex marketplace and helps it's clients sift through the clutter. They might even be allowed to earn a few dollars in the process.