Commentary

The 'Problematics' With Programmatic Buying

by Ari Rosenberg , Op-Ed Contributor, February 23, 2012

I am in awe of the intelligence of those working in the automated buying space. I get how much they care about improving the online display ad business, and I understand the unique benefits this advancement in technology delivers. I also see a fundamental problem being swept under the rug. Programmatic buying via ad exchanges only works for buyers (and related facilitators); it doesn’t work for premium branded publishers.

Those working in this automated buying space who have never sold advertising directly for a publisher may be operating with a distorted view of the relationship between sellers and buyers of media. I believe their view has buyers and sellers working together toward one common goal. The reality however, is that this relationship is the exact opposite: Buyers get paid to decrease the cost of media inventory that sellers are paid to increase.

Defining “fair value” for this inventory through a real-time bidding process sounds ideal, since competition should drive up CPMs for premium publishers, but what will actually occur is a constant state of price erosion. Here’s why:

A. Programmatic buying amputates the value of brand and context.

If you don’t think context creates value, please read the story about Joshua Bell, a world-renowned violinist who was ignored by commuters as he played at the metro station in Washington D.C., and who sold out a plush theater in Boston two nights prior at $100 per ticket.

RTB via ad exchanges targets audiences -- not contextually branded environments. While that works extremely well for long-tail sites with sub-par content, it will have an adverse effect on the comScore 500.

By mixing in their ad impressions into one vat and then allowing buyers to pull out audiences disconnected to the context and brand in which that ad impression is seen, the value a premium publisher produces will vanish.

Just like the commuters who ignored a world-class violinist, buyers will have such an easy time ignoring the value of brand and context, and will define “fair value” for ad exchange inventory based on the quality of the data used to target an audience, and how that audience responds to the ad message. Inventory evaluated this way sets up an easy win for buyers and serves up lower CPMs for publishers, who ascertain no value for the consumer attention their brand delivers to advertisers regardless of any actions taken in response to an ad.

B. Programmatic buying has an incentive issue.

The promise buyers are making is that if publishers put their premium inventory onto the exchange, and it performs really well, buyers will pay more for that inventory -- which is a contradiction of what buyers get paid to do.

The reality is that buyers (and advertisers) have an incentive to have their ads perform “just well enough” in order to offer CPMs for exposure on premium branded sites that are just high enough for premium publishers to accept (because it’s more than what they get from an ad network), but significantly lower than what buyers would pay if these impressions were bought directly. This misalignment of incentives creates a moral hazard and another big win for buyers -- who want and need to buy premium-branded inventory, but now won’t have to pay a premium to purchase it.

Programmatic buying via the ad exchanges feels like a poker game set up for buyers and sellers where the buyer’s cards are stacked and the house makes the money -- making premium publishers the mark.

online publishing

8 comments about "The 'Problematics' With Programmatic Buying".

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Ruth Calhoun from Trulia, February 23, 2012 at 11:58 a.m.
Managing both directly sold campaigns and indirect media monetization has proven to me that both ways of doing business can, and should, coexist for premium publishers. To achieve maximum advertiser diversity, satisfy DR marketers' performance requirements, and fill all potential inventory – RTB and exchange involvement is a must. That being said, there will always be a place for direct sales and custom programs. As the new digital ecology shakes out, premium publishers are behooved to differentiate guaranteed and remnant inventory by offering something BETTER to strategic partners. Let technology companies do the work to fill basic, boring banners. But don't lose out on branding dollars by throwing your hands up and accepting lower prices through third parties; listen to your clients' needs and innovate. Publishers still define the value of premium inventory.
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Ari Rosenberg from Performance Pricing Holdings, LLC, February 23, 2012 at 12:13 p.m.

Ruth thanks for taking the time to read, comment and share with your twitter followers. I respect your experience but I don't think any indirect channel is a must for premium publishers -- I think it starts a long and painful process of price erosion. Ad exchanges are ad networks in different clothing and that channel has not helped publishers increase value and CPM's -- it has hurt them...

Nikolai Rochnik from Rocket Fuel Inc (USA), February 23, 2012 at 2:48 p.m.

Great points Ari, you would be a great addition to a panel at any ad exchange event aimed at sceptical sellers (publishers).

As a member of programmatic buying community, I think that:

* (your point A) of course context adds value, but it is a much weaker signal in response prediction than behavioral / demographic attributes. For example, a user in-market for a luxury car (determined from past online behavior) is about as likely to respond to an automotive advertiser as he will on caranddriver.com. A CEO (determined from anonymous data supplied by external data vendor) using Microsoft Hotmail is about as likely to respond to a business service advertisement as she will on wsj.com. In the world of all things programmatic, of course statements "about as likely" are replaced with scores with many decimal places. This is before you even consider cost efficiency. Then consider volume available, there are orders of magnitude more impressions available to reach car buyers and CEOs on Youtube and Hotmail than on caranddriver.com and wsj.com.

* (your point B) you are equating premium/high price with direct selling and low price with exchange selling. We see it instead as arbitrary fixed price between a single seller and a single buyer vs fair market price determined by the auction, with multiple buyers participating. Do art buyers at Sotheby's auction have an incentive to buy at the lowest possible price? Yes. Would they have to pay higher if they bought from the seller directly? Not necessarily, but more importantly neither the seller nor the buyer in a direct transaction would know whether they ended up with the fair market price with the same certainty as the auction outcome would give them. Next, just like Sotheby's sellers have reserve price, ad inventory sellers have floor price. Lastly, the worst outcome in the marketplace is not a sale at a subjectively perceived low price, it is no sale at all while there would have been buyers bidding above the floor, i.e. unsold ad inventory.

Nikolai Rochnik from Rocket Fuel Inc (USA), February 23, 2012 at 2:51 p.m.

the third sentence in my comment above was meant to be "a user in-market for a luxury car (determined from past online behavior) *on youtube.com*"

Ari Rosenberg from Performance Pricing Holdings, LLC, February 23, 2012 at 3:21 p.m.

Nikolai -- your comments wreak of the intelligence that is driving this space -- thanks for sharing your insight with me and the readers of OPI.

I think we can filter this argument down to a more basic level -- audience based buys = performance based buys and performance based buys are bad for publishers b/c they have no control over their users nor do they have any control over the creative that runs and yet their revenue is dependent on both of these factors.

I would argue your last point for sure -- a sale to a brand advertiser at a low price is worse than no sale at all -- I stand by column in that the exchange outlet, despite its sophistication and efficiences, is a suckers play for premium publishers b/c buyers get premium inventory at DR prices.

Rick Monihan from None, February 24, 2012 at 10:57 a.m.

I believe there are many different conversations taking place in the exchange space, and some are overlapping others, perhaps unnecessarily.
First, there is always a place for exchanges, even with premium publishers. Regardless of what product you have to offer, there are many different levels of demand. CPG pays lower CPMs than Autos, certain Autos pay lower CPMs than Mercedes, and retail stores pay lower CPMs than Theatricals. And so on. Exchanges don't exist to "drive up" CPMs, and that has never been the selling point of them. The RTB process is a selling point to create natural tension at various levels of the demand function.
Secondly, there is an issue of exchange as open versus private. I'm not as much of a fan of an open exchange for a premium publisher. In this sense, Ari, your point of view is absolutely a concern. While RTB provides some degree of price support, in the end the overall game becomes a 'race to the bottom' for commoditization of a branded product. Purchasing a M18-34 impression on Spike carries a very different connotation than buying a M18-34 impression on CBS Sports. In an open exchange, that difference is washed away for simply the 'value of a M18-34'. In this sense, the exchange provides no value to premium publishers. On the other hand, a private exchange allows the publisher to manage the entry gate, the inventory, and the pricing.
Third, I'm a believer that there are few solutions to problems, mostly trade offs for various issues. If you correctly define the trade offs, you can optimize and maximize your revenues. Operationally, exchanges (from a premium publisher POV) offer massive cost savings without eroding the value of the direct sales team. Automating a good portion of work which is currently done by hand, by large numbers of people, can provide massive savings for agency AND publisher alike. In addition, the premium publisher's sales team becomes more effective because instead of spending time preparing paperwork, checking on deliveries, and double checking on whether bills were paid, more time can be spent visiting the agencies who are doing the purchasing to explain exactly why the premium publisher offers a more valuable product (at a $15 CPM) than another competitor who has a private exchange but is charging $10. By focusing more on the data and the details, the value proposition becomes more important, and offsets the 'race to the bottom', while freeing up more manpower to deliver that value proposition.

In the end, there are some good arguments on why exchanges don't offer a value to premium publishers, and you've hit on those. But just focusing these obscures some of the larger discussion points which exist and are out there - and worth discussing.

Ari Rosenberg from Performance Pricing Holdings, LLC, February 24, 2012 at 11:14 a.m.

Rick -- your voice of reason is always appreciated and readers should take note of what you share on these boards....

Andrew Boer from MovableMedia, March 16, 2012 at 12:04 p.m.

Ari,

I completely agree w. you, and yet I feel the real battle has moved elsewhere. Premium publishers just don't command audiences and distribution the way they once did, and except for a few -- they never will again. Brands are also no longer willing to wait for premium publishers to deliver advertising that actually engages.
This is the year that brands are starting to become premium publishers themselves, and are going to compete head to head with publishers for audience. The open internet, exchanges and Google have broken the premium publishing model completely -- and at this point, whether a premium publisher chooses to sell ads direct or through third parties on the open internet is a choice between a quick death or a slow one. Premium publishers need to get their audience off of the open internet and into apps and tablets as quickly as possible, or they are dead.