What’s the future of the ad exchange model? It’s clear that ad exchanges and DMPs are the future of the media business, as media has become more and more of a commodity and data has become a requirement to add value -- but where are things headed?
Many people refer to the commodities exchanges as the future of the ad exchange model, but first there must be a marketplace for buying and holding media assets. I was initially skeptical of this version of the future, because there aren’t too many media buying shops willing to take the liability of those media assets on their books. But then I realized that this market already exists and thrives -- and is called the upfront. In the television upfronts, marketers and agencies buy and hold media assets until later in the year. In some cases they put all of these assets to use, while other times they put them back into the market as scatter, taking the financial hit in the form of a cancellation clause. If marketers had the chance to buy, hold and resell that media at either a profit or at least a break-even, wouldn’t they consider that?
The “futures” market is a tenuous one, especially in a volatile stock market, and one where economic indicators are across-the-board chaotic -- but the advertising marketplace continues to grow. More money is flowing into TV advertising every year, and the Internet continues to expand regardless of the almost infinite supply of impressions. OOH and print may not be growing, but they are still finite assets that retain value, and marketers still want to take advantage of them. A futures marketplace could indeed be valuable if marketers and agencies were set up to take advantage of it.
The agency category is the one I find the most interesting here, because it’s the model that has been most in flux over the last 10 years. The Internet and digital, more than anything, pushed margins down on agency commissions, so agencies have been innovating to find new revenue streams. Creative continues to be uncommoditizable, and strategy continues to be only semi-monetizable, so agencies have focused on media buying -- specifically by creating trading desks and analytics groups.
Agencies are focusing on the data and they are driving the media landscape into a commodities market. If you agree this is the case, then it makes sense that the agency category may shift to a buy-and-hold strategy for media. Some agencies have done it for years by entering into upfront agreements with portals and larger publishers. If you have money in the bank, and you know you’re going to be buying media for your clients, why not try to buy it at the low end and sell it at a profit, which is probably still a discount for your clients?
Of course there’s the argument that large marketers and public companies might be the ones to take advantage of this model because they are the ones who ultimately buy the media and are responsible for its use. I can foresee a model where marketers buy the media on the market, hold it, and pay their agencies to put it to good use, rather than paying them a commission for it. There could even become a secondary market for marketers who want to trade and barter media for their benefit. The opportunity is endless if you commit to the idea that media can be bought, held and sold on a futures platform rather than the way most agencies buy now, which is last-minute and through manual insertion orders.
For this model to truly succeed, media buying agencies need to mature. Currently they are full of young, undeveloped -- and, in too many cases poorly trained -- buyers. The new buyers would be analysts and traders. They would be evaluating trends and matching those market trends against the needs of the clients. I don’t see these buyers being compensated at the same scale as Wall Street bankers, but I see them commanding stronger salaries than the current media buyers. It’s a skill, one that could not be easily replaced by some smart person off the street.
What do you think? Can a futures model succeed in this business? Would it have to be cross-platform, encompassing online and offline, or could a stand-alone online marketplace exist and survive? Let me know what you think by posting a comment on the Spin Board!
Market dynamics will lead inevitably towards efficiency, comoditization, and transparency. There is only one caveat to this outcome. Nor Media owners, nor advertisers, nor media agencies are in favour of full transpareny. The former, because it will push prices down, the advertisers because they believe some of their competitive advantage lies on getting better prices than their neighbourgs, and agencies, because the optimization of DMP can be use as a source for additional income, as describe in your article.
I think trading desks will arrive, but the proof that it will take long is the fact that TV GRPs, which is the most comoditized advertising currency, is still negotiated by phone.
A futures market yields the same results as a real-time market, but it just creates different opportunities. Different opportunities means different winners, and by default different "losers" (a term I use loosely because theoretically the only loss may be one of opportunity rather than actual monetary loss).
I believe it makes sense that a futures market can work. In an extreme sense, we can look back to the old "Max Headroom" TV show and the "Ad Market" which set the pricing for all available impressions sold in real time.
Why can't this happen? Why shouldn't it? If, as a publisher, I believe I can hedge my future revenues by offering some amount of impressions for 2015 today - and if there is somebody willing to purchase - then I should have the capability of doing so.
I think this model would work, but doesn't it present conflicts of interest for the agency?: (1) incentive to recommend owned media versus the best available on the market (2) selling their owned inventory at high prices to make high margins versus negotiating down prices on behalf of the advertiser. (3) other conflicts?
This is an interesting model particularly for a 3rd party. Those conflicts would have to be resolved before an agency could effectively participate. Thoughts?