Benchmark Capital is a venture capital firm that has had particular success in investing in online marketplaces such as eBay, OpenTable, Yelp, Zillow and Uber. Based on the successes and failures of these companies, Benchmark has created a philosophy on which markets are susceptible to birthing successful online marketplaces, and general partner Bill Gurley recently published its methodology online.
So, is the online video advertising industry likely to produce a successful marketplace with the ad exchange? According to Benchmark Capital’s methodology, the answer is yes, and I have shared my analysis below:
New Experience vs. Status Quo
(A+) Video ad exchanges enhance the media buying process. Buyers have a vastly larger pool of publishers to buy inventory from and there is no minimum amount they’re required to spend in order to access those publishers. As a result, advertisers are much more likely to generate better performing campaigns and have the ability to optimize that performance over time. Less waste and better performance results in happy advertisers.
Economic Advantage vs. Status Quo
(A) The economics for both advertisers and publishers are better on exchanges. Advertisers pay lower cost per thousands (CPM) on average and have much less waste, which leads to lower overall costs and higher return on investment (ROI). Publishers gain access to many campaigns they would otherwise not have received and they don’t have to maintain a large direct sales force. In fact, the exchange creates economic viability for many publishers whom would otherwise have no means of monetization.
Opportunity for Technology to Add Value
(A+) There are many areas for technology to add value to the media buying experience. Ad exchanges have perfect market information, which enables technology to provide inventory forecasting, pricing recommendations, performance optimization and workflow efficiencies for buyers. For sellers, technology can provide tools for better yield management and transparency leading to better economics per impression. Transparency is the enemy of the traditional media sales model, which creates ongoing advantages to the video ad exchange.
Fragmentation of Suppliers
(A+) The digital video publisher ecosystem is highly fragmented and is increasing in its fragmentation as more sites add video content. This is a clear advantage of the video ad exchange model.
Friction of Supplier Sign Up
(B+) The third-party video advertising standard (know as VAST) has massively reduced the friction of adding a supplier to the ad exchange. In fact, most video publishers can be live within an hour. This is clearly not a limiter of the ad exchange model, but there will always remain some friction in publisher sign-up regardless.
Size of Market Opportunity
(A) The digital video advertising market is already worth billions of dollars and on a path to $5-10B over the next few years. Once you include mobile video in your projections it is very easy to see this market over $10B within 5-10 years. Yes, a huge market.
Expand the Market
(B+) The market size analysis above is based on industry analysts, but do they really understand how ad exchanges expand the digital video ad market? Unlikely. A single platform with huge inventory volume enables many new video advertisers with narrow audience targets such as local advertisers, data/cookie targeted advertisers and retargeting advertisers. Furthermore, now search, display or mobile ad sellers with no video technology can deliver on the promise of video with their own value add.
(A+) Ever seen a broadcast TV show with no ads? Higher frequency leads to better marketplace dynamics and video advertising is a never-ending transactional marketplace.
(A+) Ad exchanges are part of the payment flow, which means it is simple to extract value from each transaction. Additionally, since both buyers and sellers of digital media gain advantage on each transaction, they prefer this financial model.
(A) Does an incremental buyer or seller add value to the market? Absolutely. Each additional buyer makes the marketplace more attractive to sellers because there are more dollars available. Each additional seller makes the marketplace more attractive to buyers because it means there is more inventory available for their target.
Of course, no marketplace will score perfectly in this analysis. However, digital video advertising fits quite well. With this level of fit, it is simply a matter of execution to attract buyers and sellers to come together and realize the potential of the marketplace.
Only the future knows how successful video ad exchanges will be. But if it were my money, I wouldn’t bet against them.