• by Vijay Balan , July 31, 2013

A marketplace is a system of buyers and sellers trading a commodity in a state of positive tension. Buyers are constantly looking to buy the most valuable inventory at the lowest possible price and sellers are looking to continue to differentiate their products to extract the most value. This positive tension gives rise to a need for innovation to, among other things, drive efficiency.

As with most markets, the demand-side tends to mature faster due to proximity to capital and investment decisions. The buying side of the online media business is no different; the need for better campaign execution, measurement and supply aggregation has driven quicker innovation. But in high growth markets, the rapid pace of innovation tends to expose some fundamental flaws in the way each side perceives and adopts these innovations. The one that I find most interesting in the online advertising industry, and one that we’ll explore today is programmatic execution.

To understand this dissonance better, let’s start by looking at how it all began. In the early days of the industry, insertion orders were faxed back and forth between publishers and advertisers. The publisher’s goal was to make as much inventory available as possible to satisfy advertiser demand. As one can imagine, creating an Available-To-Promise model for a commodity that has highly volatile availability and is instantly perishable, is among the hardest problems to solve, a work in progress till today.

To address this issue, publishers forecast their traffic and created a swath of inventory that had a high probability of being available -- aka “guaranteed” -- and what was excluded came to be known as remnant inventory.  Publishers could thus achieve higher sell-thought with two classes of inventory: a  higher price for guaranteed availability of inventory, and a lower price for non-guaranteed inventory.

The commercial aspect of this problem is one of channel conflict –  creating a new revenue channel that ultimately serves the same audience with similar products with quite different prices. As expected, this could create cannibalization of revenue, which is undesirable. In addition, sophisticated technology platforms came into play to allow for more “just-in-time” decision-making on remnant inventory. This method of execution came to be known broadly as real-time bidding (RTB).

Now, using this historical baseline, the most unrefined definition of programmatic tends to conjure up images of distraught direct salespeople seeing their direct deals evaporate due to cannibalism from network partners. Massive revenue losses due to channel conflict is not the only problem; real time means the publisher doesn’t see and approve the advertiser and ad creative ahead of time. Imagine a child-friendly website subjecting its audience to an ad intended for mature audience -- as nightmarish a scenario as can be.

However, there is an important distinction here that is lost in the cacophony. All programmatic execution is often seen as being synonymous with RTB, which is somehow associated with certain negative aspects of remnant as a whole. This is understandable, since RTB evolved as a mechanism to monetize remnant inventory at scale, but change is coming.

I now find publishers talking about investing in programmatic execution more holistically than ever before. Finally, transactional efficiency and dynamic pricing are being separated as two completely different concepts. Simply taking the old “dry martini and a firm handshake” insertion order and executing programmatically allows both buyer and seller to get what they want. Buyers are guaranteed delivery of impressions to the right audience in a brand-safe environment, and publishers can achieve less waste by bringing all demand together on a single platform to conduct more holistic yield management.

Ultimately, we will see publishers opt in all their inventory in a single programmatic channel in which RTB enables their inventory and allows them to have complete control over pricing. The concept of private exchanges embodies this concept very well today where publishers can have complete control over their inventory but also access to the inventory.

It's time to erase that artificial line between guaranteed and remnant!