• by Ellen Siminoff , October 12, 2007

The last five years have seen an explosion in search advertising, with spending nearly doubling year-over-year to reach more than $8 billion in 2007, according to Thomas Weisel Partners. During the same period, spending on display ads has grown much less rapidly, at about 15 percent per year.

Recently we had the pleasure of hosting a panel at our Client Summit with top executives from Google, Microsoft and Right Media, a Yahoo company. The panelists talked about the emergence of ad exchanges as a solution to the rapid growth of remnant display inventory due to the explosion of consumer generated content, and how these exchanges will improve efficiency for both advertisers and publishers.

Ad exchanges allow online advertisers to bid on inventory and let publishers set minimum prices for placements. Purchasing display inventory in a biddable marketplace brings a greater level of efficiency to the marketplace as buyers and sellers are matched more effectively, allowing advertising salespeople focus their efforts on selling premium inventory.

The recent flurry of consolidation in the advertising space -- including Google's intended $3.1 billion purchase of DoubleClick, which recently launched an ad exchange, Yahoo's recent $680 million acquisition of the 80 percent of Right Media it did not already own, and Microsoft's purchases of aQuantive and AdECN -- points to the fact that ad exchanges will play an important role in the way advertising is bought and sold in the future.

The panelists from these companies described how ad exchanges will become integrated with search advertising, creating a one-stop shop that will allow marketers to manage all of their advertising campaigns in one place -- including paid search, display and video ads, and, one day, print, TV and radio ads.

It's no wonder this is a hot topic -- ad exchanges for display inventory are structured a lot like the paid search bidding platforms used by the search engines. Paid search has become the most effective Internet advertising medium of all time for two reasons: targeting and measurable ROI. One of the main reasons display advertising hasn't grown as fast as paid search is because it has long suffered from a lack of both targeting and measurable ROI. According to the Interactive Advertising Bureau, more than twice the amount of advertising spending goes to search than to display advertising.

Marketers are willing to pay more for search placements because ads are highly targeted and deliver measurable ROI on their advertising spend. In much the same way, in an ad exchange, publishers can set higher minimum pricing for targeted display ad inventory, and the advertisers who bid for these targeted placements get better results.

But will ad exchanges bring just another headache when advertisers already have to contend with managing thousands of keywords across separate paid search networks, hundreds of banner ads across disparate advertising networks and have the added challenge of coming up with a video and social network advertising strategy?

If structured correctly, ad exchanges will eliminate headaches, not create more of them. The marketplace will benefit by automating the sale of remnant inventory on the exchange and allowing salespeople to focus on selling premium inventory. The coming shift to ad exchanges, along with integration of search and display advertising, will ultimately bring more measurability, transparency and accountability to the entire market.