“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Kirk McDonald, president at PubMatic.
Many in the programmatic world shamelessly borrow strategies, tactics and even language from the world of finance.
Some companies have “tickers” on their websites that scroll real-time eCPM data for all the verticals they serve in a way that wouldn’t look out of place on a Bloomberg terminal. Much of the industry’s technology and business innovation in recent years also mirrors the work that has made financial markets more transparent, efficient and effective.
But as the field matures and takes on even more characteristics of the financial industry, it also inherits many similar risks and challenges. One risk that I think is greatly underappreciated has its roots in what’s known as the “principal-agent” problem.
In programmatic, media buyers and sellers are “principals,” while exchanges, platforms and ad networks work as “agents.” The agents perform services on behalf of principals in return for some benefit, but the agents must balance their own interests against those of the principals they serve.
To some extent, these sorts of conflicts are inevitable because the goals of each party will always be different. This is as true in advertising as it is in negotiation, strategy or politics. But this frames a number of important questions.
When setting pricing, is the ad exchange acting in a way that benefits itself more than its customers? Does a platform’s decisions about how to configure and allocate inventory ultimately serve the needs of the platform more than those of its buyers or audience? Businesses can thrive or fail on how skillfully they negotiate this balance.
These problems are compounded when there is information asymmetry. Every side of the market has at least some incentive to hoard what it knows and draw a curtain over its strategy. This can lead to situations where pricing and process are hidden in a “black box,” giving agents greater ability to elevate their interests above principals, sometimes without principals ever knowing.
The result for the publishing industry is an erosion of trust. If media buyers don’t trust what they’re buying and bad actors take an unfair cut of the deals, publishers end up with less revenue to invest in compelling content.
We are fast moving toward a world where nearly all advertising can be bought and sold programmatically. The benefits to buyers and sellers are obvious, but the system will only work if there is mutual trust. And that trust comes largely from openness and transparency: If we just don’t know what’s going on, it’s harder to make rational and informed decisions about whether partners are fairly serving our interests.
As demonstrated in the financial industry, when principal-agent problems persist, regulation soon follows. If we want a truly open and interoperable programmatic industry, we have a responsibility to police ourselves and mindfully navigate the thicket of mutual and conflicting interests that is inherent in the business.
To this end, it’s possible to turn the challenges of a fast-moving field into advantages by tapping into our history of rapid innovation. The digital advertising industry is doing in a matter of years what the financial markets took decades to accomplish, in terms of fighting fraud and malfeasance, ensuring accuracy and transparency in pricing and streamlining manual processes into automated, real-time transactions.
Every day, we make decisions that can slowly nudge our businesseses in one direction or another. We have the choice between moving toward openness, transparency and fairness or retreating to closed systems and opaque processes.
I believe that it is in the industry’s best interest to err on the side of transparency. This will help build greater trust in our systems, increase the footprint of programmatic, ensure fair pricing and business practices and, ultimately, benefit all industry players over the long term.
Follow Kirk McDonald (@kirkm3), PubMatic (@PubMatic) and AdExchanger (@adexchanger) on Twitter.
