While Exchanges are Hot, It's Actually Not About the Exchange

"The Provocateur" column is intended to incite discussion on a variety of topics around the evolution of digital media.

The Provocateur: Darren Herman of Varick Media ManagementLots of conversation and buzz around advertising exchanges (and exchange-like players) such as the Google Advertising Exchange, Right Media at Yahoo!, AdECN at Microsoft, Pubmatic, Rubicon Project, FIM Serve, etc., as they are popping up around the world and are attracting some serious venture investors with deep pockets such as Mayfield, Venrock, and DFJ.

The number of exchanges or exchange-like players is increasing at a higher rate than at any other time in history, and the overall advertising ecosystem is going through a renaissance period. Just this week, Google announced their release of the Google Advertising Exchange which was once called DoubleClick AdEx.

While exchanges are fascinating, they in themselves are not the transformative part of the industry.

Transformation is coming from the following:

    1. Real-Time Bidding: while exchanges allow for real-time bidding, eventually, you do not need to be on an exchange to real-time bid. If you view technology as an enabler (which I'm a firm believer in), then owning real-time bidding is not the part of the value chain that's going to create ultimate shareholder wealth. If we mirror the financial markets (lets pretend the financial markets are in a positive state), then the trading houses and financial instrument players are going to create maximum wealth due to their risk/reward tolerance. With real-time bidding in the advertising exchange ecosystem, I'd argue that having the smartest media/audience trading team that understands quant is going to be where the big payouts occur.

    2. The Black Box: Since exchanges are inherently "dumb," meaning that they do not optimize for you (some can if you let them), then the "black box" of optimization is going to be what drives optimal or sub optimal results. Using a black box does not mean that inventory and audiences need to be opaque, but how optimization occurs using real-time bidding and assigning value to different attributes is where many firms are going to focus. Why is this transformative? This has generally always been a human-led process at many media agencies and we're starting to see this turn to black box algorithms. Recently, I sat in a meeting with a vertically-integrated advertising exchange player where they mentioned that one holding company sent consultants in to review their black box.

    3. Inventory Access: At VMM, we use the word inventory as a meta word which includes media and audiences. Inventory needs to be vast and in some cases, proprietary, as with access to as much inventory as possible allows real-time bidding and black boxes to find inefficiencies and powers the various exploitations. Being a singular exchange is great, but we do not see any one exchange becoming the singular. I believe that history repeats itself, so if we look at paid search marketing, Google controls 67% (approx) of the worlds PPC landscape which is not 100%. There will be room for many players and with a volume of players, more opportunities can be recognized.

    This even plays out in the data marketplaces and exchanges, there will potentially be many players (BlueKai, Exelate, Acxiom, IXI, Bizo, etc).

Do not get me wrong, exchanges in themselves are fascinating and for many people, wealth will be generated. The transformation, though, is going to happen with real-time bidding, the black box, and inventory access, amongst many others. The position I'm looking to take is to be the Goldman Sachs of the industry (bold in these economic times). I do not need to own the Nasdaq or NYSE, but what I do want to provide is structured advertising products to my clients.

Exchanges are not everything to everyone, but are providing a spark of evolution to the advertising ecosystem.

If anything, this is an exciting space.

Till next time,

Darren Herman
President, VMM


  1. Good insights Darren! I think you're right about where lots of value will be created, but I wouldn't count exchanges out of that game just yet.

    It's only relatively recently that Goldman makes so much money from prop trading. Most of their history was as market makers and investment bankers, very similar to the exchanges of today. They used this business to gather data, smart people, and perspective on where money was being made.

    The exchanges may be waiting, gathering data and developing insights through a market-maker's purview. And one day we'll all wake up to find we're working at the equivalent of People's Bank!

    Suffice it to say that I expect that's the long-term plan of at least one exchange.

  2. Great post. Will we need advertisers to think of their online investments more like their GS investments?

    I see a fundamental difference between financial markets and real-time media trading markets. Financial instruments are useful for betting on current and future value and require taking upfront positions where success is derived (or foiled) by fluctuations in price, independent of the underlying value. This is where the trading houses derive big payouts. In the RTB world, there is no future price of the impressions you buy (only impressions like them)--wouldn't this help protect against speculation and resultant wealth concentration at the brokerage (ad network, ad trader, agency demand platform) level?

  3. Very well said as usual Darren. Though I would argue that the technology to handle hundreds of thousands of bid requests per second and effectively bid on them is hard enough that it is unlikely to ever become commodity. Otherwise I think you are right on.

  4. Christian Brink

    kblake - your question about speculation - taking a speculative position in media doesn't involve RTB; only exiting it does.

  5. Ramsey M

    Good post. An exchange is about supply normalization, and then it provides the mechanisms of control on the buy and sell side to support both a spot and futures market where buyers take data at a tactical (clicks, site visits, demos, etc) and strategic (POV that auto inventory will be severely constrained) to determine what the value of inventory is.

    Access to inventory was not an assumption five years ago, but with the RMX, AdX, others and DSPs, it's fair to assume access to inventory. So, the winners will be defined as those that are best able to negotiate preferred access and/or use insights to create advantage.


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