Programmatic 3.0: The Next Paradigm In Inventory Procurement

chrisoharasellsider"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 Chris O’Hara, vice president of strategic accounts at Krux.

Marketers have always craved access to quality audience at scale. That was once as easy as scheduling buys on the top three broadcast networks and buying full-page ads in national newspapers. Today, the world is more complicated, with attention shifting into a splintered digital universe of thousands of channels across multiple media types.

Ad tech companies have tried to corral a massively expanding world of inventory in ad exchanges, along with the means to bid inside them. This “programmatic” world of inventory procurement is deeply flawed, yet still the best thing we have at the moment.

It’s flawed because it mostly offers access to commoditized “display” ad units of dubious value and struggles to deliver real audiences, rather than robots. But it’s also good because we have taken the first steps past a ridiculous paradigm of buying media through relationships and fax machines, while starting to bring an analytical discipline to media investment that is based on measurement.

So, as we sled the downward slope of the programmatic buying Hype Cycle, we are starting to see some new trends in inventory procurement – namely, a strategy that involves replacing some or all of the licensed programmatic architecture, as well a growing reliance on one’s own data.

But first, before we get into the nuts and bolts of how that works, some history:

The Monster We Created

After convincing ourselves of the lack of scalability in the direct model, where we would call an ad rep, we have set up a lot of distance between a marketer and their desired audience.

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Imagine I am a cereal manufacturer and have discovered through media mix modeling that digital moms on Meredith sites drive a lot of offline purchases. They are the “household CEOs” that drive grocery store purchasing, try new things and are influential among their peer group, in terms of recommending new products. In today’s new media procurement paradigm, there are many “friends” standing between my target and me:

  • Media agency: This is a must-have, unless marketers want to add another 100 people to their headcount with an expertise in media, but this adds 5% to 10% in costs to media buys.
  • Trading desk: Although many marketers are starting to take this functionality in-house, whether you trade internally or leverage an agency trading desk, you can expect 10% to 15% of media costs to go to the personnel needed to run this type of operation.
  • Demand-side platform (DSP): Don’t forget about the technology. A 15% bid reduction fee is usually required to leverage the smart tools necessary to find your inventory at scale across exchanges.
  • Private marketplace: But wait! We use private marketplaces to make exclusive deals among a small pool of preferred vendors. Yes, but they operate inside DSPs and carry transactional fees that can add between 5% and 10% extra.
  • Third-party data: You can’t target effectively without adding a nice layer of audience data on your buy, but expect to pay at least $1 CPM for the most basic demographic targeting – a significant percentage of cost even on premium buys.
  • Exchanges: Maybe you pay for this via your DSP, but someone is paying for a seat on an ad exchange and that cost is passed through a provider, which can add another several percentage points.
  • Supply-side platform (SSP): It’s not just the demand side that needs to leverage expensive technology to navigate the new world of digital media. Publishers pay up to 15% in fees to deploy SSPs, a smart inventory management technology to help them manage their “daisy chain” of networks and channel sales providers to get the best yield. This is baked into the media cost and passed along to the advertiser.
  • Ad server: Finally, the publisher pays a fee to get the ad delivered to the site. It is a somewhat small price, but one that is passed along to the advertiser, usually baked in to the media cost.

This is essentially the middle of a crowded LUMAscape, a bunch of different disintermediating technologies that stand between an advertiser and the publisher. Marketers pay for everything I just described. They may not license the publisher’s SSP for them, but they are subsidizing it. After running this gauntlet, marketers with $10 to spend on “cereal moms” end up with much less than half in media value – the amount the publisher ends up with after the disintermediation takes place. This can be anywhere from 10% to 40% of the working media spend.

That’s probably the biggest problem in ad tech right now.

We’ve essentially created a layer of technology so gigantic in between marketers and audiences, that 60% to 70% of media investment dollars land up in venture-funded technology companies’ hands, rather than the media owner creating the perceived value. How do we change that paradigm?

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Leapfrogging the Middleware

Data management technology is increasingly replacing some of the middleware in this procurement equation, effectively writing the third chapter in the saga we know as programmatic direct.

Here is a bit of background.

What I call “Programmatic Direct 1.0” was the short-lived period in which companies leveraging the DoubleClick for Publishers (DFP) ad-serving API built static marketplaces of premium inventory.

For example, a premium publisher like Forbes might decide to place a chunk of 500,000 home page impressions in a marketplace at a $15 CPM. Buyers could go into an interface, transact directly with the publisher and secure the inventory. The problem that inventory owners had a hard time valuing their future inventory and buyers weren’t keen to log into yet another platform to buy media. This phase effectively ended with the Rubicon Project buying several leaders in the space, ShinyAds and iSocket, and AdSlot taking over workflow automation software provider Facilitate Media. Suddenly, “programmatic direct” platforms started to live inside systems where media planners actually bought things.

Programmatic direct’s second act (2.0) is prevalent today. Companies use deal IDs or build PMPs within real-time systems and exchanges to have more control over procurement than what is available in an auction environment. Sellers can set prices and buyers can secure rights to inventory at a set, transparent cost. This works pretty well, but comes with the same gigantic stack of providers as before and includes additional transaction fees. This is akin to making a deal to buy a house directly from the owner, but agreeing to pay the real estate broker fee anyway. The thing about programmatic direct transactions is that they are fundamentally different than RTB because they don’t have to take place in “real time,” nor do they involve bidding. A brand-new set of pipes is required.

“Programmatic direct 3.0” – or whatever we decide to call it – looks a bit different. Let’s say the big cereal company uses a data-management platform (DMP) to collect its first-party data and creates segments of users from both offline user attributes and page-level attributes from site visitation behavior. The marketers have created a universal ID (UID) for every user. Let’s imagine they discovered 200,000 were females, 24 to 40 years old, living in two-child households with income greater than $150,000 and interested in health and fitness. Great.

Now imagine that a huge women’s interest site deployed its own first-party DMP and collected similar attributes about their users, who were assigned UIDs. If the marketer and publisher have the same enterprise data architecture, they could match their users, make a deal and discover that there’s an overlap of 125,000 of users on the site. Maybe the marketer agrees to spend $7 CPM to target those users, along with users who are statistically similar, every time they are seen on the site for November.

The DMP can push that segment directly into the publisher’s DFP. No trading desk fees, DSP fees, third-party data costs or SSPs involved. The same is true for a variety of companies that have built header bidding solutions, although they see less data than first-party DMPs.

With this 3.0 approach, most of the marketer’s $7 is spent on media, rather than a basket of technologies, and the publisher gets to keep quite a bit of that revenue.

Sounds like a good deal.

Follow Chris O'Hara (@chrisohara) and AdExchanger (@adexchanger) on Twitter. 

12 Comments

  1. Great overview, and it's a trend en route - but I would put the question of WHY you would continue to even use a "DFP"? EG: why not let a publisher create "direct-buy 'experiences'" using a CMS such as SiteCore/Wordpress or an (Oracle)Maximyser Optimizely/Adobe Test & Target et al with something like a "Beeswax" or similar bidder in the middle? You would know from the "DMP" that an 'view to human' has occurred for tracking purposes and the personalization tools are getting smarter about the 1000's of experiences to line up.

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  2. Well, 3.0 sounds good and fair but what about websites which aren't big enough? Like a local blog or a news site? Wouldn't they tie up with an ad exchange or an SSP rather than building their own ad tech platforms? The issue will still remain, to some extent, right?

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  3. Chris Boucher

    Well written and interesting. It does sound like a good deal, and frankly if it was a branding and reach/frequency play with a premium publisher it may just work well. However, I question the ability to not only scale it (as pointed out) but more importantly optimize it. I would dare to imagine that it would well be worth the 10% additionally cost for the publishers to not have the headache of it to run it through the SSP's (even if this was shared by advertiser and publisher). This way, there amounts to a 30% cost savings + 3rd party data savings of $1 (by your model--15% for Trading desk and 15% bid reduction). This way more goes to the publishers, with more scale and optimization ability for the brands/agencies. Question is, will SSP's bite the hands that feed them and cut out the DSP's

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  4. I think both comments are completely valid.

    1) Chris makes a great point--site personalization, e-mail, etc -- are all ways to drive 1P data directly into execution platforms. I was focusing on display here, because it's where most of the "disintermediation" happens... Love the Beeswax reference.

    2) Phalen, you are right on the money. We are seeing smaller pubs on the same DMP share UIDs in a consortium so they can scale and fight both larger pubs, and the mega platforms. It's happening a lot in Europe right now

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  5. So apparently in programmatic 3 every single campaign is negotiated independently and trafficked separately. But everyone uses krux. Seems reasonable.

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    • Jay, keep in mind that many header bidding solutions are also enabling this more direct connection to publisher inventory. Obviously, when marketers and pubs are on the same architecture, the transfer of data is easier (no user matching). Also, scale can be achieved through "always on" data partnerships, and a UI that exposes avails to the media buyer, who is already in the system creating 1P audiences. But, yes, there's plenty of work to be done creating scale. That's where workflow automation and planning systems come in, but that's a whole other article. Happy to take offline and dig in

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  6. Why aren't we all kicking and screaming each time we go to the grocery store and see that a can of green beans costs $.89, yet the farmer only received $.06 for those same beans? Any one of us is welcome to operate our own farms, or go a farmers market on our own and personally buy all of our food direct. But that's a pain, and we've decided there is enough value in the rest of the chain that we pay it.

    All of these extra costs need to create an ROI greater than their cost or they're not worth it. So, if there is a way for an agency to go direct-to-publisher and produce better results than going through the current programmatic ecosystem, I suspect you're right and that will become the default. However, a lot of advertisers are deriving significant value from the existing system, whether through low-floor PMPs or the RTB market, "despite" all the players needing to be involved.

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  7. great post and thanks for sharing your views..
    as it seems to me, that this will be what avoid scalability of your model let me ask a question : what do you mean exactly by "If the marketer and publisher have the same enterprise data architecture, they could match their users"

    i understand the matching part..just would more details on the "same enterprise data architecture"...do you mean the same tech provider ? or maybe the exact same taxonomy ?

    if the conditions to make that "match" are too numerous , it avoid scalability of the model right ?

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    • Great question. In the case of a first-party DMP, both the publisher and marketer assign a UID to each user. That data is partitioned, but since they the user has been assigned with the same ID mechanism, the publisher and marketer have the "pipes" set up to create the user match assuming permission has been granted.

      Less scrupulous systems might assign an ID across clients, and have a shared taxonomy, in which case no permission would be needed to match the user.

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  8. It is an interesting perspective. For the concept to be feasible or appealing, however, the DMP would need to create a lot of functionality that it doesn't currently have -- trafficking workflow, numerous targeting parameters (not likely just a cookie pool of moms or other targets), filters for fraud, brand safety, and format integrity, reporting and optimization technology, planning and measurement tools, etc. At that point, the need for the DSP hasn't disappeared, it's just that the DMP will have attempted to replicate it. You could say the same for the sell-side --who'll provide the tools that publishers need? If it all resides in a single technology platform then we're back to where we started, with the same conflicts and diluted solutions that lead to programmatic 1.0.

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    • Max--you nailed it. If you think about how media planning is evolving (finding people based on their "personas" across addressable channels), clearly the need for sudience data directly integrated into PLANNING systems is where the real innovation lies in the future. The DMP needs to integrate into such systems, and continues (for now) to have to closely integrate with the excecution systems where such management happens. That said, marketers will always try and find innovation that puts more "media working dollars" into play. But it's early days.

      Reply

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