Today's column is written by Zach Coelius, CEO of Triggit, an online advertising technology company.
Now that Google has bought Invite Media and publicly stated that the purchase was all about real time bidding (RTB), the market seems to have woken up to the fact RTB is not hype and it is here to stay. The early claims that RTB wasn’t real, then that it was too expensive, then too small, and then too dangerous for publishers have been proven wrong. Yet, the positive reasons for why RTB is winning have never been well defined. So here goes.
The most important reason why RTB wins is that it makes publishers more money. The cause of this is very simple; the more buyers who are active in any market looking at a good for sale, the higher the price will be; such is supply and demand. In an RTB enabled market, every impression has literally tens or hundreds of thousands of media buyers with their own unique requirements and data looking at each impression and bidding for those that suit them best. These ad impressions are not interchangeable commodities, but in fact unique events with highly differential values for different types of advertisers. Thus, it is easy to understand that the more bidders there are looking at each impression, the more likely it is that one of those bidders will be willing to pay a very high price. Compare this with a publisher’s sales force that might sell to a handful of advertisers or an ad network with maybe a hundred active advertisers at any given point in time, and you can see how RTB results in higher effective prices than other status quo options.
Another cause of the increased prices from using RTB is the proliferation and increased sophistication of cookie-based targeting. Whether it is a cookie dropped from retargeting, derived from an advertiser’s CRM system or in-market intender cookies purchased from a 3rd party, user data has become incredibly important in display advertising. The advertisers who buy using cookies are willing to pay five or ten times more to reach these highly targeted users. Since most users are almost always in the market for some item or service, most impressions usually have at least a few buyers with a cookie on the user who are willing to pay higher prices. Remember that the advertising ecosystem incorporates hundreds of thousands of very diverse marketers with equally diverse target audiences. Obvious the more of these buyers looking for cookie matches on a publisher’s inventory the better. Average the effect of this across the highly heterogeneous inventory that a single publisher has and cookie matching with RTB drives prices up.
The third reason why RTB raises prices is that it is significantly more efficient for media buyers. Using status quo media buying methods, over a third of an advertiser’s funds for display media are wasted sending out RFPs, IOs, trafficking tags, compiling disparate reports, de-duplicating attribution and managing campaigns with manual, tedious, and wasteful processes. That is money that could and should have gone to publishers as media spend. As any student of supply chains will tell you, increased efficiency in the chain on the part of the buyers is often passed through to the suppliers as a result of the competition among buyers for the good they need. While some in the media business claim that an inefficient process is good for media sellers, what they are actually talking about is the competitive dynamic between publishers who have access to the buyers and publishers who do not. You can see the intra-publisher dynamic playing out in the significant price differential that currently exists between the largest publishers and the long tail. While increased efficiency will certainly reshape the dynamic among publishers, the reduction of waste is good for publishers as a whole and good for the industry.
Across the board, these three traditional market dynamics have been the drivers that have tripled average media costs on the exchanges since we started tracking them a year and a half ago: more bidders per impression, the highly differential value each advertiser places on a cookie, and increased efficiency. Publishers are already making more money with RTB, and as we on the buy side get better at what we do, and as more advertisers transition to buying in real time, we will only see further price increases.
Yet even with these three market forces causing CPMs on the RTB exchanges to rise, there is another even more important reason why RTB will eventually look at every digital media impression. This is because RTB is not actually a second channel used to the exclusion of another sales channel. RTB is additive to any existing channel. What this means is that a publisher can expose their inventory to RTB bidders while at the same time maintaining all their other channels such as a direct sales force. When a bidder through RTB submits a bid that is higher than what the publisher can get from their other channels (which is a very common occurrence, with bidding wars for in-market cookies resulting in CPMs over $50), the publisher can take the higher price. Thus RTB enables a publisher to immediately realize the gains available from showing their inventory to DSPs without them having to abandon the channels that currently work for them. Moreover, with the use of a floor price, it is trivial for a premium publisher to prevent channel conflict when exposing their inventory in this way. Quite simply there is no reason why every publisher wouldn’t want to immediately expose inventory through RTB and start gaining additional revenue.
As RTB continues to increase average CPMs on the exchanges, more and more publishers will find it easier, more predictable and more profitable to sell their inventory in this way. This publisher migration has already begun in earnest as the volume of available inventory on the exchanges is growing exponentially. It is clear that a virtuous cycle is in full effect. At the end of the day RTB and exchanges are simply more efficient markets, and looking back at the course of history, it is pretty clear that trying to fight against the market’s drive to efficiency is always a pretty dumb idea.