In the first part of this series, I highlighted the common industry definitions of "Private Exchange". Today, I'll offer some analysis of these different options, as well as discuss some of the key considerations of each for premium publishers.
One point in common between the three key options we discussed in part I (the siloed marketplace, the tiered auction, and exclusive-access ad slots) is that each model allows a degree of additional control for publishers that may help them overcome their concerns about indirect sales through RTB. Maintaining the viability of direct sales channels while introducing an RTB exchange offering is a complex, challenging, and downright scary proposition for many publishers. If managed incorrectly, this new channel can potentially undercut upstream efforts and eat into a publisher’s largest revenue streams, thus alienating their direct sales force. But when managed appropriately, RTB sales can be a powerful stream of demand to tap into that drives complementary revenue and ad offerings to round out the publisher’s portfolio. However, as we’ll see, each of the “Private Exchange” implementations offers a unique path to doing so – sometime with unintended consequences that may actually negatively impact the publisher’s overall yield or the health of their sales channels.
Use case #1 revisited: “Private Exchange” = a siloed marketplace with controls managed individually by publisher
It may be difficult for the publisher to properly merchandise that inventory to the marketplace if there is not sufficient supply mix such that they can maintain a level of opacity over their inventory, such as to protect their brand sales. For example, a publisher with only a handful of placements comprising “Sports” inventory may find it difficult to create a “Sports” category offering through RTB that doesn’t compete directly with (and likely at lower price points than) their direct sold “Sports” offering. This concern may be mitigated by either listing the inventory as part of a larger exchange where other publishers’ sports inventory is present, or by selling the “Sports” inventory blindly without the category label that may otherwise create the risk of channel conflict.
There are also other economies of scale at play when considering a Private Exchange, where it may not make sense for individual publishers to “go it alone” and establish their own marketplaces. Continued fragmentation of the market runs counter to the efficiencies possible through the consolidation of RTB markets into bigger liquidity pools, where proliferated demand meets readily-available supply to ensure the most effective matching of buyers and sellers. Scalable sell-side technologies, such as price floors and custom auction rule sets, require engineering investments that stand as a barrier to entry for many publishers, and these features may perform better when based off of a broad set of different signals coming from a variety of shared sources.
Use case #2 revisited: “Private Exchange” = a tiered auction
Designing the RTB marketplace as a tiered auction seems like a logical way of dealing with some of the core issues of introducing an indirect sales channel, which include concerns with the quality of the demand, pricing, and channel conflict. Giving preferred demand in a higher priority access tier assures that the ad quality and user experience will be more tightly controlled. It also makes it easier to set different rules such as pricing, transparency, etc. depending on the demand segment of the potential buyer. This also syncs naturally with the way that sellers intuitively think about allocating their inventory – first to buyers who can pay more, then to sources with lower bids, and finally to sweeper networks or house ads that can monetize the remaining impressions.
There is however a critical flaw in this strategy: when a downstream, “lower-tier” demand source is actually willing to pay more for an impression than someone in a higher tier. One of the key value propositions of an exchange auction model is the efficiency of matching buyers and sellers at scale, such that the more valuable impressions are delivered to those who can do the most with them. The intended outcomes are then both better ROI for buyers and greater revenue for sellers, resulting in accrual of the value created to the principals involved in the transaction. This efficiency is interrupted when tiering occurs in the marketplace, and can result in both frustrating experiences for buyers as well as suboptimal revenue performances for publishers.
A better solution to this same problem is to implement a “custom exchange” – rather than a private one – where demand is not strictly excluded or tiered, but instead is evaluated at the same time with a custom set of rules for each.
There are two key benefits to this approach: 1) it maximizes the revenue for the publisher by selling each impression to the highest bidder at the maximum clearing price, since it evaluates all potential second-price (i.e. clearing price-setting) bids within the same tier, and 2) it maximizes the visibility into demand and the potential opportunity costs of custom business rules applied to certain bidders, allowing a publisher to regularly evaluate the tradeoffs being made between demand quality/exclusion and potential revenue.
Keep in mind that under this scenario, it is still possible for a publisher to exert total control over the inventory by establishing rules per bidder. Higher quality demand can be preferenced, while a “hurdle rate” may be applied to less-desired ads and while also still gaining visibility into their potential revenue contributions if settings were modified. In a tiered auction, the publisher simply foregoes this ability to assess those subsidy costs due to the cutting off of lower tier demand from bidding on impressions cleared in the upper tiers. It then becomes impossible to make informed decisions in the future as to the effectiveness of those rules, or to determine whether a better set of rules can be implemented to achieve the publisher’s goals.
Use case #3 revisited: “Private Exchange” = exclusive-access ad slots with predefined transactional terms
This option is an attractive complement to a direct, hand-sold sales channel, but it still enables marketers to leverage the efficiencies of RTB buying, such as global frequency targeting or capping, brand and creative rotation, and proprietary data targeting.
In this method, a publisher slices off a predefined segment of inventory and delivers it to an advertiser through RTB-like plumbing – typically via a DSP. They are then able to apply the same real-time logic to these buys: global frequency management, brand optimization, DCO, etc. The catch here is that such an offering needs to be priced high enough to be consistent with the publisher’s direct sales, while reflecting the increased efficiencies delivered to the buyers through a premium on that pricing. This way, both buyer and seller realize gains through this method, and share the benefits gained from more efficient matching of inventory to ad.
One potential pitfall for publishers to avoid when implementing this flavor of “Private Exchange” is around guarantees and passbacks. Similar to my assessment of tiered auctions, siloing off inventory for delivery to a private ad slot is akin to that same concept of putting up walls around your demand and introducing opportunity costs of not selling to downstream demand that may be willing to pay more for some of the impressions. Therefore, it is critically important that publishers make this method work for them by securing a guarantee of consumption at a set price in exchange for the privilege of reserving this inventory.
This method is quite similar to guaranteed direct sales, where the average pricing is favorable to both parties considering the volume being consumed. Many buyers will press for this configuration, but without the guarantee of consumption – sometimes called a “passback” or “cherry picking” of the inventory available through the ad slot. This is a risky proposition for publishers, as they are essentially executing an extreme version of a tiered auction (where only one buyer has right of first refusal and can select all of the best inventory while leaving much lower quality inventory behind). In this scenario it may be difficult for the publisher to determine an appropriate pricing structure for such an offering, since they will no longer be able to assess other buyers’ willingness to pay for that inventory, nor the quality of the inventory being consumed relative to that being “passed back” to the publisher to try to monetize elsewhere.
Navigating the world of RTB exchanges and their “Private Exchange” variants can indeed be a minefield of confusing and complex choices. Premium publishers should carefully consider their options for an exchange design to ensure it is as complementary as possible to their offerings.
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