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A battle is looming between online exchanges for display ads, and Right Media CEO Mike Walrath will be in the thick of it.

Launched in April 2005, the Right Media exchange acts as a stock market for publishers, networks and advertisers, and claims to have more than 20,000 buyers and sellers using the platform a day.

Here, we ask Mike about the benefits of the exchange model, his company’s recent $680m purchase by Yahoo! and how he plans to face up to Google when it enters the space.

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Can you provide a brief summary of how the exchange works?

It’s an ASP technology that enables advertisers, publishers and ad networks to connect with each other on a common platform and trade ad impressions in real time. They gain liquidity and transparency, they know who they are doing business with, and they gain control over creative approval.

The other thing, which people tend to overlook about the exchange, is that we provide ad management functionality – the ad serving, the trafficing and the analytics interfaces.

We only get paid when there is a transaction, and that fee is less than 10% of the value of the transaction.

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There’s a lot of discussion about whether ad networks will be disintermediated by online exchanges. AdECN, for example, has adopted a policy where only ad networks can participate and act like brokers on its exchange. What’s your view on that issue?

This issue comes up quite a lot. AdECN talk about only dealing with ad networks, and I understand that there’s some logic in that. But I think that in a liquid and large market, which I don’t think they have at this point, the benefit to ad networks of having advertisers and publishers participating is extraordinary.

What is not going to change is that ad networks create value by being part of the transaction. They have proprietary targeting and aggregation capabilities that advertisers and publishers don’t have, and can create market efficiencies that advertisers and publishers can’t. In the exchange, the opportunity for ad networks is that they can gain more access to quality demand and supply for their own networks.

The evidence of this is we’ve seen over 50 ad networks join the exchange and we haven’t seen a scenario where the network doesn’t grow their revenues. Gaining access to that inventory creates a lot of value for ad networks?

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Doesn’t your model add a lot of complexity for you?

It’s a lot of work and a lot of complexity, but it’s about creating the most valuable marketplace. That complexity is what creates liquidity and we remain committed to keeping the exchange open.

We also have developed specialised versions of the product for smaller publishers. There’s a version of the exchange called Direct Media Exchange, which is specifically designed for their needs.

I don’t see us changing our model in any way. The acquisition by Yahoo! will provide us with scale and resources to bring the exchange out to even more customers.

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How can the exchange be used to gain information about users and user behaviour?

We offer pretty standard targeting capabilities, including the ability to create your own custom segments of users.

The Right Media exchange does not do any user profiling and we don’t collect user information. We enable buyers and sellers to create their own custom profiles, using their own information, and to make those profiles actionable on the exchange.

The exchange enables me to use my proprietary information to make purchasing decisions, without having to disclose that information to anyone else. It can all be done in a way that is fully anonymous. The benefit of that is you gain the ability to delivery highly targeted ads in a very liquid environment.

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How much activity on the exchange is US-based?

I don’t have specific numbers but it’s certainly the majority. It’s not almost all. We have substantial activity in many different markets and we are putting a lot of effort in the UK, where we have five or six people on the ground now.

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Has Yahoo!’s investment affected the willingess of other big publishers to add their inventory to the exchange?

There have been questions about whether other big publishers will steer away from the exchange, and the answer is no. We haven’t lost any publishers. If anything, the level has increased since the acquisition because they know we will be able to keep up with the scale, and because of the liquidity Yahoo! will bring.

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How much activity is Yahoo! responsible for?

At the moment, it’s still quite small. Historically, they have represented less than 5% of the transactions over the last few months. But the opportunity is tremendous and they have talked about their intention to put substantial portions, if not all, of their non-premium inventory on the exchange.

There are also other opportunities that we will be hearing about from Yahoo!, as far as how they can use the exchange to drive adoption is concerned.

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Do you expect to become involved with Panama in any way?

We really need to get the deal closed before I can give you a good answer to that question. The deal will close in the next couple of months.

We are going to operate as a separate business unit and will remain as open as we have always been. The number one focus is on delivering value to our existing and new customers through the platform. That’s the mandate of the business. Longer term, we will see how many Yahoo! capabilities we can leverage to drive even more value for our customers.

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Why are all these exchanges emerging now, and why have they been developed by start-ups, rather than the big incumbents?

Maybe folks needed to see the model proved at some level before jumping in. In some ways, the evolution towards exchanges has been intuitive, and in some ways it hasn’t.

Over the last few years, there has been significant fear in the market about whether commoditisation will be a good thing or bad thing for companies. As the only exchange I think that has gotten to scale, we have proven to publishers that whether some of their inventory becomes commoditised is not necessarily in their control, but how they deal with that is in their control. As publishers embrace an efficient way to create a competitive market for non-premium inventory, prices rise and revenues rise. That’s a pretty strong indicator of the value of the exchange industry.

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Do you have any interest in doing the same thing for other areas of the ad market?

The short answer is yes. The caveat is that we want to remain focused on the value proposition in this market. We define the market, ultimately, as any ad that can be bought and sold digitally.

Today, we’re very focused on online advertising and particularly display and graphical advertising. But long term, the model does apply to lots of other forms of media.

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How are you going to compete with Google when it launches the Doubleclick exchange?

It’s hard to tell what it’s going to be, when they haven’t brought a product to market and we don’t know whether it will be similar or different. But we have a number of advantages –  getting to critical mass and liquidity is not easy to do, and once you get there it’s hard to compete with you.

Also, in a more functional sense, running an exchange is very different to running an ad management platform. While many features overlap, constructing a different type of market is not as intuitive as people assume for companies in the ad serving space. We have had to learn a lot of really difficult lessons over the last few years about the really fundamental business problems of running an exchange. Anyone else that wants to play in the space will have to learn those lessons as well – and they are not the kind of lessons that you can just throw engineers at.

By no means do we underestimate the competition that is likely to come, but we’re pretty comfortable with our leadership position and we expect to extend that lead

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Do you see eBay as a potential threat?

You would think that, logically, they would be interested in this space. They were obviously involved in that cable initiative, but we haven’t seen much else that would indicate they are eyeing the exchange space for online ads.

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