By introducing the auction model to display advertising, he hopes to benefit advertisers, agencies, ad networks and publishers. Ten sales houses have signed up to trade on the exchange when it goes live.
We caught up with him while he was over in London recently, to talk about why he chose to launch in the UK before the US or China, what political and technical challenges he faced, and what impact AdECN might have on the overall ad market.
In a nutshell, what will the exchange do and how will it work?
An exchange is a marketplace to faciliate trades among members. In our case, we are using the stock exchange model. In our world, the stockbrokers are the ad networks and we are the stock exchange, and private individuals don’t trade on the exchange – they have to go through a broker.
That’s key to our model. We cannot allow advertisers and publishers to trade on the exchange.
Why is that?
Several important reasons. For one thing, it is a complicated business and there will always be a level of service and support required. As with stockbrokers, those ad networks provide support and service to their clients.
Also, for the exchange to be successful, it has to guarantee payment. If you sell something on the exchange, we have to guarantee you will be paid – no questions. There can’t be any doubt about that.
If I had 250,000 advertisers to collect from, I couldn’t guarantee that I could pay the publishers that sell the inventory. But if I am dealing with, at most, 100 reputable ad networks, I can provide guarantees.
The other reason, which is a bit more obscure, is that for the exchange to benefit its members, it has to provide liquidity, and for liquidity you need large volumes of decent traffic, and that comes from the ad networks.
Presumably, you also don’t want to compete with the ad networks…
Yes, not only do I not want to be competing with the ad networks, I would have to hire an enormous support staff. There are also different types and flavours of ad networks, and you can’t be all things to all people.
We’re no more trying to get rid of ad networks than the London Stock Exchange is trying to get rid of stockbrokers.
There are other models out there. AdBrite deals directly with advertisers and publishers, so in that sense they are not an exchange, but they are auctioning off publishers’ inventory. It’s a useful model and it will survive and do well, I think.
Right Media is calling itself an exchange, but it is again working with advertising and publishers and competing with ad networks, which ad networks don’t care for.
What are the benefits for advertisers and publishers then?
What’s driving the exchange for us is the concept of real-time, highest-bidder-wins auctions.
It’s a fully automated exchange, so in advance, ad networks put in the details of their publishers’ inventory onto the exchange – each spot on each page, the dimensions and the allowable ad content, and maybe a minimum price.
The buying ad networks, on behalf of their advertisers, put in the details of their campaigns, their creative, the behavioural, contextual and profile-based targeting they want, and how much they are willing to pay. They sit in the system, like bids and asks in the stock market.
When a viewer lands on a webpage, it triggers the auction. As that page is being called, we are conducting an auction among all the advertisers for whom that view is a fit. Whoever is willing to pay the highest price gets it.
Each auction is run in about 12 milliseconds, as the page is loading. We run an ad for each and every impression – you don’t buy inventory in batches, an auction is run every time a viewer lands on a page.
As for the benefits, the fixed pricing model people use these days doesn’t work very well, because ad impressions are worth different things to different people. Why not price them differently? Advertisers also know what they are getting.
For the publishers, they know they are charging the highest price they can for each impression. They are also selling off a lot more of their inventory. If you have a fixed rate card, sometimes people are willing to pay what you are asking, but sometimes people would have been willing to pay more.
The publisher ends up making much more money – and this is very important for the large social networking sites; even now, half of their inventory goes unsold.
How will you make sure the selling ad networks provide what they say they are providing? Is this where IASH (an association of UK ad networks) comes in?
First of all, all the inventory is categorised by source and type – not just by type of page and content, but also whether the ad network has a direct relationship with the publisher and so on.
As for IASH, it has a set of principles, and we are the technical manifestation of those principles. IASH tells you how to behave and provides auditing, and our system makes sure people behave that way.
We check the ads and the inventory on the fly by checking the sites. We do spot checks which check whether a site really was what the ad network said it was. We do the same with ads to see whether they are appropriate. Usually, we can catch those things in the first bad move.
If you’re an ad network, do you have to join IASH to participate in the exchange?
No, not necessarily.
Our programme is that we have been operating in the US in a limited way for over a year, but we are launching in the UK first, and part of that reason is IASH. It’s a smaller market, but people are already sitting down together and talking about the correct way to do business.
We don’t have any official connection with IASH, but we have formed something called the AdECN UK consortium, and the idea here is that this is a non-profit entity, made up of our members, to trade on the exchange.
If you want to trade on the exchange, you have to be a member of the consortium, and it gives the consortium members an opportunity to control quality. They can make sure people who are trading are of good character.
How do you charge?
The way it works is we charge our members for a seat, and then a flat transaction fee. The seat cost for early members is £1, so it’s nominal. The transaction fees range from $0.03 to $0.015 CPM, but that includes ad serving as well.
It’s a flat fee, albeit scaling on volume, because we want to be utterly neutral. If the exchange makes more money when the deals get bigger, we feel it would not be fair, favouring the publisher over the advertiser.
It’s the same reason why we can’t be owned by an ad network or a publisher. The fact that Yahoo! owns 20% of Right Media means Right Media is not neutral, and the other big publishers won’t play on it.
Do you expect to have an impact on chain buying?
Yes. With the exchange, there’s no reason for passing deals from ad network to ad network - it’s too expensive. Just run it through the exchange.
Do you see Google as a potential threat, considering its plans for exchange-based trading of radio, print and TV ads and so on?
Perhaps. Down the road, about three years from now, I expect display advertising to be broken down like a pyramid.
Twenty percent of the traffic is still going to be sold by the direct sales staff at the publishers. Then the middle 30% is going to be sold by ad networks to their own clients.
Half of the bottom 50% is going to be sold through an exchange of some sort. We think we will capture half of that, as the exchange that supports ad networks.
The other half will be taken by the quasi-exchanges that are working directly with publishers and advertisers, in competition with the ad networks.
You asked if Google will come into it – absolutely. But it will be playing the game for Google and won’t be offering neutral infrastructure. Like in CPC advertising, it will be playing for the house account.
Do you have plans to apply the model to other areas of online advertising?
Yes, we have plans afoot to incorporate search in the bulk of our economy. Already, we can bring in search feeds from search engines and load them into the system as mini-CPC campaigns.
We don’t do outbound search, where you can enter your ad campaign on our system and it will go out onto the search engines, but we have some plans for that as well.
Email is going to be very important on the exchange, and by the end of this year I expect we will be announcing something on email.
How much politics have you had to deal with?
Politics is perhaps not the word I would use. There has been a lot of conversation; a lot of people have differing depths of understanding about what we are doing and the economics.
People with a lot of experience with the stock market get what we are doing. We are not over here selling products and services, we are selling economic theory.
It’s been one of the biggest intellectual challenges of my life to come and try to explain the concept to people.