Ad Exchanges are NOT Like Financial Exchanges

It seems everyone offering an ad exchange would have you believe that ad exchanges are like stock exchanges.  Right Media initiated the flawed comparison back in 2005, ContextWeb named their exchange ADSDAQ in 2007 (missing “NASDAQ” by one letter), and Google continues the comparison today. Certainly the comparison serves a marketing purpose – it conveys a proven model, market efficiency, standardization of the goods transacted, and fairness for all. But ad exchanges are NOT like stock exchanges.

Long before the concept of the “ad exchange” came around, there were other companies (ad networks, marketplaces, etc.) aggregating publisher inventory and advertiser demand. The biggest difference with exchanges though, hence the comparison to the stock exchange, was that their buy/sell model was based on an auction and a winning bidder – every buyer supposedly competes on the same basis for a given impression, just as buyers compete on the same basis for a given financial commodity. This model for buying and selling however is the only resemblance to a stock exchange – it ends there.

When you buy a share of stock on the NASDAQ or NYSE, you know exactly what you’re getting. You have access to the same standardized information about that share of stock as everyone else, upon which to form your own opinion or analysis, and the attributes of that stock are transparent and standardized. It’s on that basis of standardization that stock exchanges have become truly efficient market places. Any transactions based on non-public and privileged information are considered “insider trading”, illegal and economically detrimental.

In contrast, ad exchanges provide very little transparency or standardized information to what you’re actually buying – they simply offer ad inventory by the tonnage through an auction model and cookie retargeting. As a result, buyers are (by design) required to bring their own data to the table. This basically means ad exchanges as they exist today are built on “insider trading” principles and arbitrage – where the winning bids are by buyers who take advantage of market imbalances. These market imbalances allow them to buy the inventory at a price lower than what it’s truly worth. This of course works well for the buyers, but not so well for the sellers whose inventory is being undervalued. The greater the market imbalance, the greater the opportunity cost for the seller.

The imbalance revolves around DATA – all the attributes of the user and impression that increase market value. The more information available, the more potential value in the market place. As Rob Leathern from CPM Advisors points out in a recent AdExchanger blog post:

Despite people talking about how advertising online is data-driven, there is not a lot of good, clean data for buyers or sellers. Bits and pieces of data about a user and ad inventory are everywhere but publisher practices vary … Advertisers, agencies and buyers need to know more about inventory in a standardized, systematic, scalable way and for that to happen, this information needs to be created at the publisher end and retained throughout the buying process whether that is direct, via a marketplace or through an ad network … The more information that is available about an impression, the greater the chance I can make a good decision whether or not to buy it …”

Rob is speaking of course on behalf of buyers. The fragmentation of data, combined with a lack of standardization, makes his job harder. But data fragmentation also makes the seller’s job harder too, and with greater monetary consequences. Exchanges are in a position to level the informational playing field for all and become truly comparable to stock exchanges, yet they continue to separate information from media. Could it be because the exchanges are owned by the same companies that have the most data about each of us, the greatest number of advertisers, and therefore the most to gain from insider trading?

Until exchanges empower publishers with the tools, data and transparency they need to properly value and leverage their inventory in the market, they’re only encouraging the insider traders and arbitrageurs, further shifting the balance of power away from publishers. If exchanges continue to support the current one-sided model, their cost to publishers will exceed the benefit, and the comparison with stock exchanges will be but continued rhetoric.

Comments

[j]

I don't understand this statement: "As a result, buyers are (by design) required to bring their own data to the table." What data are buyers bringing?