The Second Wave of Display: Math and Science Rule the Day

Earlier this year, Wenda Harris Millard, former head of display ad sales for Yahoo!, and more recently co-CEO of Martha Stewart Online, was quoted widely for her rant at the January IAB annual meeting that we needed “More Art, Less Science!” in online advertising.  She issued her rallying cry, “we must not let our assets be traded like pork bellies!”  The word “Google” wasn’t mentioned until the third day, when [now former] president of Display Advertising for Google, David Rosenblatt, took the stage, and the word “algorithm” was nearly shortened to a four letter word.

The Google machine can’t be stopped however, and last week the firm launched its new offensive in digital marketing, with DoubleClick AdExchange v2.0.  Unlike Ms. Millard and many other agencies, publishers, and ad networks, who fear this revolution as the ultimate battle of art and science, we believe that this product launch, in conjunction with Adobe’s acquisition of Omniture, further accelerates the perfect blend of accountable creativity and a new wave of art and science together.

It’s important to note that display ad exchanges aren’t that new — Flycast was around in the late 90’s and more recently, Yahoo bought RightMedia, and Microsoft acquired AdECN.  Both Yahoo’s and Microsoft’s ad exchanges are successful and growing, and Yahoo recently added a front-end powered by AdReady to help open up their exchange to SMBs.  Yet auction-based ad exchanges are waiting for a catalyst to go mainstream. We believe the long-awaited (and anxiously feared) Google launch is the driver for growth and competition for all three major exchanges.

What’s Different?

For the first 15 years of the Internet, advertisers large and small generally turned to their ad agencies for display media buying.  These agencies created the campaigns ideas, made lots of banner ads, negotiated with the ad networks and publishers they represented, and then selected and executed the various flights of display ads.  The ad networks pre-negotiated the CPMs (Cost Per Thousand display impressions) with all the publishers where they could place banners, from global powerhouse media sites like Martha Stewart Online down to the local blogger writing about flowers and homemaking.  Folks in the industry made it more efficient with behavioral targeting and other methods, but at the end of the day, banners and rich media flew around like crazy through daisy-chained ad networks.

The main effect of this on advertisers was information asymmetry, inefficiency, and loss of bargaining power — resulting in lower ROI.  There were three layers of negotiation between the advertiser and their ads, and the potential for poor targeting and simple mishandling was significant.  The hidden effect was that small and mid-sized advertisers couldn’t get good placements on major sites (at decent rates) because agencies negotiated with these publishers by aggregating all of their client buys — effectively locking out small advertisers not represented by an agency.

Ad Exchanges, however, turn the tables in a way similar to how search advertising auctions impacted advertising.  Ad Exchanges automate more of the process of buying and selling display ads -taking out layers of negotiation and information asymmetry from the equation- and essentially making it more like search engine marketing (where tens of thousands of advertisers are placing their own ads in real time).  Instead of having to go to an agency, advertisers can simply go to exchanges like Yahoo!’s mydisplayads, select some ads, modify them, and then select the auction-based CPM prices they are willing to pay.  They can identify the category of publishers and websites down to the individual website level, they can start and stop campaigns in near real-time, and they don’t have to make massive buys to do it.  They just have to be good at their own math and science.

This puts the power squarely back in the hands of the advertisers, a situation of particular concern to agencies.

Perhaps the most significant difference with Google’s launch is that, DoubleClick Exchange 2.0 is integrated with Google’s AdWords and AdSense solutions — bringing a significant base of buyers and sellers immediately into the display auction market.  While RightMedia and AdECN brought the auction to the masses — Google is bringing the masses to the auction — and that’s the catalyst that will transform all three major players.

Who’s Impacted?

DISPLAY MEDIA AGENCIES:   The Agencies have the most to lose in this dramatic shift.    Agencies will suffer from the increased transparency of the media CPMs, and increased efficiencies offered by automated creation, handling and placement of their display ads.  Clients will be more demanding for measurement, monetization and maximization of their display media spend.

AD NETWORKS:  The Ad Networks will also be impacted, as their opaque negotiated rates will come under scrutiny and pressure from the advertisers and agencies as described above.

ADVERTISERS:  Advertisers benefit the most from this launch, as they will have more selection of more inventory that is easier to reach and place without having to pay all the middlemen.

YAHOO! and MICROSOFT:  Yahoo and Microsoft have a big opportunity here.  While Google’s launch of DoubleClick Exchange 2.0, integrated with their search capabilities, might seem like a direct incursion into Yahoo’s display stronghold, Yahoo and Microsoft still have much larger networks of sites.  Google’s launch will stimulate new interest in display advertising across the board, however Yahoo and Microsoft have the more established exchanges on which this new interest will be capitalized.  Add to this, the Bing/Yahoo! relationship around search and the potential to integrate their search and display offerings, and again we end up with a scenario where the big three have an interesting strategic scenario, and advertisers are the ultimate winners.

PUBLISHERS:  Website publishers have the most to gain, but likely will react in a way adverse to their interests.  Publishers have to decide who will be allowed to advertise on their sites, and at what rate.  Premium publishers like Washington Post, ESPN, Facebook and others will continue to have an in-house sales team to maximize the value of their premium inventory.  Mid-market publishers will likely react negatively to an Ad Exchange dominated world, as they will have less ability to control the prices of the CPMs on their site and will view their inventory as being commoditized, as in Ms. Millard’s quote at the beginning of this piece.  This initial dip in CPMs will be counterbalanced by a greater quantity of advertisers competing for those slots.  Ultimately, inventory will get filled more quickly and competitive bidding will occur, thus stabilizing the CPMs at rates higher than one might initially suspect.

ONE BIG CAVEAT
The biggest concern and caveat to all of the opportunities mentioned above is if the publishers, agencies and ad networks fight back so strongly that no one plays with the ad exchanges, and stifles their growth.  Unlike with search, where Google, Yahoo and Bing! are both the exchange and the end publisher, in the display world, the big three are the exchange but not the primary end publisher.  If quality publishers don’t make their inventory available to the exchanges to release the pent-up and accelerating demand, then we’ll end up with no improvement and no change in the display market.

ACTIONABLE INSIGHTS

Actionable Insight 1:  You can’t manage what you don’t measure. Start demanding your detailed, daily, display ad metrics from your agency.  The state of the industry is that whoever has the contract with the Ad Server owns the data — so you may not own your own data.  Check on that, and make sure you get it.  Not just the high level impressions, clicks and costs, make sure your data includes the publisher, segment, conversion events and actions ON A DAILY BASIS.  If you can get the data, Covario can help automate the aggregation and analysis through it’s Marketing Action Platform.

Actionable Insight 2:  Don’t wait for the change, be the change. Don’t wait for your display ad agency to suggest they start buying on the exchanges – they won’t.  Demand to know which Ad Networks they are using, ask them to start working with the big three ad exchanges — and demand that you get the side-by-side results.  Alternatively, you can have your own in-house team start placing experimental buys on the exchanges, to see if you get better results, more cost effectively, than the display media agency.

Actionable Insight 3:  Think outside the box on who should be doing the work. Ironically, the best people to start doing auction-based display buys for you may not be your traditional banner ad folks — it’s probably your search team.  The quantitative, on-the-fly, complex data set management and competitive skills used in search marketing are much better suited to the auction-based model.  We recommend that you talk to your in-house paid search team, your agency’s paid search team, or your search marketing agency to evaluate the differences in process and skillets.

Actionable Insight 4:  Don’t forget the Art part. There’s still a huge opportunity for great creative in display advertising.  While there will be significant efficiencies driven from the new auction-based display models, advertisers will also be able to select from thousands of very good, proven, pre-built customizable ads. Creative excellence will continue to be an important differentiator just as it is search marketing, which is only text.  Covario is already adding features to Covario Paid Search Insight to help optimize creative copy in addition to position and payment.  The same functionality in Covario Paid Search Insight will be available to help measure and manage display ad creative as well.

Actionable Insight 5:  Start measuring search and display together. Too many companies still view search and display as separate silos and don’t compare apples to apples for attribution modeling.  Ad Exchanges will offer the perfect opportunity to truly compare search and display side-by-side, as they will be coming from the same provider.  They will be offering higher degrees of transparency than ever before, and the CPMs and CPCs are more likely to be aligned in an auction based world.

Thus, Google’s Doubleclick Exchange launch should not end up being a battle between the creatives and the scientists, between the publishers, agencies and the advertisers, or even between your own left brain and right brain.    This launch will be the catalyst that ushers in a new wave of interest in digital marketing and brings new opportunities to all the players.

Bookmark this post: