The Current Age of Ad(versary) Tech Is Ending
I'm gonna make up more acronyms and you're gonna like it
Hello and welcome to another installment of Gareth Hates Ad Tech. In today’s rant, I’d like to address something that I’ve been pondering for some time but have only spoken about in hushed tones with people who have had a few drinks. Namely, it’s why doesn’t Independent Ad Tech work?
I know most of you reading this will react with indignation – “well, what do you mean work!?” “Of course it works look at all these companies!” blah blah. But the fact of the matter is that the meaningful online advertising businesses are the walled gardens. There’s a reason market growth is primarily going to a few places – Google, Facebook, TikTok, etc – and we aren’t seeing anywhere near the organic growth in independent ad tech.
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My theory why is simple – independent ad tech doesn’t convert. Ask any affiliate who has been working for more than 5 years – DSP banners don’t back out. And I've witnessed this personally, onboarding performance buyers onto various DSPs that I’ve worked at only to see them fail. Another barometer for this – how many D2C companies do you see built on the back of DSPs? I know the CEOs of a few big ones and I can tell you programmatic wasn’t even a consideration until they were spending decent 8 figures per year already on the primary channels (FB, Google) and for many of them still isn’t. This is because it doesn’t convert for them – you can’t build a sales focused business on DSP based buying. That’s not to say that no D2C brands buy programmatic, I’m sure some do, but it’s not the “go to” channel to scale up your business with your Series A. It’s just how the world is right now.
In order to diagnose why this is, I’d like to look into the history of Programmatic, namely, the history of DSPs and SSPs.
DSP - Demand Side Platform – a platform built to run campaigns for advertisers (either with an advertiser or agency logging in themselves, called “self-serve,” or with employees of the DSP doing it for them, called “managed service.” Apart from the functional definition, many people will say DSPs exist because in the transaction they represent the “buy-side” interest
SSP - Supply Side Platform – a platform built to “make publishers as much money as possible” by selling to DSPs or as many companies as they can. What SSPs do has actually shifted significantly over the years, and that’s one of the first things I want to discuss. But always their marketing has been built on “we represent the interest of the publisher.”
WTF does an SSP even do anymore
The original SSPs were not in the business of selling inventory to DSPs. In fact, that’s a different business model – using OpenRTB to sell inventory to DSPs is being an “Ad Exchange.” But we’ve used them interchangeably for so long that we’ve lost sight of the original purpose of an SSP. The original purpose of an SSP was to manage publisher integrations with Ad Networks and Ad Exchanges, not to hold auctions with DSPs.
Cue the Time Machine
Why does programmatic exist? The original programmatic platform, the Right Media Exchange (Sorry Jeff and Bill and AdECN, I did work at AppNexus after all), was actually a technology integrated marketplace for Ad Networks to buy and sell from one another. I’m going to make a really crappy graphic to illustrate the evolution that brought modern programmatic into being :
Phase 1 - Basic Internet Pub
Publisher speaks to advertiser, like coca cola, advertiser agrees to pay publisher 13 goats for 1 month of putting their jpeg on publisher website. Publisher agrees, much goat wealth was had.
Phase 2 - Ad Serving
Publisher has more advertisers that want to work with it. Also, publisher realizes that some months have lots of traffic, and publisher should get paid more money in those months. Enter publisher adserver – two primary functions, change the ads that show on the site without having to re-code jpegs, also count the things so you can charge based on counts not on time (maybe some basic targeting too). New way to sell, many many more goats for publisher. Advertiser decides to trust but verify, builds advertiser adserver to count and swap things for them to make sure their goats are getting their money’s worth.
Phase 3 - Ad Networks
Companies realize that publishers aren’t the best at getting in touch with lots of advertisers to get as many goats as possible for their ads – and that they don’t need to be a publisher to represent publisher inventory. Ad Networks are born – people who live to do nothing but sell ad space and don’t have to worry about pesky things like writing or creating things of tangible value to your average human.
Phase 4 - Hell
Phase 4 is known as waterfalling – where ad networks realize it’s way easier and faster to scale up their business if they deal with each other instead of dealing with those annoying advertisers and publishers. This is primarily driven by a lack of internal liquidity – it’s difficult to scale up supply and demand at the same time within a single network, and easy to extend your liquidity crisis to another ad network (who has lots of scale) instead of trying to keep adding more advertisers and publishers. This is where every network starts working with every other network using ad tags, and this is the environment in which programmatic was born.
Phase 5 - The birth of RTB, RMX
You’re welcome for the worst graphic in history – but you get my point. Right Media Exchange was an environment where instead of pinging all your network partners in a line, as depicted in waterfall hell, you pinged all of them at once and everyone cleared in this lovely unified auction inside of Right Media.
Does this sound familiar? Because it should.
You see, history started with disaggregated demand and supply integrated in a shitty way (waterfalling), except the people doing the buying and selling were ad networks. So Right Media created a way for all of the ad networks to sell simultaneously to one another.
We have entered this phase, precisely, once again – except instead of the ad networks being the ones who want to transact simultaneously, it’s the publishers, exchanges, and DSPs. And instead of RMX, it’s prebid.js.
Welcome to the brunt of my article. In the interest of brevity, here are the next steps :
After RMX was born, Ad Networks became a commodity. They needed to figure out a pitch.
They realized that they could sell to advertisers or publishers more effectively by convincing them “I’m on your side! It’s my job to make YOU as much money as possible.”
This pitch works. This pitch works because these people were trading CPC agency budgets, and performance was a commodity (read : didn’t exist, this was garbage). This is where ad tech starts to die, and while this is a small bullet point in this article, it’s a really really important one.
SSPs realize it’s much easier to sell directly to this new type of ad network, DSPs, on a publisher’s behalf than it is to actually manage a publisher’s relationship with their own ad networks. They all deprecate their publisher ad network management products. Also DSPs don’t want to bother with pub stuff.
The terms SSP and Exchange become interchangeable. We enter a gross phase of ad tech middle men where both SSP and DSP are taking as much in fees as possible. Remember RocketFuels 50% margins? Ever seen Pubmatic’s 30%+ margins on S2S sourced inventory? And they did like, no work, other than stand up a few OpenRTB integrations
Prebid comes along to help publishers manage their relationships with Ad Exchanges – the dominoes begin to fall
And this is where we are today. Ad Tech is like a wave function that has peaks and troughs. At the peaks, you have a bunch of different companies doing things and managing one another. At the trough, a new disruptive technology emerges that commoditizes and flattens ad tech and you don’t have companies managing companies anymore, you fewer players and they work with each other simultaneously instead of synchronously/one at a time.
We are experiencing a flattening right now. And this is probably the most necessary flattening that’s ever happened in independent ad tech – because walled garden ecosystems have emerged that simply perform better than this monstrosity that I’ve been describing for a bazillion paragraphs.
Why do walled gardens perform better than this mess?
Improved Optimization – when a system is ingesting the publisher inventory from the client, interpreting the signals itself, the optimization works better
No Asymmetry of Information – walled gardens are aware of how well a piece of inventory is performing for a campaign and what the goals of that campaign are. By knowing the goals of the campaign, they know what price the advertiser would be willing to pay, and therefore the “maximum expected value yield” (MEXVY) which they can play with to pay themselves. They also know, generally, how much their inventory costs, because they’re aware of the market for it (it’s their inventory!)
Fee Flexibility – as a result of #1 and #2, walled gardens can take dynamic revshares. Within any modern bidding systems, there are two competing metrics – MEXVY (maximum expected value yield, or the expected performance of a campaign backed into a bid) and the ECP (expected clear price, or how much they think the inventory will cost based on historical market conditions). The delta between these two numbers represents the maximum margin a buyer can take. Sometimes this number could be gigantic, like 50%+, and sometimes this number could be tiny, like 1% – but being able to dynamically deliver it is the foundation of a high margin successful advertising business.
Point number 3 is by far the most important. It’s the most important because in the modern DSP SSP ecosystem it is impossible – Prebid/GAM has the best ECP data, SSPs have “okay” ECP data, and DSPs have all the MEXVY data, and therefore the margin optimization that needs to occur for a system to be competitive in the auction cannot. Because of this, advertisers miss out on inventory that would perform for their campaigns, publishers don’t get money they could be getting, and nothing scales and nothing works as well as walled gardens. And don’t get me started on DSPs and SSPs trying to do their own dynamic margin management in this mess, which they do, and everyone loses except them. This is why modern ad tech is “dying.”
But this is all changing now. This is changing because the separate layers that were born in inefficient post-RMX ad tech land are being rendered unnecessary by Prebid. Prebid.js is the new Right Media – providing a central location for all buyers to bid on and assess the performance of their inventory. But it’s RMX on Steroids – because Prebid obviates the need for a management layer (the SSP), by taking something that was a siloed tech platform problem (buyer-of-my-stuff management) and turns it into an open source function. Now, this also would’ve been solved over time on Right Media, like it was on AppNexus, if RMX and AppNexus started working with publishers and running their own DSP, which is the case now on Xandr and was always a technology capability in both platforms. It’s also why I think buy microsoft stock?
The Rebirth of the Ad Network
What’s going to happen next, or should happen next, is SSP fees will be ground into the dirt (maybe a flat CPM based fee? I pitched this at RTK, nobody wanted it, but maybe i was just early) or SSPs will go away. DSPs will begin buying directly from publishers or publisher proxies like prebid management companies, because there’s basically zero friction for them to do the integrations now that Prebid is so standardized, especially if PBS catches on, and DSPs will become ad networks once again with the sell side managed by open source software.
This would be a huge, huge win for everyone. Now DSPs get to be Ad Networks like the walled gardens, they have direct access to publisher inventory and can build more meaningful performance signals and do proper ECP MEXVY margin management, and they should be able to capture more market share from Google and FB. Please god like this happen as soon as possible.
In conclusion, TLDR
Prebid needs to usher in an era of Advertiser and Publisher collaboration. What I mean by this is performance feedback loops – publishers need to know if their inventory is performing for campaigns or not, and bidders need to be ad networks with dynamic margin control.
Performance needs to be the determinant of pricing – nothing else. A free market where high performing inventory is properly valued is the best possible outcome for all publishers. We know that CPMs in this environment are high, as facebook CPMs in general trounce the programmatic CPMs attained by any publisher right now.
Advertisers need to start optimizing to actual performance so they stop getting taken advantage of by middle men. Stop doing “branding” shit. This is another hill I will die on.
If all this comes to pass, we will have an efficient prebid facilitated auction where bidding platforms buy directly from publishers.
Please, don’t talk about SSPs and DSPs needing to “protect the interests” of their clients. That kind of thinking is what screwed us in the first place, along with dumb agencies allowing their money to get stolen by middle men.
Prebid Management Companies are for all intents and purposes publishers. SSPs are going to buck and try to hurt them, but they’re good horses to bet on long term.
SSPs will either go away or will fundamentally change – and frankly, are probably unnecessary with Prebid Management companies aggregating small publishers and prebid itself providing all the relevant and necessary functionality.
I also love ad networks, lol.
A Few Caveats before you @ me :
SSPs could gather MinBidToWin (MBTW) data from GAM and Prebid and pass this along to DSPs. This would help a lot. But like…DSPs could also easily retrieve this information themselves. This is still in the works.
I’m not trying to hate on anyone — but there are too many companies doing what can be done by one with relative ease in the value chain right now. Especially when Prebid can centralize just about everything we could possibly need it to, and more, and could probably even build a superior auction environment to Facebook and Google.
Gareth Hates AdTech is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.