Programmatic advertising is the engine that powers free digital content. In less heady terms, programmatic advertising is the heavily automated process of buying and selling digital ad space. Often described as the future of online advertising, global programmatic ad spend will hit $14 billion this year, and is projected to grow rapidly over the next four years to nearly $37 billion by 2019.
In less than 10 years, programmatic technology has grown to power the majority of online and in-app ads.
In less than 10 years, programmatic technology has grown to power the majority of online and in-app ads. Sophisticated programmatic exchanges facilitate billions of trades (the buying and selling of ad space, or “inventory”) across websites and apps on the multitude of screens we interact with daily.
Programmatic trades are automatic. The smooth functioning of the exchanges that facilitate those trades is not. The future of programmatic ad exchanges hinges on buyers’ confidence in the quality of the ad-space inventory that they’re purchasing. A buyer, or brand, needs to feel confident in knowing that if they are buying space to show their ad on The New York Times website, then that’s where it will appear. Advertisers need to know they are not risking their brand integrity or marketing dollars by buying low-quality or fake, robotic inventory.
The Interactive Advertising Bureau (IAB) recently issued a joint report with Ernst & Young that notes that ad fraud, bots and ad blockers are costing the advertising world around $8.2 billion annually; last year, the U.S. Senate published a report on the threats of fraud in online advertising.
Even if you’re not an expert on the inner workings of online and programmatic advertising, chances are you are familiar with the consequences of bad or low-quality inventory, otherwise known as “lemons.”
Even if you’re not an expert on the inner workings of online and programmatic advertising, chances are you’re familiar with the consequences of bad or low-quality inventory, otherwise known as “lemons.” It turns out that the lemon phenomenon is encountered in many markets. Economic theories that help us understand the impact of low-quality lemons, first developed to describe the used-car market, have relevant applications to programmatic advertising markets as well.
“The Market for Lemons,” a seminal paper written in 1970 by Nobel Prize-winning economist George Akerlof, describes a market in which sellers offer either cars of high value or low-quality “lemons.” A smart buyer who is unable to determine the quality of a given car needs to be skeptical and offer no more than the average value of similar cars in the market. But because that average value is less than what the best used cars are worth, owners of good cars are discouraged from selling in that market.
Conversely, the average price exceeds what the low-quality lemons are worth, attracting sellers with bad cars to offer more of them to that marketplace, and greatly increasing the amount of low-quality vehicles available to buyers. The result is a marketplace that functions poorly for both buyers and sellers, with a reduced volume of transactions, lower prices and less valuable opportunities for high-quality sellers.
Poorly policed programmatic ad exchanges are no different. Buyers, or bidders, who are uncertain about the quality of the inventory that they are purchasing must rely on that market’s averages, opening the door for more disreputable sellers to enter the market and sell low-quality inventory. Buyers become reluctant, high-quality sellers only receive lower prices, they withhold their best inventory and the quality of that entire marketplace is degraded.
The simplest way for buyers and sellers to avoid the consequences of bad advertising inventory is to only trade in high-quality exchanges, which are open, transparent and rigorously monitored.
The simplest way for buyers and sellers to avoid the consequences of bad inventory is to only trade in high-quality exchanges, which are open, transparent and rigorously monitored. The most sophisticated programmatic exchanges have built-in quality standards that remove the threat of fraudulent participants entirely.
Lessons learned in other markets about lemons apply with full force to today’s online programmatic advertising exchanges. High-quality advertisers and publishers do best in an exchange that enforces high standards. The proliferation of mobile devices and increasing consumer screen time requires programmatic technology to deliver ads effectively and scalably across an increasingly diverse user landscape of screens and formats.
The advertising industry can’t afford to undermine trust or waste time and money participating in low-quality exchanges. This will inhibit programmatic’s full potential to power a vital monetization engine for the digital world. Without quality control, some programmatic platforms will collapse under the weight of bad inventory. The ad tech sector, already starting to consolidate, will continue to see the number of significant players reduce as quality demands escalate, and the best players, those capable of operating truly high-quality markets at scale, emerge as ever-clearer leaders.
The advantages of quality control, and the issues that can arise in its absence, are fully explained and understood by Paul Milgrom, Ely Professor of Economics at Stanford University, and Andrew Vogt, research assistant at Auctionomics, in the paper, “Ad Exchanges Are (Not) All The Same: How Better Policed Exchanges Help Premium Publishers.”
Tim Cadogan is the chief executive officer of OpenX, which exists to help publishers grow their businesses by monetizing great content. Today, OpenX operates one of the largest, most efficient and highest quality programmatic markets in the world. From 2003 to 2008 Cadogan was at Yahoo, most recently as senior vice president of global advertising marketplaces, overseeing the primary advertising product lines at the company — including display, search and video. Previously at Yahoo, he was vice president of search, where he was responsible for both the consumer search and paid search businesses. Prior to Yahoo, Cadogan was vice president of search at Overture (formerly GoTo.com); he has also been a consultant at the Boston Consulting Group and McKinsey & Company. Reach him @OpenX.
This article originally appeared on Recode.net.