Ad exchange and DSP explained

This article unravels the concept behind ad networks, exchanges and demand side platforms that form the core of the multi-billion $ internet advertising industry.
Arun Nair - Author

Before I explain Ad Exchanges and subsequently DSP (demand side platform), let me take you through the evolution of display advertising. For those who came in late, Display advertising is advertising on the internet that appears alongside content on web pages in many forms, shapes and sizes varying anywhere from plain text to rich interactive multi-media banners. These ads are "published" on websites with the intent of inducing a reaction from the user (in the form of clicks, interaction with the banner or simply gathering attention) that will eventually benefit the advertiser.

Now the distribution of these ads from the advertiser to the publisher has evolved over time, grown in complexity as the internet population grew and the stakes got higher. Traditional distribution of these ads involved three players - the advertiser, the publisher and the visitor (consumer, visitor to a website). The "advertiser" paid the "publisher" every time an ad was displayed (an "impression") when the user visited the website.

This model was simplistic, but it only benefited the big publishers with millions of page-views in traffic because advertisers wanted their ad where the masses were. This left out the long-tail of publishers who were below the threshold levels of traffic, that weren't part of the advertisers' consideration set. This problem was offset by the genesis of "advertising networks" that gathered "display inventory" from these disparate publishers and packaged it to potential advertisers. However, this solution was short lived because as the years panned out there were hundreds of ad networks and the display advertising landscape was highly fragmented. Display ad buys had to work across multiple fragmented interfaces with tens of thousands of publishers and ad networks. Media buyers or advertisers who needed mass impression inventory would have to work with hundreds of sources to achieve scale since in this highly fragmented space, no provider had a "dominant share of inventory". The fragmentation in display space made digital media buying a nightmare.

Then there were three other issues with ad networks ...

  1. Positioning: Most ad networks don't disclose impressions per site. This means that advertisers or media agencies aren't sure where their ads will run. This can be a dangerous proposition if your ad turns up in website that you don't want to be associated with or even worse, a pornographic website.
  2. Price transparency: Let's examine a scenario. An ad network packages display inventory to an agency at say $10 CPM (cost per mille - or cost per thousand impressions). The ad network would then buy a very small portion of the inventory on premium publications at $50 CPM and a large portion of the long tail inventory at $2 CPM. The real eCPM (effective CPM) of the campaign for the ad network is around $2.50, and is far from the agency's claim of premium inventory. The marketer is however appeased with screen grabs of his ads appearing in premium positions, oblivious of the masquerade while the ad network walks away with a big margin.
  3. Ad Relevance: More often than not, the ads were out of relevance with the website content as a fall out of point 1, and also because there weren't intelligent contextual engines built into the ad servers (the server system that churns out the ads) of these ad networks.

The Ad Exchange The next step of the evolution resulted in the Ad Exchanges which addresses the lacunae stated previously. Ad exchanges are a step above ad networks wherein they facilitate bidded buying and selling of display ad inventory from multiple ad networks. The ad exchange enables real time bidding (RTB) on the display ad impressions as soon it is made available through the ad networks. The approach is technology-driven as opposed to the historical approach of negotiating price on media inventory

Using an ad exchange, publishers can auction their inventory to the highest bidder through a single interface. Buyers (advertisers, media agencies and intermediaries) on the other hand can now take advantage of the targeting capabilities since ad exchanges aggregate inventory from thousands of publishers (through the many ad networks) in one place, giving them exponentially more reach than any single ad network could. Combine that with the fact that the exchange is also highly transparent in terms of pricing and position, and you have a winner.

Enter the DSP ... However, keep in mind that Ad Exchanges are just technology platforms that make display inventory available (from different ad networks) for purchase via its RTB API. You still need a "bidder" that interfaces with the RTB API and evaluates every impression for the buyer.

The bidder announces, makes best inventory acquisition decision on behalf of the advertiser. This RTB savvy bidder is called a DSP (Demand Side Platform) and uses the RTB APIs from one or more Ad Exchanges to access inventory and make buying decisions. Using the DSP, buyers can make transparent, automated media buying across multiple Ad Exchanges in real time.

From a buyers' perspective, DSPs offer the following advantages ...

  • Contextual targeting: DSPs expose meta data of the inventory provided by the publishers and combined with 3rd part data validation, offer an authentic landscape of the target audience to choose from. These results in better performance of the campaign and a win-win for everybody involved.
  • De-duplicated reach: To optimally manage reach (breadth) and frequency (depth) of a campaign, media buyers should consider consolidating to a single buying system. This ensures that the campaign reaches out to the masses without having to duplicate it. The buyer can also cap the frequency, limiting the number of exposures per user.
  • Better workflow management: As the bid management software, DSPs typically streamline ad operations with applications that simplify workflow like campaign optimization, comprehensive reporting, dashboard interface and more.

Let's examine a scenario involving all the players through an illustration ...

A scenario illustrating interactions between a DSP, Ad Exchange, Ad Network, Publisher and the End-user.
A scenario illustrating interactions between a DSP, Ad Exchange, Ad Network, Publisher and the End-user.

In the scenario above, as users visit the webpage of a publisher's website, the display ad impression is made available and announced to the ad exchange (in real time) via the ad network that the publisher has subscribed to. A DSP connected to the ad exchange's RTB pipe makes this data available to prospective advertisers/buyers who bid for this impression based on their value of the user. The winning bid (usually based on the highest price bid) gets her ad published to the end user's webpage. Though this is a complex process involving multiple stakeholders, the whole process happens in a fraction of a second. In our scenario, the time between the display impressions becoming available to an ad being served after the bid is a few milliseconds.

So is DSP the zenith of display advertising? It certainly is a mature phase of the evolution considering the amount of sophistication and technology behind the ad serving. After all here is a solution that matches an audience with its advertiser in real time. The proof of the pudding also lies in the fact that more and more display inventory is arbitrated in real time. The market is only going to get exponentially better from here.