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Bill Urschel, an accomplished author and seasoned entrepreneur, has founded a number of technology companies including Experclick, Addison Hunter, InterQuest Partners, Alliance Manufacturing Software, Arc Tangent, and most recently AdECN in 2006. Bill has also published two books alongside more than 40 computer-related articles, and in 2000 founded The Narrative Press Inc., a publishing company that currently holds over 100 titles. He graduated from Princeton University with a degree in History.

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Auctions Speak Louder Online: Why Brokering Must be Replaced with Auction-Based Models

Written on
June 23rd 2006
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by Bill Urschel  |
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The goal of any advertiser is to reach the right viewer at the right price.

In the online world today, advertisers are too often shooting in the dark, wasting bullets and missing their mark. The problem is that the online advertising market, especially the market for display advertising, is horribly inefficient. If one ad network cannot fulfill an advertiser’s campaign it passes the deal to another, who may pass it to another, until there are two or three or even four people in the middle, each taking a bite. The poor advertiser who paid a dollar, for example, might get inventory that the publisher sold for as little as a dime. Even worse, the advertiser doesn’t really know what he got for his money.

The current online ad market is just as bad for publishers, but in different ways. I’ll go into that in a later article.

The industry needs a new business model. It needs to outgrow the old broker model and evolve to an auction model. And that is happening, right now. My own company, AdECN, has launched an auction-based exchange, and we’re seeing similar efforts from other companies both online (RightMedia, AdBrite) and offline (Bid4Spots in radio, and the Walmart-led model for television). Twenty four stock brokers figured this out in 1792 when they met under a buttonwood tree in Manhattan and formed the New York Stock Exchange.

In the online world, the auction solution requires three elements: sophisticated targeting, auction-based pricing at the impression-level, and an exchange marketplace.

Sophisticated Targeting

Sophisticated targeting is essential because that is how an advertiser knows what he is buying — and you need to know that before you know what the opportunity is worth to you. In any market model, an advertiser should be able to use contextual, behavioral, or profile-based targeting strategies, or a combination of strategies.

For example, if you are selling sports cars, an ad on the front page of cardandriver.com, where every 15-year old boy can click on it, might be worth 25 cents CPM to you, but if you know that the ad will be shown only to males between the age of 30 and 60 with incomes over $100,000, the impression might be worth five dollars: more specific targeting yields a lower cost per acquisition despite the higher price of the ad.

But this sort of precision requires the ad to be priced not at the site, page, or location level, but at the impression level — when each view of a specific ad by a specific person at a specific instant is individually priced.

If you went to buy 1,000 shares of IBM from your stockbroker, but instead you got a basket of shares from different companies in “the tech sector,” would you be happy?

Auction-Based Pricing

Auction-based pricing is how the advertiser tells the market what a certain advertising impression is worth to him. Right away, this implies that there is sophisticated targeting so that he knows what he is bidding on.

Second, it implies that the highest bid wins.

This doesn’t always happen in “auctions,” but it is critical if a market is going to be fair and open to all participants. In some closed markets, like Google and RightMedia, the highest bid does not always win, because the market maker is “optimizing” the placements of ads for the greatest revenue — the greatest revenue for the market maker, that is, not necessarily the publisher. This backroom optimization means that as an advertiser you can bid the highest CPC or CPA and not even have your ad shown. That’s not really an auction at all.

Third, there has to be some guarantee that what the advertiser paid a fair price for what he gets. If buyers get ripped off, they don’t come back. Try to imagine eBay’s giant garage sale without its buyer protections?

Guaranteeing fairness in online advertising is trickier. The targeting may be detailed and completely accurate and the advertiser has determined what is worth to him. But every advertiser knows that not all ad spots are created equal. The same creative with the same targeting and the same price is going to perform better on some spots (front page, above the fold) than on others (buried at the bottom of a banner farm page). How to protect the advertiser?

AdECN protects the advertiser by tracking the performance of every ad spot on every page on every site in the exchange, by category and other factors (yes, that is a lot of data). At the moment of the auction, if the advertiser is bidding on a spot that performs about as well as other spots of its format and category, the bid goes just as the advertisers intended. But if the spot underperforms its peers, the advertiser’s bid is reduced accordingly, to reflect the relative value of that spot. Any fair auction needs a similar guarantee.

The New York Stock Exchange has it — it is the Securities and Exchange Commission.



Reader Comments.

Hey,

Hyperbidder, Inc.(www.hyperbidder.com), is already doing all that and they are far more superior when it comes to selling ad space through auction. They sell ad space for large Publishers such as NBC/Universal, and their method is very fair. The higher the advertiser’s bid is, the more frequently the ad is shown on that specific ad space. With Hyperbidder’s auction, every advertiser determine the real ad value of each ad space on the Internet. Hyperbidder creates a real ad marketplace, and competition for the same ad space.

Posted by Gio Talegon | 12:08 pm on June 23, 2006.

Bid Based or auction models let the advertisers determine the market value of each click. We have worked on that basis for the past 2-1/2 years.

Posted by John Kerr | 12:52 pm on June 23, 2006.

This is a great explanation Bill and its a hot topic.

I saw a press release from Right Media that said they are serving 2 billion impressions a day. I don’t know about others but I’m a publisher and am happy. Their literature says they are an open exchange, and i’d try adecn if they are too.

I was sick of daisy chaining from this network to that network, losing impressions and delaying my pageloads. In Yield Manager (Rightmedia’s technology), I’ve been able to traffic in advertiser campaigns, my network deals, link easily to many other buyers and ban advertisers or creatives I don’t want. Their interface is very simple too.

A new model has arrived. Praise the Lord and pass the CPMs.

Posted by John N | 7:59 pm on June 23, 2006.

This auction based model is horrible. I’d rather take Tribal Fusion, Value Click Media, and Casale over them any day. I tried that Yield Manager program thing and it was pathetic. I am earning .80 CPM from Tribal Fusion and Casale for my USA traffic. Under this Yield Manager, I earn around .07 CPM. This is a horrid technology that will KILL the CPM industry. The only one that win is Yield Manager and the advertiser. The web site is left with holding the bag. I did a test with all four networks mentioned, and for over one month Casale, Tribal Fusion and Value Click Media were all averaging well over .60 CPM. Yield manager was averaging .07 - .10. If the traffic is the same, then the pricing should be constant. Yield manager is completely useless in the CPM arena and is killing the industry. Congratulations guys, I hope your happy with what you started. It will not be long until other users of their system figure this out.

I also used Adknowledge, Yahoo, and Google on my sites. All three programs netted me well over .30 eCPM. True CPC and CPM networks are the way to go. Advertisers and Yield manager are the only ones that win in this auction based scenerio.

Posted by Dann Cummings | 2:21 pm on June 24, 2006.

Dann,

what you’re experiencing is the reality of an auction. Your ad inventory is lower quality so you generated lower CPM. Back in the day, the big networks would pay lower to higher quality sites to overpay the lower quality sites. You are the type of publisher that I was subsidizing all these years.

For that reason, some publishers won’t like auctions, but alot will.

Posted by John N | 9:58 pm on June 24, 2006.

Johnny

Apparently you do not read entire posts before you respond. If what you say was the case then I would have been either receiving lower rates from Casale, Value Click Media, and Tribal Fusion This is not the case. My rates are as strong as ever with these three and Google, Yahoo, etc. I have only worked with two of the networks which use the Yield Manager system, rates are basically the same. For example one 22000 impressions served on the 8th of June earned an CPM rate of .09 with 296 conversions. If my traffic was not converting I think I would have little conversions. This just shows the auction system is not true to helping publishers on a level playing field. Since my rates are ten times higher than Yield Manager with the other networks mentioned then it would safe to say they do not offer a true rate on a publishers site. Rather they offer a rate where the advertiser gets the inventory for cheap and Yield Manager gets their fee. I also think Yield Manager takes a piece of the profits or some sort of fee. With that said Yield Manager has no incentive to help the publisher better their rates since they make money regardless. As more and more publishers really look into this solution they will see they are loosing more money by use their service over a standard quality CPM network.

Posted by Dann Cummings | 7:12 am on June 25, 2006.

Oh Danny Boy,

As I said, each of those networks is paying you higher because they are paying someone with better inventory less than they should be. Used to be my sites. Not anymore.

Good publishers - look at auctions like adecn and yield manager.

Posted by John N | 10:17 pm on June 25, 2006.

You discard Google’s Ad sense because Google get paid on the click through not the impression as you discussed. The Google model is designed to do two things, make the most money and serve up the most relevant content. So what determines the position of your ad is your CTR is influenced by your user’s votes or clicks. What makes this is a very interesting model that it’s serves relevant content so it’s not just advertising space.

Posted by Auctioneer | 5:03 pm on August 7, 2006.

Absolutely correct that the brokering advertising must be replaced with auction based type. It makes total sense because of the economies of scale. It is the same with forward online auctions. This should change to online auctions in reverse. Buyers should decide how much they want to pay and who to buy from not the sellers. Here is what I mean http://www.oltiby.com

Posted by auctionpro | 11:52 pm on October 9, 2006.

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