Once upon a time, buying display media online was a cumbersome, manual task. First, you needed to hire a media buyer – someone who knew both the jargon of media buying (“impression caps,” “ad serving,” “remnant,” “ROS,” etc.), and who to call to secure inventory (which publisher, which person working at the publisher). You also needed a pretty sizable budget (usually at least $25K for any campaign), and you needed a great creative director who could put together effective banner ads for your campaigns. Finally, you needed to invest in an ad server to host your ads and measure performance. This entire process created a huge barrier to entry for small and/or novice advertisers to enter the display world.
Over the last five years, the barriers have slowly been removed. First, companies like AdReady, Google, and 4Delite created templated banner ad creators, making it easy for anyone to create decent banner ads. Second, ad exchanges emerged (in particular the DoubleClick Ad Exchange, acquired by Google, and Right Media, acquired by Yahoo) that created transparent marketplaces for remnant inventory. Instead of having to call 200 publishers and negotiate individual deals with each of them, you could now buy seats on the ad exchanges and bid for inventory on multiple publishers instantly (known in the biz as “Real Time Bidding,” or “RTB” for short).
Ad exchanges, however, were still the domain of media buying experts who understood how to build hooks into the exchanges and build RTB algorithms. Then Demand Side Platforms (DSPs) emerged. DSPs took care of the seat fees for the exchanges, and built the algos and user interfaces necessary to play on the exchanges. There are literally dozens of DSPs out there – a thorough list is available through Luma Partner’s Display Landscape Infographic.
And that’s where we basically are today – you don’t need to know media buying jargon, have great connections into top publishers, hire talented banner designers, buy an ad server, have a seat on an exchange, or build your own bidding algorithm – you can have pretty decent success in media buying by just partnering with a few companies.
Given the predictions of astronomical growth of the media buying space, you would think that the future would be quite rosy for DSPs. Instead, I think what we are seeing is DSPs’ “General Tarkin” moment. For those of you who aren’t Star Wars nerds, Tarkin was the commander of the Death Star. His last line in Star Wars – minutes before getting blown up along with the Death Star – was “Evacuate? In our moment of triumph?”
DSPs face several looming challenges to their business models that will be difficult to overcome. The two most pressing ones, in my opinion are: commoditization and reverse engineering.
A few years ago, DSPs could make good margins by simply offering access to ad exchanges and building a rudimentary RTB algorithm. Since that time, the field of players has become more crowded, and gaining access to the exchanges is no longer a key selling point (note: you could argue that access to Right Media was a selling point for some DSPs, but Right Media recently barred DSPs from direct representation of clients on their exchange). SEM platforms like Efficient Frontier offer clients access to exchanges, as do retargeting companies like AdRoll, TellApart, and Retargeter. These companies, however, sell value-added services on top of simple access – like creative optimization, multi-channel optimization, or advanced retargeting granularity. The result is that the foundational technology of traditional DSPs is de-valued, driving margins down and making it difficult for purchasers to understand the unique selling proposition of the different players.
Google is slowly but surely integrating a lot of DSP (and retargeting, and creative optimization) technology into its advertising system. Google’s strategy seems to be a combination of top-down and bottom-up innovation that will soon meet in the middle. From the top, Google acquired a DSP – Invite Media – as well as a creative optimization company – Teracent – to provide media-savvy clients with a DSP offering within Google’s walls. From the bottom, Google changed the name of the Google Content Network to the Google Display Network (GDN), and has aggressively added a bevy of advanced targeting options into its system – including semantic targeting, placement targeting, retargeting, behavioral targeting, and category targeting.
The end result of these two strategies seems fairly obvious to me – an AdWords-like interface that enables even the least-savvy advertiser to bid on inventory available through ad exchanges. Most online advertisers are already quite familiar with the AdWords ecosystem, so I’d assume that Google’s primary bet here is on GDN becoming the default platform for access to ad exchanges, with Invite Media’s technology being integrated into AdWords and eventually disappearing as a stand-alone product.
As with all things Google, access to the exchanges, creative optimization and bidding algorithms will all be free – or at least appear free – to the advertiser. No doubt, as with GDN, Google will take a decent cut on the back end, but advertisers will only have to pay one bill to Google, rather than separate fees to DSPs, behavioral data providers, and creative optimizers. Think of this like Google Analytics versus Omniture; will some companies still want to use a super-charged, paid tool? Sure – but those tools are going to have to cater to a small part of the market (some might call them “the 1%”) and spend an awful lot of R&D to stay ahead of Google’s development.
With Google offering a seemingly free, one-stop shop that allows advertisers to buy inventory on Google, ad exchanges, mobile (AdMob), and video (YouTube), it’s hard to imagine much of a future for DSPs – at least DSPs as we now know them.
A.D. – After DSPs
So what will replace the DSP? I have two answers: nothing, and digital marketing agencies. To me, asking what will replace DSPs is sort of like asking “what will replace stock brokerage firms” in 1990. Think of the evolution of stock trading: it started as a manual, expensive process, completed by people literally on the floor of a stock exchange. It then migrated to a mostly offline, cheaper process led by discount brokerages like Charles Schwab. From there, companies like Ameritrade and eTrade introduced dirt-cheap, fully online trading. And now, for many people, you can trade stocks for free through your online bank account. Brokerage firms once charged to provide a service – executing a trade – today, to survive, they must charge on value-added services like consultation and analysis. And to be clear, that’s a much tougher business model: check out the stock price of companies like Charles Schwab or eTrade since 2000 and you’ll see what I mean.
The logical next stage for DSPs is not some “uber-DSP” but rather the combination of democratized data and access with smart, process-driven experts. If that sounds similar, it’s because that is basically the path that the SEM world has followed. Today, it’s easy for SEM experts to gain access to rich data from the search engines – whether by simply using Google’s tools (AdWords UI, AdWords Editor, Google Analytics, Google Ad Planner), or through a campaign management platform like Kenshoo, Marin, or SearchForce. The hard part is actually finding the SEM experts. If you can find such an expert (ahem, like PPC Associates, as an example. Just saying!), you can slice and dice data, test different bidding scenarios, and create sophisticated conversion funnels to create incredibly high-performing campaigns.
This is what the future holds for display buying as well. Imagine GDN, but with access to additional inventory, more advanced retargeting, better and deeper reporting, attribution modeling, and built-in creative optimization tools. Digital marketing experts will eat this stuff up. In so doing, more and more media inventory will flow through digital agencies which are already comfortable with bidding, data, and Google’s UI. This is the democratization of display media buying and it will be a huge win for Google, a win for publishers (an efficient market with more players should eventually raise CPMs), a win for advertisers, and a win for agencies. Some DSPs will likely evolve to continue to play a role in this new world order, though I suspect most won’t survive. Those that don’t will perish like so many dis-intermediated middle men before them (stock brokers, travel agents, record stores). Such is the march of progress.
– David Rodnitzky, CEO
– Questions? Comments? Email us at blog at ppcassociates dot com.