Underscore Marketing's president shows how bid-driven exchanges for online inventory are more relevant today than they've ever been.

If given the choice, most online media planners would prefer to allocate every dollar of their online budget during the planning process, rather than have a portion of their ad budget set aside for opportunities that are anything less than ironclad. In today's marketplace, defined by accelerated demand for quality ad inventory, advertisers and agencies alike are more open to the idea of spending money on opportunities that arise opportunistically.

There are tremendous efficiencies to be gained by leveraging short-term fluctuations in the supply and demand of quality inventory. Some of the best opportunities cannot be planned for weeks or months in advance of a media flight. Exchanges are among the tools that help buyers take advantage of efficiencies and new opportunities.

"Wait," you might have just muttered to yourself. "Did Hespos just say 'exchanges' and 'help buyers' in the same sentence?"

Yes, I did. In the past, I've been somewhat dismissive of ad exchanges, wondering aloud what incremental value some of the older exchange models would be able to bring to the table. Today, however, we're playing a much different game than we did in the days of Flycast and AdAuction.com. A perfect storm is brewing, gathering strength from both the demand-driven online ad marketplace and from new tweaks that have been made to the online auction model to make it more advertiser-friendly. If players like Right Media and DoubleClick are on the mark, more robust ad budgets could be carried to publishers on the winds of this storm. (Full disclosure: Underscore Marketing is a participant in the launch of DoubleClick's new exchange.)

Why now?
For many high-demand advertising categories, any syndicated research run is going to reveal advertising opportunities with a handful of portals and larger content sites. This is nothing new. We know the old 80/20 rule and how it applies to media spending with the larger players in a given category. Demand in the marketplace has driven CPMs up and availability down. If you're looking for action-based inventory like CPC or CPL, you may be out of luck entirely.

The temptation to buy around larger sites with a roll-up of long tail inventory is greater than it has ever been. This usually leads buyers in one of two directions. They either buy long tail inventory by dealing with a much larger number of small sites, or they look to ad networks to assist them in that regard.

Ad networks can certainly be helpful, and I am still a huge advocate of their use. However, ad networks still introduce inefficiency into online ad buys. Most of those inefficiencies are addressed by increased transparency. 

Allow me to explain…
Based on my experience with the ad network model and seeing how they run first-hand, I know that between 30 and 60 percent of the cost of a network buy ends up in the pockets of the ad network. We know that folks working at ad networks need to make a living, but the introduction of this kind of markup represents a weakness in the network model.

There's also the notion of transparency with respect to where advertising eventually runs, and what other opportunities exist elsewhere that can be compared on an apples-to-apples basis with opportunities we may know about at the time.

Truth be told, with many networks, buyers simply don't have enough visibility into markups, availability and the mechanics of execution on the buy to make it sufficiently attractive to advertisers.

But what if we had the tools to be able to set prices with smaller sites quickly and easily? The process of buying around larger content sites and portals becomes a lot more efficient. So does the notion of supplementing the buys we place with the big boys with other inventory that tends to duplicate less than ad space bought across a number of larger players. 

Exchanges bring these abilities to ad buyers.

The need for quality inventory trumps all
It's this need for quality inventory bought from publishers other than the usual suspects that will drive the success of auction marketplaces. I think online advertisers and their agencies will more readily adjust to setting aside opportunistic budgets for auction-based bidding than they will to paying premiums for inventory that is subject to constant demand from competitors both direct and indirect.

I'm not talking about the blind, nickel-per-click inventory that dirt merchants peddle across the industry, either. Exchanges can bring opportunities on tier one and tier two sites that arise from short-term, unforeseeable situations like traffic spikes, cancellations and optimization by existing advertisers.

With exchanges, the publisher wins as well as the advertiser, in part due to the ability to fill these opportunities with targeted campaigns rather than relegating the inventory to ROS advertisers.

At this point, I don't see the exchange model as an immediate threat to the network model. However, I do see exchanges bringing increased transparency and efficiency to the table.

I think that's something that advertisers will welcome.

Tom Hespos is the president of Underscore Marketing and blogs at Hespos.com. Read full bio.