If an advertiser needs an efficient sales experience on a small number of sites, then exchanges can offer an effective solution.

I appreciated Tom Hespos' article "Ad Exchanges…Is Now the Time?" because it's certainly a topic that is overdue for more public debate and education. Every ad placement model has its place in the online advertising ecosystem and Hespos raises some good points about the potential efficiencies and opportunistic buying afforded by exchanges.

So, is now the time for ad exchanges?

Yes. However, determining if an ad exchange is right for your needs requires a deeper understanding of how they work and the trade-offs between exchanges and traditional ad networks.

Similarities to networks
In my opinion, exchanges are simply a variation of the more mature ad network model: in both models, there are buyers and sellers of ad inventory. 

Both models offer varying degrees of transparency.

While top networks and exchanges allow targeting based on content verticals -- customized sub-networks, individual sites, or specific users based on content, audience or behavioral requirements -- they both include sites that may not be able to be disclosed to preserve relationships with key partners and to protect publisher rate cards through blind placements.

Most ad networks fundamentally operate under the principles of the auction model in that the highest paying ads get priority in the serving queue. Advertisers purchase inventory based on their objectives and negotiate pricing that will meet their ROI metrics or brand results based on content and/or audience reach and frequency. Performance and targeting weigh into the equation, but the best networks serve based on eCPM. 

Any quality network allows the ability for a publisher to set the floor rate for their inventory, so both models help maximize yield.

Differences from networks
Networks provide an extremely high level of service to both publisher and advertiser clients through the expertise and knowledge of the inventory they represent. Strategic account management minimizes wasted budgets by getting ideal performance more effectively. A managed network campaign will have the ideal mix of frequency capping, targeting and optimization in place from day one based on the experience of the people responsible for your budget. In an exchange, you have to go through a learning process for each deal you place.

A true exchange needs to be 100 percent impartial to both buyers and sellers. It should operate as an open marketplace with primarily operational support. If they are also buying or selling within that exchange, can you be sure they will facilitate the best transaction for both parties? Is there information available to them that is not available to other buyers and sellers?

Anatomy of an ad exchange
Within an exchange, advertisers can select a specific site and set the rate they are willing to pay for that inventory. This helps to automate the sales cycle and maintain brand integrity for the buyer. However, premium inventory will still garner a relative pricing premium, and in most cases publishers don’t need an exchange to help sell it. The top sites that may participate in an exchange will set rates that maintain the value of their rate card and do not undermine their own sales efforts. The selling of premium inventory at discounted pricing occurs mostly on a blind basis.

While automation can make buying specific inventory a more streamlined process, the advertiser may not get the scale or inventory guarantee that a network can provide through strategic inventory deals and their aggregate buying power. A network has the flexibility to manage a campaign across many placements to maintain performance and volume. A network also has the same flexibility to provide sites with representation to advertisers through traditional media plans and dedicated account management.

As a publisher, both models can help fill unsold inventory. However, a network can offer representation services to champion the true value of a property. An exchange will not offer such customized solutions, resulting in lower eCPMs because a publisher will only earn what a buyer is willing to pay for it. A publisher in high demand could do well. However, if a site and its users’ value is unknown by the buyer, it will fetch only minimum bids. 

One factor minimizing transparency is the fact that most ad exchanges are heavily supported by the participation of ad networks, rep firms and brokers, creating another intermediary that causes advertisers to pay more and publishers to earn less. This additional layer of separation between the advertiser and the site serving the ad creates less transparency, not more. The exchange may offer a degree of qualifying criteria for their network and broker participants, but will that third party maintain the standards advertisers require?

While most networks typically serve the best paying ads first, they do not offer the option for advertisers to pay +1 of the highest bid offered by an exchange. Although more labor intensive and arguably not scalable, this does provide advertisers with a potentially lower cost solution on a per-placement basis.

Opportunistic but less efficient
On a site-by-site basis, an exchange may make sense for advertisers and buyers looking for some discount on rates for premium inventory and who prefer a self-service purchasing platform. However, advertisers who have a large budget and demand the expertise and level of service required to meet serious campaign goals will run into difficulty, especially if they wish to achieve performance with optimization on a massive scale. If an advertiser needs an efficient sales experience on a small number of sites and has the time to manage the process, then exchanges may offer an effective solution.

Advertisers and publishers expect their partners to perform. Exchanges enable clients to help themselves, while networks are equipped to provide a higher level of service and scale. And while the time may have come for exchanges to find their place in the market and to provide value where they can, I don’t expect them to become an optimal solution for most advertisers or publishers anytime soon.

Chad Peplinski is vice president, media development for ValueClick Media. Read full bio.