What is ad inventory arbitrage? How is it different from traffic arbitrage and who benefits from it? Is it dying? And if so, what is killing the ad inventory arbitrage industry? But most importantly – how does all this influence you, the publisher.
Most industries are based on a fairly simple equation – buy cheap (labor, materials, ready product etc.) and sell high. Your profit is the margin. In economic terms, this is called arbitrage.
(Not this Arbitrage!)
The ad industry is no different. Between the advertiser and the audience there are multiple entities, each taking a percentage of the advertiser’s investment. This is called inventory arbitraging.
Ad agencies, trading desks, networks, and all sorts of “middle-men” have existed since the first editor of a publication said: “I am tired of talking to advertisers”. (Said publication may or may not have been carved on stone tablets. Technology has changed, but the principle remains.)
To put it simply:
Inventory arbitrage refers to a practice used by ad industry mediators, such as ad agencies, trading desks or networks, of buying ad space directly from publishers and selling it at a higher price to advertisers. The margin between inventory bought (from publishers) and sold (to advertisers) is how these companies generate revenue.
Stone Age vs. Tech Age
In the stone age of digital advertising, agencies would usually just charge advertisers a sum of money for a number of exposure or clicks, and show reports at the end of the month. Aside from creating very rich ad agencies, this did little for the ad market.
Publishers would get paid a lot less that what advertisers invested. Some of the traffic was artificially generated. The poor CMOs at the end of the chain usually had no idea where the clicks came from, who the audience was, and had hardly any way to measure ROI.
But they had little choice but to continue and invest in digital advertising as it outgrew traditional channels. We’ve all seen this trend on the infographics and PPTs that execs love so much.
The schemes for earning arbitrage vary, and have evolved over the years alongside advertising technology. Especially in the digital advertising market.
Today, the ad arbitrage strategies that trading desks and agencies employ depend a great deal on the understanding that publishers and advertisers have of the ad tech market, which its limited at best. Uneducated publishers earn less and unknowing advertisers pay more for inferior exposure and performance. The traffic brokers pocket the money.
Google and Facebook are giving publisher coalitions and agencies a hard time and taking over the digital advertising market. With real time bidding, header bidding, the plague of ad-blocking and too high a percentage of fake traffic? The market has just gotten more complicated for everyone.
More middle-men have squeezed their way into the arbitrage equation, and it’s no longer just agencies and trading desks. It’s complex algorithms sitting on RTB exchanges, and reselling repackaged traffic across exchanges, often by taking advantage of network latency issues.
At this point, you’re probably developing a thorough dislike of these middle-men. If they’re getting a piece of the cake, this means less cake for you, as a publisher. But the very existence of middlemen implies they have a role to play in the digital ad market.
The most important role arbitrageurs have in the ad market is reach and exposure. It’s better to share the cake than have none at all. With the help of arbitrage agencies, advertisers can (for a fee, of course) reach more publications. And publishers can fill ad spaces that would otherwise go unmonetized.
The consolidation of the ad market and the improvement in communication between exchanges, DSPs and SSPs, forced arbitrageurs to evolve. To continue charging advertisers a premium for each view or click, they had to create added value for their clients. This evolution brought in another variable into the arbitrage equation – data.
Agencies began to collect user data and develop optimization algorithms. For example, using machine learning and user profiling, agencies could purchase inventory at CPM, but offer the advertiser performance-based pricing (CPA). They call it “strategic media buying”, and advertisers often prefer these types of deals as they get a much better picture of their digital advertising ROI.
Despite the above mentioned contribution arbitrageurs have to the ad market, they are often seen as vultures, preying on advertising budgets while contributing little to the ecosystem. Trading in inventory without adding value is often seen as plain exploitation of the system.
For example, an inventory trader can purchase banner placement on a publication (or several) at CPM. He can then sell this placement to video demand channels at a much higher cost in CPV. In-banner video is just one of the techniques arbitrage traders use.
Another major issue with ad inventory arbitrage is that views get repackaged, re-purposed and resold once or more before the advertiser creative pops up in an ad spot. The more times the traffic “cycles” through the system, the harder it is to tell its source.
There’s no lack of black-hat traffic generation techniques, many of them using clickbots, botnets and other naughty things to get you banned on AdSense and other networks. When mixed in with legitimate ad views, this traffic poisons the pool, creating low performance for advertisers and a loss of trust in the automated ad trading market.
So it’s no surprise exchanges, DSPs and ad networks like AppNexus and Facebook ban all inventory arbitrage using their platforms. But as long as there’s a need for them, the middle-men will still be there, exploiting the margins.
And the Publisher
But what does all this mean for you, the publisher? That you too need to evolve.
Offering your inventory to a select DSP or even sticking to direct sales only will eliminate the middlemen and their profit. But it will also limit the demand sources for your inventory, preventing you from getting the highest possible bid for every placement.
On the other hand, offering your unsold inventory on the open RTB market can be a scary endeavor, opening your inventory to reselling and loss of value.
End of the day, it’s all about optimizing your ad yield to maximize revenue while keeping your monetization channels safe from penalties and maintaining a positive user experience. Easy to say (actually not the easy) and harder to implement.
There are many ways to optimize ad yield but the tactic that will provide you the highest yield and is also very safe is optimizing your ad layouts for increased ad revenue. Starting with ad layout optimization should become a best practice for online publishers.
Why? Because, when using a trusted partner like AdNgin, it is safer than introducing new and unknown demand sources or creating complex waterfalls in ad servers that start out manageable but soon turn into a Frankestein type creation that you lose control over. You can start by clicking the button at the top right corner.
Eyal Katz is head of marketing at Pangeo. Eyal also likes long walks on the beach at sunset, having a cocktail with friends, and listening to Swedish Death Metal