The term ad exchange refers to online market places, where advertising space is brokered and auctioned. Publishers (website and blog operators) offer advertising space for monetization. Merchants (advertisers, marketers, and ad networks) can buy this advertising space in order to place their advertising material such as banners, rich media, and video ads.
The sale is based on an automated process that calculates the price of the advertising space and inventory in real-time depending on the supply and demand. This is known as real-time bidding or real-time advertising. The principle is similar to an auction: Merchants can bid on ad space with a specific number of ad impressions. The advertising material belonging to the highest bidder is then displayed for an impression.
Ad exchanges emerged as a result of the development in the advertising market: As more and more ad networks came onto the market, the advertisement process became increasingly complicated and unclear. There were more offers than customers. Different ad networks partially sold advertising space amongst themselves when they had no one else to sell to. One hereby also spoke of the so-called ‘Run on Network’ campaigns to describe such extra space.
This led to higher commissions for every ad network, increased time intervals between the sales of an advertising space, and increased complexity in the sales process. This in turn led to the development of market places that bound together the different ad networks and, at the same time, constituted a central access point for advertisers and publishers. Through technologies, such as real-time bidding that is still used by Google in the paid search, ad exchanges became auction rooms that optimized the pricing for publishers (yield optimization) and gave advertisers access to different providers of advertising space.
An ad exchange platform is basically a collection of ad impressions. Publishers enter their inventory into the system in the form of impressions. This is referred to as a supply side platform (SSP): Here, the provider uses a system that is later connected with another subsystem known as a demand side platform (DSP). If a user visits a website that has a certain number of advertising spaces, communication is initiated between the provider (SSP) and purchaser (DSP) in order to display an appropriate advertisement. This only takes a few milliseconds, and the user does not notice anything.
Merchants or advertisers thus opt for specific impressions, which they can purchase in a next step. Technically speaking, they acquire them earlier with the specification of the different criteria that are checked by the system before the ad is displayed. To do this, they use the demand side platform. This exchanges different types of information with the supply side platform, e.g., the content category for the advertising space, user ID per impression, or other targeting and retargeting data. The DSP checks the criteria and determines which advertisement is best suited to the target group and would therefore have the highest success rate.
The DSP then submits the bids for advertisement spaces. The SSP receives these bids and determines the highest bidder. The corresponding advertisement is in turn displayed on the website visited by the user. The real-time bidding process should only take a few milliseconds in order to display the advertisement to the user as fast as possible. On average, only about 100 milliseconds elapse between the first part and last part of the communication.
Unlike ad networks, ad exchange does not deal with bundled advertising space on a variety of websites that are beyond the control of the merchant. It involves scalable values such as ad impressions or CPT (cost per thousand). Here, the merchant can opt for a specific advertising inventory. An advertising inventory refers to values that are used as a basis for the price calculation of a certain publisher. In most cases, individual impressions are used as the basis.
As a principle, ad exchange therefore increases transparency: The price of advertising spaces is directly related to the calculated [scope] of the platform in the form of impressions or similar key performance indicators (KPI). Furthermore, these values are calculated in real-time. The price for an advertising space is determined within milliseconds, whereby the stakeholders give a minimum and maximum price on the one hand and Algorithms are used for the calculation on the other. These algorithms link providers with purchasers and determine the auction price through technical queries.
Under certain conditions, the algorithms also contain targeting strategies. This allows for different approaches that have a direct impact on the possible bidding strategies. As a result, different bidding strategies can emerge depending on the definition of the target group and availability of as much data as possible about the target group.
Ad exchanges are players in real-time advertising. It’s a trend that is slowly replacing the traditional display marketing in the US. Since ad exchanges represent a certain development of ad networks, they offer publishers the highest possible yield in the monetization of blogs and websites. They are also profitable for merchants and advertisers: Thanks to the different targeting options, advertisements can be directly adapted to different target groups and the bids for the advertising spaces are optimized.
These provide companies with new advertisement options particularly when combined with different technologies such as RTB and applications from the Big Data field (e.g., data management platforms, in short DMPs). However, these complex relationships require expertise and curiosity for digital media. In Germany, this topic is still relatively young. Only a few media agencies have real-time bidding and ad exchange in their portfolio.