The RightMedia Problem, The Microsoft Lesson, And Why OpenX Will Eventually Win
The RightMedia Problem
The advertising exchange model is very promising and great in theory. Letting publishers put their display ad inventory up for bidding by advertisers really sounds like something that can improve efficiency both on the publishers and advertisers end. In practice however, things are different.
RightMedia is probably the largest advertising exchange today. Yet, publishers still use it mostly for their remnant ad space, allocating their quality ad space for other advertisers and top tier networks. Advertisers – completely aware of this fact – prefer to spend their display budgets with established and reputed ad networks, and leave RightMedia bidding for the smaller advertisers and networks. The result is that the average CPM on the exchange is low.
It seems that the exchange still didn’t reach a critical mass that will bring the breakthrough in its performance. The only way for the exchange’s average CPM to increase is by adding more advertisers and publishers into the game. Only then will publishers allocate quality ad space to the exchange, and large advertisers and networks will come along.
How does an ad exchange grow?
The Microsoft Lesson
According to Yaron Galai, who had suggested Microsoft to offer a 200% rev-share to all publishers, growing an advertising network – and I believe rules apply here for ad exchanges as well – is by growing the publishers base:
While the advertisers are the ones paying for everything, acquiring advertisers is a secondary concern for an ad network. A distant second. The #1 key to making an ad network work is the publisher side. Even though the publishers are being paid, it’s much more difficult to win publishers than it is to win paying advertisers.
Whether or not someone at Microsoft have read Galai’s post, it seems that they had followed his advice. They realized the only way to win market share over Google is by attracting Google’s publishers – not advertisers. So the rumor about an high-paying AdSense alternative spread and many publishers were eager to join once the private beta tag is off. Few weeks later though, when Microsoft opened up pubCenter for the public, payout has dramatically sunk.
RightMedia shouldn’t be learning anything from Microsoft about publishers retention. However, with acquisition in mind, Microsoft’s experience can serve as a good lesson for RightMedia . Tempting publishers works. If RightMedia could only find a way to tempt publishers to join, it will be able to grow its publishers base and advertisers will follow.
But there’s a catch – unlike Microsoft, RightMedia can’t simply double or triple publishers payout. Being just the exchange manager, RightMedia is not involved in the money flow. In the exchange, money flows directly from advertisers to publishers and not via RightMedia as the middle man. RightMedia is not in a position to offer any financial benefits for their publishers.
That’s a problem. And not only for RightMedia, but for any ad exchange out there. How can an ad exchange tempt publishers?
Why OpenX Will Win
If an ad exchange can’t compensate their publishers with money, it may never grow. Only an ad exchange that is able to offer another type of compensation, a service or a added value perhaps, has chances to appeal to publishers. OpenX is such an exchange.
Wait a second. Isn’t OpenX an ad serving solution?
Well, it is. OpenX is an open source ad serving software that is becoming very popular. It disrupts the ad serving business by eliminating a great portion of the ad serving costs. Disrupting is great, but OpenX is a business and needs to make money on its own. Having already a big (and steadily growing) amount of publishers, with a very close affiliation to their advertising space, it was only natural for OpenX to eventually launch an ad network of some sort. Better yet, it decided to take the ad exchange path.
Though still small, I believe OpenX exchange has better chances to make it. It has a large base of publishers enjoying a free or very cheap ad serving solution, whether as an hosted solution or as a stand alone installation. Converting those publishers to participate in the exchange may be much easier for OpenX than it would be for RightMedia to find new publishers out in the cold market.
In a sense, OpenX is not an exchange that offers an added value. It’s an added value that offers an exchange. And that’s why they’ll eventually win.