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All things Mike .

Programmatic Advertising

strawberries and milkProgrammatic what now?! Who-how advertising?!

I’m still a little fuzzy on the details myself, but it’s a topic I’m trying to catch up on quickly. What follows is my current, nascent understanding. (I hereby disclaim any assertion of truth, factual correctness, or entertainment value.) Programmatic advertising is the nouvelle vague of online advertising, that seeks to cut out the middleman while enriching a publisher’s ad inventory to increase margins for publishers.

Okay, some background. Online advertising traditionally works in one of two ways, both involving media and content publishers (who have empty ad space on their webpages, and are AKA sellers), who sell their ad inventory (i.e. their ad space) to advertisers (AKA buyers). This ad inventory is constantly being generated: each time a user loads a webpage, each ad placement represents a salable ad space, known as an ad impression.

The first way to capitalize on these ad impressions is through direct sales, in which a publisher staffs an in-house ad sales team that works directly with advertisers to transact sales of ad impression packages for advertisers to run their campaign(s) through. The packages can be targeted to the advertisers needs, for example, only at website visitors that are logged in and have purchased a waffle-maker from the site in the past two months. The more an advertiser can hone in on a particular marketing segment, by running highly-targeted campaigns, the more they are willing to pay for the ad inventory. It’s important to note that in this way, ad inventory is sold in advance of its actual generation: an advertiser buys a package of 10,000 impressions, and as those impressions are generated by users viewing pages on the site, the website will populate them with the advertiser’s ads.

The second way is through an ad network. An ad network is a giant middleman that buys ad inventory from publishers, standardizes it, enriches it, and then auctions it off to advertisers, algorithmically, piecemeal, in real-time. This means that publishers don’t need in-house ad sales teams pitching and managing accounts with advertisers. Instead, they can hook their website into the ad network via simple programming methods and quickly gain access to a huge market of advertisers. (Note: Even though this involves some programming, this is not what is known as programmatic advertising.)

“Piecemeal” and “real-time” mean that ad impressions are sold on an individual basis, automated at very high speed by the ad network. These transactions do not involve future inventory, like with direct ad sale packages, but instead involve ‘fresh” inventory as it is generated. (Yes, each ad you see on most websites you visit was transacted between the time you started loading the page and the moment the ad appeared!)

On the other hand, these ad networks don’t differentiate those fresh ad impressions in very many ways. This means publishers’ can’t capitalize on their ad inventory’s unique premium value.

Ad network: “Give us your fresh ad impressions. Put ‘em in the 5¢-bucket if the page it was generated on has anything to do with cheese, the 3¢-bucket if its display size is 200 pixels by 150 pixels, or the 1¢-bucket if neither.”
Publisher: “Wow, those are my choices? What about impressions generated by logged in users that bought a waffle-maker in the last two months? Advertisers have paid lots for that in the past.”
Ad network: “Pfft. Put it in the 1¢-bucket, or buck off!” [Evil laugh, as follows.]

Thousands of publishers continuously pour their ad inventory into these networks. One interesting ramification is this is that as an individual surfs between websites serviced by the same ad network, that network is able to track that user (through the magic of third-party browser cookies). While this threatens user privacy, it allows the ad network to enrich the inventory it has purchased from publishers with cross-website user attributes that the publisher alone could never know. This is valuable to advertisers, the ad network profits from it, though arguably at the cost of user privacy.

Anyway, back to that evil laugh. Because of it, so-called programmatic adversiting techniques and products have evolved. The essential idea is that publishers should be able to enhance their direct sales with their own real-time ad transacting service tailored to all the premium data attributes that are unique to their inventory. This cuts out the middleman (a significant agent of user privacy invasion), provides more targeting and value to the advertiser, and therefore increases revenue for the publisher. User behavior tracking is still involved, but it is now silo-ed within each website, which I think fits much more naturally with user expectations. These techniques, products, and services are difficult to implement but are rapidly becoming more affordable.


Allow me to illustrate. Let’s say I own a dairy farm, and I produce milk. I produce plain milk, but I also produce chocolate milk, and my family’s secret-recipe strawberry milk. Also, all my cows are rBST-free. I make money in two ways. One way is by painstakingly setting up contracts with local grocers. This requires sales, legal, billing, and delivery services, but at the same time the grocers pay a pretty penny, because they know they are getting high-quality plain, chocolate and strawberry rBST-free milk from a local farm. This is akin to content publishers using direct sales to sell targeted ad inventory at a premium; advertisers pay extra to be confident their ads will be displayed precisely to who they want to reach.

The second way I make money is by selling wholesale to a big national distributor. I truck off huge containers of my various kinds of milk. I don’t make as much profit per gallon, so it makes sense for me only if I can scale my milk production very high, and just profit on volume. One of the reasons the prices aren’t as high as when selling locally is that the distributor doesn’t differentiate between rBST-free milk and rBST-contaminated milk. They also don’t differentiate strawberry milk. (They just add it to their industrial tanks of plain milk!) All of my premium selling points are worthless to them. But because they have national reach, and I can’t sell all my milk locally (for one, I don’t have the legal and delivery resources, and two, there isn’t enough local demand), they are still a useful revenue channel. At the same time, the distributor might differentiate by region (so that consumers can buy fresher milk from a region close to them), something that is largely irrelevant to my local buyers.

(Here’s where I have to stretch the analogy just a bit.) Luckily, some smart people have come along and invented an affordable way for me to own my own national sales and distribution center! Sales are done directly to the grocery chains throughout the nation (and even directly to households) through a sophisticated website, that is customized to denote the premium rBST-free and strawberry milk that I offer. Let’s say the distribution center is manned by low-cost robots and self-driving cars. I still need to invest in some sales and other support staff, but not as much as before and with much greater return. Now I can have the best of both worlds: selling my premium products at premium rates, and reaching a national audience.


Reading about all this has opened my eyes to the dynamism of the online advertising space. What I thought was a static environment is actually a landscape of innovation and evolution. To digress a bit, another interesting aspect of online advertising I recently discovered is called ad network optimization. This is, as I understand it, when a publisher actually methodically measures the (revenue) performance of various ad networks against various ad placements and other impression attributes, and then automatically re-allocates inventory to maximize revenue. Online advertising, important privacy considerations notwithstanding, is a much more vibrant business than I’d previously thought.

One thing I will credit myself with: I’m stupid and I know it. And, if I’m gonna attempt to participate in this space, I’m gonna keep trying to learn more about where it’s going.

In the post above, I used the phrase “ad network,” though I might have meant “ad exchange.” I’m not 100% sure. My perception is that most ad purchases are bought through real-time bidding, which occurs on ad exchanges, but I seem to be reading that ad exchanges are still considered novel to a degree, and that ad networks handle most ad transactions. So, I’m not sure what the right phrase is, or what the current reality is. I.e., I’m really stupid.

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Commenting options at bottom.
Chris Forno (jekor) said:

Interesting post, and I’m hoping the technology catches on.

One thing I’d have to have before trying to sell ad-space directly to advertisers is some sort of automatic ad-safe subset verifier (for Flash/JavaScript/whatever). I don’t know how much value the ad networks really provide, but at least the better ones are expected to keep malware out of your inventory.

Now what would really be cool is some sort of automated-but-still-friendly-to-the-user micropayment system…

Mike McG said:

Very true about malware risk. User trust is fundamental to success. And there is already enough skepticism arising from the whole “create a detailed profile of each user and trade it for ad dollars” model. But the fact that this process also introduces the risk of giving unfettered access to user’s computers to third-parties raises the bar for earning user trust very high.

Putting your ad-serving into the hands of any third-party service means you trust them to not abuse/undermine the trust of your users. And therefore it’s certainly something worth a lower ROI on the part of publishers for. But it seems so difficult to determine if an ad servicer is trustworthy. I need to investigate more but it would be interesting to know if there are secondary services that can monitor websites for malware ads (periodic sampling). (One problem with that is that such audits cannot be counted toward ad buys.)

And on top of all this, is the inherently insecure nature of electronic communications. I might be willing to take the hit on revenue by disabling all but static image ads, but how can I be sure a malicious advertiser doesn’t manage to load scripts through the IMG tag. I might whitelist my advertisers, but what if their ad management account gets cracked, or the ad asset hosting service gets cracked. Or if the ad service itself is cracked. Bleah.

Ultimately, if you want to ride this new programmatic wave, I find all of the above reason to build your own solution. And I can’t imagine an open source solution appearing any time soon, given the cultural distaste for the ad model amongst hackers and the competitive-mindedness of those that are cool with the ad model. (Though I need to look more at OpenX, which I thought was just an ad network, but now I’m seeing it might have programmatic features.) I know, as a user, I’d be a little more willing to trust a website relies on an ad server that is subject to Linus’s Law.


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