The Fat Middle (and Other Programmatic Direct Myths)

TheFatMiddleI recently sat through some great presentations on “programmatic direct” media buying at the recent Tech for Direct event in New York. With almost 70% of digital display dollars flowing through the negotiated (RFP) market, everyone wants to be in the game. One of the presenters, John Ramey of iSocket talked about what has happened to the advertising yield curve for digital display. This curve starts at the upper left corner with premium inventory capturing the highest CPMs, and is supposed to flow gently downward on the x-axis, towards the lowest value of inventory, ending on the lower right corner. A classic marketplace yield curve.  In this world, ESPN can charge $20 CPMs for their baseball section, sites like Deadspin in the mid-tail can charge $7, and the networks and exchanges aggregating hundreds of sports blogs in the long tail can charge $1. Nice and fair, and rational.

This is not what has happened, though.

As Ramey correctly points out, we have a yield cliff now. This is world in which there are two types of inventory: The super-premium, which is hand sold directly for double-digit CPMs; and the remnant, which is sold via RTB on exchanges or surviving ad networks, often for pennies. In this world of the Haves and Have-Nots, there is no middle class of inventory—even though one could argue that $7 inventory on Deadspin might actually outperform its upscale cousin, ESPN. This inventory disparity we have created in the digital advertising industry has nothing to do with supply and demand, but everything to do with the process by which we transact.

Premium mid-tail buying is a great idea. Back in 2009, marketplace platforms like TRAFFIQ were bringing this innovation to the space, and enabling marketers to cherry pick and aggregate premium quality sites that could offer friendly CPMs and URL-level transparency. It’s not a new concept. In fact, I think premium mid tail buying is the canary in the coalmine for programmatic direct; when today’s technology can make it easy to put together a large array of guaranteed buys, and enable fast and easy optimization, then we will have succeeded. Here what was missing in 2009, and what we need to succeed today:

  • A Centralized Directory:  You can’t buy stuff without knowing what’s available and how much it costs. Other media channels like direct mail have published prices for mailing lists, right down to audience targeting. You want to reach people who have bought something from the Cabela’s catalog in the last six months, and restrict the mailing to men only? No problem. You can find out what it costs, and who sells it. The digital display market needs to be organized in a directory, down to the placement level. You shouldn’t have to wait for an e-mail back from an RFP to find out what known inventory costs. That work is being done now, but has a lot more work to go through before it is comprehensive.
  • An Extensible Platform: Today’s API-driven technology makes it easy to enable buying directly into publishers’ inventory. A link into DFP means buyers can discover availability and start serving ads with a few button clicks. The problem is that agencies want a Single System to Rule Them All. So far, agencies have been stuck with installed, legacy systems that have more to do with billing and reconciliation than media planning and buying. Agencies want new, web-based ways to discover and buy great inventory, but they also want a system that plugs into their existing tools. They are not going to log into another buying system if they don’t have to. A system that can enable premium mid-tail buying at scale either has to integrate directly into existing media management systems—or replace them. Right now, there are a lot of tech companies at work retrofitting old technology or creating new technology that promises to make this a 2014 reality. It’s a horse race, and agencies are starting to place their bets. The winners are the one with the most extensible platforms that are good at integration, and they will be richly rewarded. The rest will fail, or become a point solution in someone else’s platform.
  • The Right Model: This is may be the most important factor in determining programmatic direct success. If you are charging anywhere north of 10% (and some would argue a LOT less than that) to help media buyers aggregate inventory, then you are not a “programmatic direct” technology company. You are an ad network, or media rep firm. The reason for industry consolidation is because disintermediation through technology has its own yield curve: The disruption that occurs always benefits the middle layer first, but markets always rationalize later. Mike Leo, former Operative CEO, told me about how another industry solved a similar problem that was occurring in the media business, where ad agencies were starting to rebel against specialized media buyers who in the middle of the transaction, with opaque pricing methodologies. The year was 1968, and agencies teamed up and decided that a standard rate of 15% was all they were willing to pay for television buying services (and then they eventually bought all of the media buying companies, but that’s another story). Anyway, markets always rationalize themselves, and right now even 15% feels like a big vigorish for agencies with ever-shrinking margins on their media practice.
  • Standards: It’s 2013, and we are still faxing IOs. This is largely because there are no accepted standards—and no protocol—for electronic orders. This is actually not a hard problem to solve, but getting adoption from buyers and sellers is what’s needed. Right now, a few companies are working with groups like the IAB to get real traction with standards, and we need that to succeed to make programmatic direct buying a scalable reality. Electronic orders suck a lot of the viscosity out of the deal pipeline, and start to let the machines do the grunt work of order processing, rather than a $50,000 junior media planner.

The good news is that there has been a tremendous amount of progress in 2013 on all of these initiatives. The promise of true programmatic direct buying is closer than ever, and there is enough real development behind the hype to make these dreams of efficient media buying a reality in the near future. In that future, it just may be possible for a buyer to use demand-side technology to aggregate the “fat middle” of premium mid tail publishers, and start to reward the middle class of inventory owners who are currently getting paid beer prices for champagne content.

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Complexity is the Digital Agency’s Best Friend

Agencies are afraid of change, but change always happens. Is your manual workflow a "red stapler?"

Agencies are afraid of change, but change always happens. Is your manual workflow a “red stapler?”

But Solving the Right Problems are the Key to the Future

I once heard Terence Kawaja remark that “complexity is the agency’s best friend.” It’s hard to argue with that. Early digital agencies were necessary because doing things like running e-mail campaigns, building websites, and buying banner ads were really complicated. You needed nerdy guys who knew how to write HTML and understood what “Atlas” did. Companies like Operative grew admirable services businesses that took advantage of the fact that trafficking banner ads really sucked, and large publishers couldn’t be bothered to build those capabilities internally. The early days were great times for digital agencies. They were solving real problems.

Fast forward 13 years. Digital agencies are still thriving, mostly by unpacking other types of complexity. “Social media experts” were created to consult marketers on the new social marketing channel, “trading desks” launched to leverage the explosion of incomprehensible RTB systems, and terms like “paid, owned, and earned” were coined to complexify digital options. It’s hard being a marketer. So much easier to hand the digital keys over to an agency, and have them figure it all out.

Some of that complexity is dying, though.

Have you ever done any advertising on Google? It’s not that hard. You can get pretty good at search engine marketing quickly, and it doesn’t take anything more than common sense, an internet connection, and a credit card to start. Facebook advertising? Also dead easy. Facebook’s self-service platform is so intuitive that even the most hopeless Luddite can target to levels of granularity so minute that you can use it to reach a single individual. Today’s platforms leverage data and offer great user interfaces and user experience mechanisms to make the complex simple.

This has created the OpenTable effect. Remember when you had to call 8 different restaurants to get a Valentine’s Day reservation? What a pain in the ass. I used to always get to it late, and usually spend a few hours getting rejected before finding a table somewhere. Today, I log into OpenTable, type in “11743” and see all the available 8:30 reservations for two in Huntington. A few clicks, and I am locked in. Would I ever go back to doing it the old way? Sure, why not? Call my beeper if you need me. Please “911” me if it’s important.

So, with all of this innovation making the complex simple, and all of these platforms democratizing access to advertising inventory, analytics, and reporting, why are digital agencies still making a living off of the lowly banner ad? Is there a good business left in planning and buying digital display media?

Programmatic RTB is coming on strong, now representing the way almost a quarter of banner inventory is purchased. That’s a good thing. Platforms like Rubicon Project and Appnexus are making it easy to build great businesses on top of their complicated infrastructure. Marketers can hire an agency to trade for them, or maybe just build their own little team of smart people who can leverage technology. That seems to be happening more and more, making managing RTB either a specialist’s game, or not an option for the independent agency.

Really complicated, multi-channel, tentpole campaigns and sponsorships can never be automated. They represent about 5% of overall display spend, and that’s really where a digital agency’s firepower can be leveraged: the intersection of creativity and technology. That sector of digital involves a lot of what’s being called “native” today. Working with content owners and marketers to build great, branded experiences across the Web is where the smartest agencies should be right now.

How about the rest of the money spend on digital display—the 70% of money that goes through the transactional RFP space? A lot of agencies are still making their money buying reserved media, trafficking ad tags, and doing the dreaded billing and reconciliation. Marketers who pay on a cost-plus basis are starting to wonder whether spending money to have expensive agency personnel create and compare spreadsheets all day long is a good use of their money. Agencies that do not get paid for such work are seeing their margins shrink considerably, as they grind away money paying for low value tasks like ad operations. Clients don’t care how long it took you to get the click tag working on their 728×90. Just saying.

A lot of this viscosity within the guaranteed space is being solved by great “programmatic direct” technologies. Right now, you can use web-based systems to plan complex campaigns without using Excel or e-mail, and you can leverage web-based tools to buy premium inventory directly from great publishers—the kind of stuff not found inside RTB systems. Protocols and standards are being written that will, in a few short months, make the electronic IO a reality. Systems are being built with APIs that can enable trafficking to go away completely. Yes, you heard me. People should not have to ever touch JavaScript tags. That’s work for machines.

This future (“programmatic direct”) has been coming for a long time, but it is still met with resistance by agencies, some of whom are continue to benefit from complexity—and others who are (rightfully) scared of change and what it means for their business. Looking at legacy workflow systems, you wonder why they are so hesitant to leave them, but the cost of switching to new systems is high in terms of emotion and workplace disruption—and previous attempts to “simplify” agencies’ lives didn’t really work out that way.

So, how can digital agencies start to change, and embrace the new world of programmatic direct tools, so they can turn their energy to strategy and client care, rather than be an “expert” in processes that will eventually die?

Part of that is learning to recognize if you have a “wizard” on staff. The Wizard is the guy that has truly embraced complexity within the agency. He is the “systems guy” who knows how to pull complicated reports out of legacy workflow platforms. He probably knows who to write the occasional SQL query, and he knows where all the bodies (spreadsheets) are buried. When a web-based technology salesperson comes calling on the agency, and shows the CEO or VP of Media what web-based programmatic direct buying looks like, they are showing an agency a world where a lot of complexity is suddenly made simple. That demo shows the future of digital media buying: a directory-driven, centralized, web-based method of planning, buying, and serving inventory. Just like search! C-level agency executives and media people want it. They want their employees focused on strategy and analytics…not ad trafficking. But to get it, they invariably tell you to go see the Wizard. “Fred is our ‘systems guy.’ He’ll know whether this can work for us from a technical standpoint.”

That’s when innovation dies. Fred, the Wizard of the legacy systems, will shut down any innovation that comes his way. Complexity is Fred’s best friend. When you are the only guy that can pull a SQL query from your data warehouse, or reconcile numbers between SAP and your agency’s order management system, then you are a God. Fred is God…and he doesn’t want a downgrade. Complexity is the reason great digital agencies were built, and continue to thrive. Tomorrow’s big challenges are going to come from complexities in cross-channel delivery and attribution, and keeping up with new platforms that are delivering amazing native marketing opportunities, not being the next at reconciling ad delivery numbers from servers.

When innovation comes knocking on your door, don’t let Fred answer it.

[This post was originally published in AdExchanger on 6.3.13]