Why Real Time Bidding?
Traditional display advertising has become inefficient. Publishers can’t get good fill rates and a large part of their impressions (inventory) go unsold. Similarly, there is no method of valuing the user to which the banner is being displayed. Generally, a site carries a fixed CPM, irrespective of the quality and profile of each individual user, accessing that site. Similarly, the Advertisers lose by not generating a good ROI on their display marketing budgets primarily because the impressions are not targeted and majority of the impressions are delivered to visitors who do not match the target profile of the advertiser. Again, there is no way for the advertiser to assess and value the impression of the advertisement, on the basis of the relevance of the visitor. The Solution? RTB.
Real Time Bidding (RTB) represents the process of valuing and bidding online for an ad impression in real time. The process takes place online, via the online media marketplaces, where exchanges are made between the seller- an online publisher- and the buyer, the advertiser. A popular analogy underlines the similitude between the media marketplace and the stock market: in the stock market shares become available and buyers have to compete for them, with the stock being sold to the highest bidder. In a similar manner, in online media exchange, an impression becomes available for sale and the advertisers have to bid for it; the advertising space goes to the highest bidder and the process is restarted.
Although RTB as a form of advertising has only become available in the second half of 2009, it has been rapidly capturing market share from other forms of advertising and has been steadily increasing ad spending budgets, as it has proved to be more effective than the traditional methods of machine based ad inventory trading. The regions that have been at the forefront of the development of the RTB are the United States, Western Europe and Japan.
Programmatic trading, the technology behind the RTB has been around since the beginning of the 21st century when the first advertising exchanges were launched. Programmatic buying represent the online display advertising that is gathered, inspected and optimized through side software interfaces and algorithms. However, the RTB surpasses the traditional forms of advertising, whereas the parties involved in the traditional models trade bulks of inventory at fixed prices. On the other hand, in RTB the buyers and sellers exchange display advertising inventory on the platform impression by impression, as they become available on the publisher’s website. This allows publishers and advertisers to adjust their “bids and asks” as the market conditions fluctuate and also allows them to adjust to the real time feedback received from the market regarding the efficacy of a campaign. The inventory that is traded with the help of Real Time Bidding complemented by user data conducts to improved ad targeting and a greater efficiency of an advertising campaign.
The innovation brought along by these new media exchanges consists of the fact that instead of paying in advance for advertising space, the advertisers have to bid for each ad impression in real time, which frees up resources for the advertisers and allows them to make better use of the available resources. Also, the advertisers can decide on which impressions to bid, one step at a time. The real time bidding platforms gather information about users with the help of cookies. The data provided by the cookies is usually behavioral and demographic data that provides insights about the end customer and thus helps the advertiser choose the right targets for the advertisements.
Similar to the stock markets, in the media exchanges there are typically 3 types of parties involved:
- Buyers/demand side: these are the advertisers who place bids for the ads
- Sellers/ supply side: the websites that make the impression available
- Online real time ad exchanges: represented by the real time marketplace
Buyers use Demand Side Platforms (DSPs), which grants them direct RTB access to multiple sources of inventory. DSPs usually simplify the ad operations with applications that simplify the workflow and reporting. The end products, impressions are then targeted at agencies and large advertisers. The technology behind an ad marketplace can also provide the suitable architecture for a DSP, which means that there are synergies that make it possible for a player to sustain both activities.
Publishers on the other hand provide Supply Side Platforms (SSP). In order to increase ad revenue, large publishers often incorporate yield management techniques. Therefore, publishers need to manage multiple networks. In order to increase the value of the publisher’s inventory by being on target, the SSP makes use of the data generated from the impression level bidding. So, when an impression becomes available, information is sent to multiple networks via the Supply side platform and these networks in turn send the information to multiple agencies and advertisers. The Advertiser which comes up with highest impression, gets the ad impression. Remember, all this happens in microseconds. Moreover, applications to manage ad operations are also built-in into these solutions.
The process starts as soon as a user clicks on a link to a web page. Three different types of details regarding the impression are sent to the platform: the page environment (ad location, size, clutter), the website (URL, contextual category) and the user (behavioral & demographic data such as browsing history, time zone, location). This generates an ad request.
In the second part of the process, a bid request is sent from the media exchange to the advertisers. Afterwards, the system of the advertiser values the impression. If there is positive feedback and the impression is highly valued, the system places a bid on the auction. In the last stage of the process the bids from multiple advertisers, are evaluated and the highest bidder gets the impression, being able to place his creative in it.
When using RTB, the advertiser’s network can review the pre-filtered inventory in order to determine and place bids. Once the advertising bidder is finalized, the process takes place as follows:
- The advertiser sets up a campaign with the desired criteria.
- The Ad Exchange transmits the ad call parameters to the advertising system.
- The ad system analyzes the ad in real time, evaluates it with regards to its own criteria and makes a decision whether to bid on it or not and the price for the bid.
In order to be able to better understand the process of real time bidding, we will illustrate it with a day-to-day example. Let us consider a user who spends a lot of time on fashion websites, checking the newest designer collections and shopping for clothes. While surfing, the user arrives on a website that uses RTB ads. Meanwhile, a fashion company and a luxury cosmetics company have both signaled interest in these type of users. The system recognizes the compatibility between the user’s profile and the requests of the advertisers and they both bid on the impression. The advertiser that places the highest bid wins and he gets to display the ad to the website visitor.
The entire process happens in a split second, with advertisers setting budgets and bids for the impressions, which means that they do not actively bid on each individual impression. Sometimes the criterion that determines the bidding process is very intricate, taking into consideration anything from the behavioral profile of the user to the conversion data.
The Bidder Protocol
The Real Time Bidder protocol is the following:
- Handling the request: The publisher sends a call to the advertiser’s bidding application that describes the characteristics of the impression set for auction. In order to be able to process the request, the advertiser needs to implement a system (generally handled by the SSP) that is able to interpret the publisher’s call. After sending the request for a bid, the publisher will wait for a certain pre-established period of time for a response. In case of no feedback from some of the advertisers, the exchange will continue the auction using only the bids that have been received.
- Building the response: The advertising agency’s application sends a response to the publisher containing all the details and descriptions of the bid, such as the HTML snippet for the associated creative. Alternatively, the advertiser’s application can also send macros in the HTML snippet that the publisher needs to replace with the right values used for customizing the way in which the creative is rendered. If the advertiser’s application does not send the macros, the customization is simply made in the HTML snippet. In order to generate the response, the advertiser needs to implement a system that is able to create and return the response (generally handled by the DSP).
- Testing and releasing the application: Once the advertiser’s application is complete, it needs to be tested. Once all the relevant tests are passed, the application can be released.
Real time bidding presents a number of advantages when compared to the more traditional forms of display advertising. The RTB integrates, mechanizes and improves a value chain that has been disjunct, manual and uneconomical. Hence, it eases the process of running a campaign for both publishers and advertisers, accelerating the process and making it less labor intensive, thus allowing for greater efficiency of the ads. This enhancement in efficiency and speed improves the return on investment for both parties involved in the advertising process.
The traditional forms of advertising rely on buying very large number of (not very targeted) impressions. Therefore, impressions coming from different websites are bundled together and priced to the same CPM (cost per mille). Hence, the prices that the advertisers have to pay for the impressions are subject to negotiation and the role of the market forces in pricing becomes marginal. As a rule of thumb, the process of purchasing traditional forms of advertising is characterized by a lack of transparency. Moreover, this lack of transparency also affects the reporting process for where the Impressions were actually displayed on the site. In real time bidding, the publishers and the advertisers interact directly on the online media exchanges. Hence, there is direct interaction between the supply and demand forces which determine the prices of the impressions directly in the free market, thus completely removing the negative impact of negotiation and lack of transparency and enabling the market forces to be the only drivers of the price, which benefits both – The Advertisers (they are protected from be over charged) and the Publishers (who realize the true potential for their inventory). Moreover, the ability to auction for individual impressions leads to a fragmentation of the market, leading to equilibrium prices that benefits both the publishers and the advertisers.
Another advantage presented by real time bidding is that it enables advertisers to channel their advertising budgets on the impressions that target their core markets directly. By reducing spending on advertising which is not directed at the target demographics, advertisers free up resources that can be used in order to place premium bids on those ads that cater to the target audience, which in turn offer better value by increasing revenues and offering a higher conversion rate. Also, the improved transparency offered by the RTB system compared to the more traditional forms of advertising allows advertisers to control exactly the websites on which their ads are displayed, thus insuring brand safety. This helped increase the average CTR for the display advertising industry which has been otherwise declining since more than a decade.
In a nutshell, for the supply side, RTB increases the rates at which ads are sold, by increasing the effective cost-per-mille, because the advertising is better targeted and more effective. Studies show that publishers that use RTB have managed to get an increase in their ad ad prices by 15-300%, with a median growth rate of 100%. Another benefit for the publishers is that trading inventory becomes cheaper, as there is less human labor needed to support the trading activity. Although, part of this cost advantage derived from less human labor is counterbalanced by the high cost of the advanced technology needed by the RTB. However, this cost is expected to decrease in the future, further increasing the profitability for the publishers.
For the demand side, the ad agencies, the biggest benefit is that they get access to more effective inventory. Therefore, even though the effective cost-per-mille can be higher for Real Time Bidding than for other methods of trading, Real Time Bidding campaigns can generate a higher Return On Advertising Spending, increasing profitability for the advertising agencies. Studies have shown that ad effectiveness has improved by 20% to 150%, depending on the campaign and the key performance indicator used. Using dynamic ads, which are customized in real time to specific users, can bring further improvements to the campaign ROI.
Challenges and Opportunities for RTB adoption
As mentioned before, one of the biggest advantages offered by RTB is improving the display ad value chain that has been mainly manual so far through automation and integration. This eases the process of setting up and running a campaign for both agencies and publishers, as it makes the process less labor intensive and error prone, improving overall profitability for both publishers and agencies/advertisers.
In its development, RTB had to overcome a number of challenges, some of which it even faces today.
- Adoption by publishers: The first challenge is represented by the adoption by the publishers, although not a key issue, at the moment, as it is already used by a large number of publishers. In order for RTB to be able to grow further, in terms of market share and become a standard in advertising, publishers need to make available large amounts of inventory. When adopting a certain form of advertising, publishers need to take into consideration several aspects, among which we will consider yield, data privacy and cannibalization.
- Yield is a measure of the revenue realized by publishers with a certain amount of inventory. In order for publishers to adopt the RTB process, the yield generated must be higher than for traditional forms of advertising. Given the higher eCPM realized by RTB compared to the traditional forms of advertising, yield as a measure of performance seems to favor the adoption of RTB, as has been witnessed through the success registered by the RTB among publishers.
- Data leakage is one of the concerns surrounding RTB. Data leakage can happen whenever there is potentially unwanted outflow of information regarding the user through the RTB process. Advertisers buy impressions that target an audience with specific demographic and behavioral characteristics. After the click, the advertiser can also place their own tracking cookies on the user’s computer, running a separate campaign using less expensive inventory.
- Cannibalization is another concern for the publishers regarding RTB. Cannibalization can be defined as the threat that publishers make available too much inventory through ad exchanges. This oversupply of inventory can negatively affect pricing, as publishers lose control over the pricing process. These lower prices would in turn compete with the inventory sold directly by publishers, negatively impacting all the revenue streams of the publishers. However, this situation can be avoided as long as ad exchanges and supplier side platforms offer publishers sufficient levels of price control.
- Market fragmentation is a direct consequence of the proliferation of platforms. The threat with market fragmentation is that it might reduce the volume and the number of bidders, decreasing demand and therefore revenue and yield. However, this issue has been addressed in 2012 by DSPs and SSPs in collaboration with the Interactive Advertising Bureau (IAB), who published a new version of the OpenRTB API specification.
- Brand safety is a common concern for advertising agencies and publishers. On the one hand, publishers need to control the advertisements and the advertisers featured on their websites so as to not reduce the brand value with low quality advertisements or the ones featuring inappropriate content. On the other hand, advertisers need to insure their customers that their advertisements are not displayed on a portion of the website that would make it go unnoticed by the user or among several other ads, decreasing the likelihood that the end user would click on it. Once again, this issue can be addressed by the platforms that three parties involved in RTB use, by creating block lists for certain types of content and ads.
- Technological challenges: In order to have functioning RTB systems, it is crucial to have architecture that is able to cope with the demands of having a real time auction, gathering large amounts of user data and ensuring ad serving. Integrating the different RTB platforms into one system is not trivial, as it can be easily hindered by the slow available public infrastructure. In order to overcome this obstacle and upgrade to the technology necessary to sustain RTB advertising, sufficient financial incentives need to be available.
- Brand campaigns: One of the important concerns raised by the publishers is that RTB trading works better with Direct Response campaigns than with brand campaigns. RTB trading has improved the advertising yield, but premium inventory is bought to support brand campaigns. In this case, the measurement of the advertising performance is more difficult. Advertising platforms cannot measure qualitative performance indicators such as brand awareness, brand appreciation, purchase intent or long term sales. Measuring these key performance indicators seems to be a problem for the supply side platforms, although some suppliers have started addressing the issue by undertaking surveys to measure the impact of the brand campaigns.
Conditions for the successful growth of RTB advertising
In order for RTB to be able to expand, there are a few elements that both publishers and advertisers need to take into consideration:
- Setting up the right partnerships: This is a crucial element in the growth of the RTB. Both parties involved in the RTB-the seller and the buyer- need to meet the minimum technical requirements for data safety, so that brand control does not become a problem for any of them. Moreover, both parties are subject to regular auditing of the data that is collected versus the amount of money spent on advertising.
- The publishers must control the data that is transferred: Publishers are owners of the data and they need to be able to select which data is transferred to the advertisers, in order to be able to prevent data leakage. There are situations in which advertisers will try to collect more data than needed. In order to protect itself and to ensure development of the RTB, which benefits both the advertisers and the publishers, the supply side should have a way of preserving their data. There are a number of ways to attain this: publishers must have total transparency about what data that is being transferred to the bidders and publishers must decide when advertisers go beyond what would be considered “normal targeting”.
- Screening ads in real time: In order to ensure creative control, the SSPs should have a method of screening the advertiser’s creative in real time. In the best case scenario, the SSPs would have a process incorporated into their user interface, so that publishers can view the creatives that are displayed on their website.
- Preventing Malware: In order to ensure the best user experience, landing pages should be monitored for malware constantly and if found, campaigns should be paused for that advertiser, until the issue is resolved.
- Loading Speed: In order to ensure the best user experience, loading speed should never fall below certain predefined standards. Usually, a global data center makes sure that advertisers return bids into milliseconds, in order to provide for the best user experience.
- Emerging Standards: Application Programming Interfaces (APIs) connect the ad management and operations platforms of the publishers with the ad exchanges, enabling RTB trading. For APIs, standardization has been one of the major issues since the inception of RTB trading, as the lack of standards made it particularly hard to trade inventory of the data that accompanied it. Since 2012,a lot of progress has been made in this regard. In order to improve the ability of the various existing platforms to work together, the Interactive Advertising Bureau (IAB) published a new version of the OpenRTB API specification. All major SSPs and DSPs have collaborated for its development and I is expected to greatly improve the interoperability of the systems.
The Future of RTB
The advantages presented by Real Time Bidding have made it one of the preferred methods of advertising for advertising agencies, publishers and advertisers. Over the past couple of years, the importance of RTB as a method of advertisement has grown significantly and its significance is expected to grow further in the next years, with RTB spending increasing faster than any other form of online advertising. This expansion in RTB spending is a result of the direct financial profits that are derived from its use: publishers make savings and increase their inventory yield, while agencies can increase their return on investment. Hence, both parties involved in the RTB improve their profitability.
A report published by the IDC forecasts that the RTB spending will grow from $1.4 billion in 2011 to $13.9 billion in 2016, a 9x increase which translates into an annual growth rate of 59%. Moreover, the Real Time Bidding share’s of total display advertising is expected to grow from 5% to 20% during the same time.
As mentioned before, the main reason for growth in RTB spending is the prospect of improving the ROI for both publishers and advertisers. On the supply side, publishers seek to improve their yield (represented by the amount of revenue realized with a certain amount of inventory), while computerizing sales and thus reducing costs. On the demand side, advertisers and advertising agencies manage to improve the effectiveness of their campaigns and therefore improve their return on ad spending.
There are two different categories of drivers that cause this impressive growth in RTB spending: market penetration and data intensity. Market penetration refers to the fact that both publishers and advertisers are going to make use of the Real Time Bidding. Growth will mainly be fueled by the Real Time Bidding capturing the market share for indirect sales. For this to happen, publishers must understand that marketing their inventory over exchanges does not equal lost revenues: advertisers are willing to pay the same amount of money on exchanges. Even though in some cases publishers might incur losses in CPM for their inventory, it has been proven that these losses are overcompensated by a decrease in unsold ad space. Therefore, more publishers have entered the market, leading to an increase in the number of brand advertisers using Real Time Bidding. Hence, RTB has developed from a medium for direct response into a tool for branding campaigns. It is expected that as soon as the RTB reaches a saturation rate in the indirect sales market, further growth will be generated by the growth of the mobile RTB and RTB-based sales of direct inventory.
The second driver behind the growth in RTB spending is the data intensity of the campaigns, which was generated by the enhancement in the quality and the use of data. The newly developed algorithms use the data as a key input in determining the real value of the impressions, improving the key performance indicators.
Mobile Real Time Bidding
The next stage in the development of RTB would be the penetration of the mobile advertising market. However, this natural progression occurs slower than expected, due to the fact that mobile advertising faces a number of challenges which are unheard of in traditional desktop online advertising. Moreover, the architecture behind mobile advertising is not sophisticated and complex enough to sustain RTB. However, the majority of mobile advertising is sold through networks rather than directly anyway, so this might help the growth of mobile RTB.
Although rapidly growing, the share of advertisements sold through RTB remains a low percentage of the total online advertising market. However, this share is expected to further grow in the near future, as the RTB spending is currently on the rise. As Real-Time Bidding continues to grow, publishers get a chance to increase their advertising yield and gain valuable insights about their customers. Therefore, the opportunity cost for publishers is too high to remain unengaged in RTB. For advertisers, RTB allows buying impression by impression, as opposed to bulk buying. This in turn allows advertisers to better execute customer segmentation strategies, without wasting their advertising budgets. The interaction between the campaign data, site data and the user data is a recipe for success in direct trading strategies. All these elements combined explain the growing success of RTB in the advertising industry and ensure an exciting future for the advertising environment.
Open Bidder – A customizable RTB toolkit for Advertisers.