Pattern Recognition, by Ian Sigalow

Uncategorized

High Frequency Media Buying

Posted on .

High Frequency Media Buying

Introduction

Archaeologists debate when the first stock exchange was formed – most say it was around 400 BC in ancient Rome. By that account the hand-to-hand trading of securities existed for over two millennia before the US Congress and SEC authorized the first electronic exchange in 1998.  Within a few years the physical stock exchange was replaced by computers, and computers changed everything.  The spread between buyers and sellers decreased by a factor of 100x, the volume of trades increased exponentially, data scientists became more wealthy than public-company CEOs, and protesters occupied Wall Street.

I mention this short history because the media business is following the exact same path.  And just like the financial markets, fortunes will be made and lost over a short period of time.  It is hard to grasp just how fast this space is changing – I have spent the last eight years looking at the market and still underestimate how quickly budgets are moving to electronic, biddable forms of online media.

The main term that people use to describe this movement is programmatic advertising.  Here is an overview of programmatic if you are interested.  In general, “programmatic” is a good descriptor, but it only captures a subset of the new phenomenon.

A broader term that we use at Greycroft is “indirect advertising”. Indirect refers to any ad revenue that originates without a sales team (usually through exchanges, networks, or affiliates).  Indirect advertising already accounts for the majority of revenue at Google and Facebook, and I believe it will eventually take over 90% of all online media budgets.

Why is this happening?

There are three main advantages with indirect advertising.

The first advantage is control over media selection/optimization.  In the direct world, agencies place a purchase order with a media company (i.e. agency says “we are buying 10mm impressions at a $5 CPM on your home page”) and the media company runs and optimizes the campaign.  As a result, every campaign gets some component of high-performing impressions and some component of filler.  Even if a publisher is doing a good job he or she can only optimize against impressions on-site, versus a holistic view across the entire campaign and multiple websites. Indirect media planning solves this problem by allowing an agency or network to pick each impression across all publishers, in real-time. This results in better performance.

The second advantage is speed of execution.  Let’s say that a consumer engaged in some action – shopped for a pair of sneakers, researched airfare, searched for a car – and an advertiser wants to respond to that signal with an ad. By the time an agency goes through the traditional, direct mechanism of insertion orders and paperwork the user has moved on.  As a result, all advanced targeting campaigns use indirect for faster execution.  This is quickly extending beyond display and into other forms of advertising as well, like affiliate and email marketing.

The third advantage is proprietary data.  Let’s say that you know something about consumers that no one else knows.  In the direct world, you have to trust a publisher to hold that data and run the media for you, or you could disguise it by using “pages” as a proxy for “audience”.  On one hand you give up your secret sauce and on the other you give up performance. In the new, indirect world you can keep this data to yourself and execute in stealth. This is particularly important as more advertisers use first-party data to buy media and don’t want to share their customer files.

The move to indirect will inevitably create winners and losers.  I expect that we will see more media companies with 50%+ profit margins thanks to indirect revenue.  However, these companies will look very different from traditional media organizations.  For starters, they will need much larger audiences to compensate for lower revenue per page, and many of them will be built on larger technical platforms that provide the publisher with infinite editorial and large network effects.

I also expect that product companies will be major winners. We see new products launching on the Internet every day – from toothbrushes to mattresses – and they are using indirect advertising to pinpoint an audience and measure a marketing funnel from impression all the way through revenue and repeat purchase.

Last but not least are the advertising agencies. The big agency holding companies foresaw this shift and built internal ad networks to capitalize on the trend. As a result they are making record profits today from digital advertising. But beneath all the big data hyperbole is a common piece of licensed software, which is simple enough for most advertisers to bring in-house. Over the long run I have a hunch that the Internet will do what it has always done best – eliminate the middleman – just like it did to the stock market circa 1998.

profile

Ian Sigalow

http://sigalow.com

<p>Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.</p>

Comments
  • user

    AUTHOR AustinClements

    Posted on 4:08 pm April 30, 2014.
    Reply

    Another advantage is programmatic allows entry for smaller budgets. Sales team couldn’t spend time going after accounts with only a couple thousand dollars to spend on advertising, but DIY solutions open the door for them. Would be great to see the percentage of Facebook’s ad revenue attributed to these “long tail”  advertisers.

  • Leave a Reply

    You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

    View Comments (1) ...
    Navigation