Real-time Advertising

Figure 1
Figure 1: Besides ad exchanges, various intermediaries, like ad networks or in-house sales forces of large publishers, can match advertiser demand with publisher supply or even be connected to an ad exchange themselves.

Since the first banner advertisement was sold to AT&T in 1994, the market for online display advertising has not changed substantially for more than a decade. Banner advertisements were typically sold in lengthy negotiations between the publisher and the advertiser or an agency representing the advertiser. These negotiations then resulted in a contract specifying the fixed price for 1,000 impressions, also known as the cost per mille (CPM), and the desired number of impressions over a certain time period. Following on the negotiations a very manual process was triggered: Insertion Orders are signed and faxed to the parties, the advertiser delivers the creatives which are manually booked into the system actually delivering the ad (adserver) by the publisher. If any changes are made to a campaign, this results in the whole process starting over again. This model results in very high transaction costs and at the same time very low flexibility, especially for the advertiser. Much has changed in the marketing industry since then. The introduction of Google AdWords in 2004, almost 10 years after the first banner advertisement, had substantial impact on those changes. In search engine advertising, advertisers do not pay a fixed CPM to Google but participate in an auction, placing a bid on pre-specified keywords. Consequently, every time a user enters a search query on Google, a real-time auction takes place that determines the rankings and prices paid per click for these advertisements. Advertisers are therefore able to alter the look and content of their text-ads and overall campaign and buying strategies almost in real-time. But while text advertisements are sold via interactive pricing mechanisms and efficient logistics for years now, banner advertising that makes up more than a quarter of total online advertising spend (about 8 billion in the US) has been lacking the efficiency gains that search engine advertising has benefitted from.

Figure 1: Besides ad exchanges, various intermediaries, like ad networks or in-house sales forces of large publishers, can match advertiser demand with publisher supply or even be connected to an ad exchange themselves.

Basically, real-time advertising is the application of interactive pricing mechanisms and efficient logistics to online display advertising. This application allows advertisers and publishers to connect directly via so-called ad exchanges that closely resemble stock markets for advertising products. This development is accompanied and driven by the rise of more sophisticated targeting mechanisms (like behavioral or re-targeting) that enable advertisers to bid on single impressions instead of accumulating thousands of them, hoping to reach their desired target group, which has led to a significant amount of wasted advertising impressions in the past.

Let’s try to make things clearer with a short example: Imagine a user, let’s call him John, who visits a soccer website. Because John has a login on this soccer website the publisher knows that John is a middle-aged male from Frankfurt, Germany. Furthermore, from the information stored in the cookies on John’s computer we know that John previously has searched for a new car. Together with this information the publisher sends a request (ad call) to an ad exchange, signaling that this impression is offered for sale. Advertisers active in the car market will now place a bid (typically a CPM value) on this impression and the highest bidder acquires the right to display his advertisement to John (e.g. a car salesperson). This whole process, from the ad call to the actual display of the advertisement, takes place in real-time, only requiring about 120ms.

Of course the process described above is simplified. In reality intermediaries, so-called supply-side platforms (SSP) or demand-side platforms (DSP) are involved in this process, trying to facilitate the whole process of buying for publishers as well as advertisers (see Figure 1).

Prof. Dr. Bernd Skiera is chaired professor of electronic commerce at Goethe-University in Frankfurt, Germany.

Bernd Skiera

Prof. Dr. Nadia Abou Nabout is professor of interactive marketing & social media at WU Wien, Austria.

Nadia Abou Nabout

Marc Heise is a doctoral student and research assistant at the Chair of Electronic Commerce at Goethe-University in Frankfurt, Germany.

Marc Heise