Let me set this up with a simple question: Have you ever heard of someone buying stock in Google and getting Procter & Gamble shares instead? No, neither have I. In fact neither has anyone in the US for decades. Why is that? Because in the middle of every transaction is a party that makes both sides hold up their end of the bargain, a central clearing party. How often have you heard of clickjacking, cookie stuffing, un-viewable ads, botnets, toolbar overlays, etc.
In all of the buzz across the industry, I have not heard a single voice raised for central clearing as a critical utility needed in the industry.
Some level-setting: what is central clearing?
Investopedia defines central clearing as the two main processes that are: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of assets and funds occur.
Next we need to figure out what part of the system is screwed up. My personal opinion is that there are two main causes:
1. Money never directly accompanies any transaction. In other words, we make deals, but the vendors doing the delivering of the ad inventory and the vendors doing the delivery of the payment are not the same. If the money trail and the ad inventory delivery followed the same trail, much of the shenanigans in the ad tech space would be much easier to reduce. The custody chain of the ad inventory is very important, as is that of the money that will be used as payment.
2. The cost of fraud is borne by the users. Central clearing is a service that charges fees to stand behind the trades of its clients, essentially insurance. If each party in an ad transaction that took possession of the impressions or served it content had to pay a small fee, the crooks in the ecosystem become a real liability to the big guys and are no longer just a reputational nuisance to the business. If the ecosystem bears the cost of fraud, it has the appropriate incentive to truly self-police.
Since exchanges are a relatively new phenomenon, in the centuries old advertising business, and since the vast majority of advertising (including TV, radio, print etc.) does not transact via an exchange, direct counterparty clearing is an industry norm that carried over naturally when the exchange traded media space evolved. But now, the exchange traded media 'baby' is not a baby any more. This is a muti-billion dollar industry with a meaningful impact on the economy.
In media here in the US, the closest thing we have to central clearing is Mediaocean. Why? Because of the amount of inventory, billing and reporting that goes through their system and they are neither a buyer, a seller, or added value reseller. Creating an industry-funded highly-transparent utility (a joint venture) would create far more value to the ecosystem than it's cost. A clearinghouse needs to be void of any conflict, for it to operate in a truly fair manner. Having a private company that can make money solely from enforcing the rules would cost far less than the wasted spend on fraudulent advertising, and the artificial creation of inventory that depresses prices. (for a good analogy see NSCC) Today, the scope of the problem is very hard to measure so little action is taken. The push back about the cost of central clearing is compared by its opponents to a ecosystem-wide cost that is immeasurable, perceived as "its zero to me, it affects only others."
Central clearing is the very self-regulation that the industry needs to set up to keep government regulators at bay. The industry is very keen on setting standards and ensuring order, hence the IAB. Like it or not, automated trading is changing the advertising business. Companies such as Media Bank and Donnovan Data Systems were set up to ensure that their processes minimized fraud, waste, and abuse in the media buying process. I view operating a clearinghouse as a simple extension of their core business into the exchange traded media business.
Lastly, I would like to get your thoughts or feedback on this. I believe that this is an industry wide conversation that needs to be started. Let's figure out how to make this happen.