What Private Exchanges Are Really For

News Corp. recently announced a deal with the Rubicon Project (tRP) to channel their ad network and other inventory through a private exchange. This news marks a significant milestone for publishers in their learning about the power of markets.  Why? because it marks a tipping point in the empowerment of publishers to retain the value of their inventory. Historically, ad networks and other such re-sellers in the market found their niche by enabling publishers to sell inventory for more that they were able to do with their own sales force. The automation tools provided by tRP, along with their scale, has shifted that market dynamic. As these tools have developed over the past few years, the technology has proven that publishers can now garner more revenue by selling the inventory themselves than by giving it to re-sellers such as ad networks. The economics of the market have shifted in a big way. The economic niche left for re-sellers is a narrow segment encompassing highly proprietary data for targeting that would otherwise not be available in private exchanges. The reality of the market today, is that there are only a handful of players that have the assets and resource to remain viable as the economic landscape shifts. Frankly, this is a positive development. The more value can be shifted back to publishers from the supply chain, the better. In the end, it is the content producers and the end buyers that underpin the entire system.

So, what are private exchanges really for? Well, the answer is not necessarily just greater revenue. It is not the 'private' in private exchange that drives that additional revenue, it is the 'exchange' that drives the incremental revenue. So to understand what private exchanges are for, one needs to understand why the 'private' is so important. In the past, when you bought inventory via an ad network, it was the network that acted to make the publisher 'private' and reduce channel conflict. Exchanges that are not 'private' are 'open.' The key difference is control over who gets to play in the exchange and what market activity data is exposed to market participants. In this equation, the balancing act played in the private exchange is increased control in exchange for decreased exposure to demand and market pricing. These types of balancing acts are difficult. In the short term, the incremental revenue derived from disintermediating ad networks and other middlemen is wonderful. But, as we all know, if the system can be manipulated to the advantage of one side, it will.

One way the traditional system has been manipulated is through demand aggregation. Agencies quickly realized that the more pricing power they had the more they could push down price: welcome to the age of the massive media agencies. While private exchanges are an important solution, they make it difficult for a publisher to understand the value of their inventory in the context of competitive supply sources. Further, the more the demand sources are constrained, the more easily buy-side collusion can drive down price.

Advertising trading is not regulated like any other market. In fact, it is pretty much unregulated. As we have seen over and over in the digital advertising space, any money making/saving opportunity that is not outright illegal will be done, and in spades! Whenever fairness and transparency are sacrificed, one of the parties to the transaction gets the short end of the stick. I applaud the News/tRP deal. It moves the broader ecosystem forward. But, I am also offering a warning: sacrificing the access of demand and the ability to compare the price of your goods to your competitors presents a different set of risks; risks that most private exchange participants have not identified nor created tools to mitigate. After all, this is digital advertising - publishers need to watch their wallet, but more importantly, they need to watch their back.