Monday 05 September 2016 5:20 am

Adverts selection: OpenX’s Tim Cadogan and John Murphy on why ad exchanges are a market for lemons and how to improve the quality of traffic

In the eyes of OpenX, advertising has – or had – a distinctly economic problem. For brands and publishers which trade advertising space programmatically over ad exchanges, information asymmetry and adverse selection are all too common.

“It's like a market for lemons”, says John Murphy, vice president of marketplace quality, referencing the famous 1970 paper by George Akerlof. “As a buyer of a used car, you're often unable to differentiate between a high and a low quality vehicle. So a rational buyer would bid an average amount. But anyone who is selling a high quality car will think such an offer is too low. The result is that all the good cars leave the market because their owners can't get what the car is worth, and it becomes flooded with low quality vehicles. A market like that will probably collapse.”

Information asymmetry

Similar phenomena were occurring on ad exchanges. Buyers of online advertising space, or inventory, were unable to distinguish high quality inventory, says Murphy. “They would bid very cautiously, which meant that the quality publishers were being under-compensated. Unless a market-maker intervened, the programmatic market could never really develop and price inventory at its real value.”

Founded in 2007, it wasn't until late 2011 that the OpenX chief executive Tim Cadogan decided to begin investing heavily in systems which could ensure such a level of quality control. “We realised we were involved in an important marketplace, but there were questions about integrity. Buyers need to know that the traffic is real, so they can feel comfortable investing large amounts of money in buying impressions. Someone needed to do something meaningful and different to drive up trust so the industry could grow. We thought it might as well be us. But when you're playing in an industry with the likes of Google, becoming the number one quality marketplace is quite a grandiose ambition.”

Now, the US firm handles 200bn ad requests a month, is enjoying 40 per cent year-on-year organic growth and has been ranked seventh on Forbes's list of America's most promising companies.

So what does this quality control involve?

“We're very strict with the kinds of publishers which operate on the exchange. We reject 30 to 40 per cent of the domains which apply,” says Murphy. “And once you're through the door, any traffic from a publisher goes through our real-time traffic quality platform, which determines whether that traffic is real or 'misrepresented' – from a bot-net or not generated by a human. This way, artificial traffic is filtered out before it ever goes to the demand-side platform which ad agencies and their brands use.”

Ad quality

Monitoring traffic quality is an enormous technical challenge. Every week, OpenX runs a top to bottom review of everything running on the exchange to remove anomalies. And traffic quality is just one side of the coin. Achieving a high standard of ad quality, which relates more to user experience than whether traffic is genuine, presents its own complications.

“We have a baseline standard to ensure ads delivered across the exchange don't make for a negative user experience,” says Murphy. Beyond certain minimum standards, OpenX allows publishers to set their own bar for the ad formats and brands which feature on their site. “They might only want ads from the automotive industry to run, and ban ads from airlines,” he says. “The problem for OpenX is that we see hundreds of thousands of unique ads coming across the exchange every day, and we need to understand the nature of each brand being portrayed and the different behaviours present so we can decide, in real-time, which ads to deliver to which publisher's site.”

Real-time guaranteed

If OpenX has achieved a greater level of transparency for programmatic trading, Cadogan is now focusing on predictability.

“Programmatic has been good at delivering choice to buyers. They can look at a stream of ad requests and match their data to bid on the best impressions,” he says. But buyers can sometimes struggle to spend all their budgets, and many want to lock down deals with publishers in advance to ensure all their budget is spent.

“Real-time guaranteed offers the choice of programmatic and the ability to reach the users you want, with the predictability of a direct sales relationship between the advertiser and the publisher, allowing you to commit to buying in advance.

“A buyer syncs their audience data with a publisher using our platform. We have a set of forecasting capabilities which allow both sides to structure a flexible guarantee which allows a certain portion of the audience to be bought, and the publisher charges more.”

As always, data is the key to this flexibility. By using historical and not only recent user data, OpenX can make seasonal forecasts around when the number of visitors to a publisher's site will rise and fall.

“If a buyer's audience overlap indicates that there are 10m impressions available next month for a target audience, it won't want to commit to buying 10m impressions in advance. It might say that if it can see 10m impressions, it will buy 6m up front, so it's not completely locked in.”

There are advantages for the publisher as well, allowing them to optimise their revenue by selling impressions on the open market if bids were higher. We're trying to make sure everyone has their cake and eats it.”