FAQ

The Exchange

What exactly is an exchange?

An exchange is an automated trading platform in which buyers and sellers enter their bids and asks, and the exchange makes the match, delivers the goods to the highest bidder, handles the accounting, and collects from and pays all of the members. An exchange has to be a neutral, disinterested party in the transactions. It cannot care who wins an auction.

This is how the new computer-based stock markets, such as Island, Archipelago, Brut, and so on now work. They are all Electronic Communication Networks (ECN's) and are extraordinarily efficient.

Over the years I've seen "exchanges" that were auction-houses for remnant inventory. One of them held an auction three days a week, using a whiteboard. There are "exchanges" where the members were merely introduced to each other in a sort of dating service, leaving it up to the members to contact each other and work the deals. There are also "exchanges" that were really CPC and CPA ad networks trading for their own accounts, and not necessarily for the benefit of their clients.

Why work with a brokerage model, like the stock market, rather than directly with advertisers and publishers?

AdECN works only with ad networks for three reasons:

First, the need for advertisers and publisher sales, consulting, and support function will never go away.  The good ad networks are already doing it well.  

Second, the purpose of an exchange is to provide liquidity to its members, which requires decent or better traffic, and the ad networks already have that — just in isolated universes.   

Third, as an exchange, AdECN has to guarantee payment.  I can't do that if I have to collect from 100,000 individual advertisers.   

Again, this is the way it has worked on the stock exchange for a couple of hundred years.  It is a model that works   Moreover, in the last three years, with the rise of the ECNs and increased automation, the profits of stockbrokers have soared.

What exactly does a member get with his seat on the AdECN Exchange?

First of all, members get real-time access to the traffic in the exchange. We provide a web-based interface, which, by the way, they can private label for their advertisers and publishers, if they want their clients entering their own campaigns and inventory. It's through this interface that they participate in the real-time, per-impression, highest-bidder-always-wins auction, and specify all the targeting, the metering, the frequency capping, the reporting, and the exclusions.

AdECN also provides the ad serving, although if the member wishes, he can use a third-party ad server instead. AdECN also acts as the financial clearinghouse. We collect from all members and pay all members, guaranteeing that every member gets paid for what he sells. It's up to the members, of course, to collect and pay from their own clients.

Does a member have to run all of his traffic through the exchange?

No.

A member can run nothing through the exchange, and just use our hardware, software, and bandwidth as the infrastructure for his own closed system.

Or a member who is very heavy on the publisher side might opt to run all of his publishers but none of his advertisers (and vice versa).

Most members, however, will use the exchange only when they are certain it will make them more money than using their own client to fill the transaction. The member can set a profit threshold at the auction level. We run the auction for the impression, then check to see if the filling transaction from the exchange makes him his X percent more money than using his own client. If so, we use the exchange client. If not, we use the member's client.

Actually, we have a subtle variation on that last: a member can also specify that the exchange pick the winner who makes his publisher the most money, rather than himself. It's up to him to decide whether this is enlightened self-interest, or not.

We're talking about just display ads, aren't we? Does this tie into search at all?

Mostly display ads, yes. But we built in an interesting feature for our members. They can take a feed from a search engine, such as Yahoo, MIVA, and most others, as an XML file. This file contains the advertiser's bid, the search words, the CPC bid, and the text for the ad. Our member can load this in, and the exchange will treat it as so many CPC campaigns. When one of these CPC bids wins an auction, we show the text ad in a graphic frame. If the ad gets clicked on, the search engine pays the member. So, basically, search and display start to blend here. It can be a nice little arbitrage revenue stream for a member of the exchange. 

How many members do you expect to have overall?

Not more than a hundred or so.  We estimate that today there are about 65 credible networks in the United States and Canada, 18 in the United Kingdom, 8 in continental Europe, 1 in China, and 5 elsewhere in the world.  That said, we see new and very interesting networks popping up all the time.

Can the AdECN Exchange handle ads for other media, like television?

At the moment, no, but that is a limitation of the other media, not AdECN. AdECN is all about the uniqueness and value of each individual impression. When each television set has a unique IP address, AdECN will be able to target to the individual viewer linked to that address, showing each viewer potentially a different ad in that same 15-second spot, and advertisers will pay different amounts to show different ads to different viewers. AdECN does exactly that today on the web. But for now, television is not granular enough to benefit from the AdECN exchange.

Mobile devices, however, which have something like an IP address, are very close to being venues for AdECN advertising. The remaining hurdles are just business issues: the new ad formats for the small devices are their own economies, requiring more advertisers to support them, and the wireless carriers are playing gatekeeper in the middle between the advertiser and the phone user. When there are two healthy ad networks serving mobile devices, AdECN will get involved.

Does the market ever close?

No.  Internet traffic flows around the clock, around the world.  A member can launch campaigns, sell inventory, and monitor everything at any time. 

Doesn't an exchange eliminate the need for media buyers or ad sales?

Hardly. 

A member would always like to match his own buyers with his own sellers — why split a commission if you don't have to?  Ad networks will always need people buying media and selling ads. 

Any excess inventory a buyer gets can be sold on the exchange, increasing that buyer's value to his network.

Any unspent campaigns a salesperson lands can be spent on the exchange, increasing that salesperson's value to his network.

Consider this: the stock exchanges with their increasing use of the ECNs are now far more efficient than ever before, and yet the stock brokerage industry just had its most profitable year ever.

If 100 ad networks can trade inventory on the exchange, what differentiates one ad network from another?

You might ask what differentiates one stock broker from another — Merrill Lynch versus Charles Schwab versus Fidelity.  Same answer: style, sales, support, pricing, and execution. 

In fact, there is even more differentiation in the advertising world: you have networks that specialize in branding, others in response, others in lead generation, and there are at least four pricing models — CPM, CPC, CPA, and CPL — not to mention all of the arbitrage angles.

Can't an advertiser get the same inventory from one network as another with this system

No.  For example, if an ad network has an exclusive representation agreement with a publisher, that inventory only gets on the exchange through that ad network, and the network will only place the inventory on the exchange if he can't get a better price for it from his own advertisers.  If an advertiser wants first crack at that inventory, he needs to be a client of that network.

Even if a member does put that excess inventory into the exchange, he can keep it blind, preserving the branding advantage for himself.  

Aren't the big networks going to take over with a system like this?

No. All networks have constant liquidity problems, and all players benefit when it is solved.

Again, how many stock brokerages are there? That world is not owned by one or two players.