Overutilization of the Spot Market is Responsible for High Programmatic Costs

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By Doug Huntington, CEO, FatTail

The advertising transparency company Adalytics confirmed yearslong suspicions about high programmatic advertising costs when it released research showing that, on average, 22 to 45% of advertiser spend goes to DSPs and SSPs. The revelation that, in some cases, 98% of a media buyer’s bid goes to intermediaries was likely concerning for most, if not shocking.

Of course, publishers are likely to find the news of astronomical intermediary costs highly concerning, as they depend on advertising revenue to survive. Media buyers may also be concerned, as they have a right to know where their money is going.

But the core problem here, despite appearances, is not a lack of transparency in the programmatic advertising supply chain. Rather, it is overutilization of the spot market itself. Let’s dive into the reasons for high advertising costs and alternative solutions to understand why costs are high and what the way out is.

Why SSPs and DSPs Can Charge High Costs

Before anyone gets on their high horse, it is important to recognize what SSPs and DSPs do that is of value.

The initial purpose of SSPs and DSPs was to liquidate remnant inventory that would have otherwise gone unsold. This remains a helpful use case, as, even if the intermediaries take 45% of such a deal, whatever remains for the publishers is revenue generated from inventory that would have otherwise gone to waste.

SSPs and DSPs are especially helpful for longer-tail sites without direct distribution.

Big-pocketed sites like the New York Times follow a hierarchy of advertising transaction types. They first aim to sell their inventory via manual negotiations and programmatic guaranteed, where they have more control and can charge a premium. Then, they move on to preferred deals and private marketplaces before turning to the open market.

But longer-tail sites and niche publishers might not have the workforce to fulfill direct deals, meaning the intermediaries who can provide them access to the many buyers available via the spot market provide a highly valuable service.

Yet this is exactly where the core inefficiency driving up the costs of ad intermediaries lies — most publishers do not sell as much inventory upfront as they would like to, in part because they have no way to make it accessible at scale via programmatic deals. The result is overutilization of the open market, which decreases publisher control and erodes value. To illuminate a better path, we need to understand the reasons that publishers and buyers are unable to make full use of high-value deal types.

Why Publishers and Buyers Have Insufficient Access to Premium Deal Types

Publishers should be able to access the efficiency of programmatic coupled with the higher value and control afforded by direct deal types, by which I mean programmatic guaranteed, preferred deals, and private auctions.

But to increase access to direct programmatic deal types, the adtech industry would need to create ways for publishers to expose products, inventory, and pricing to select buyers and enable the latter to book ‘upfront’ deals programmatically.

Buyers would need to be able to go to one destination where they could see all these options across publishers. Even better, the buying platforms could show the publisher’s product catalogs directly in their own user interfaces so that the buy-side workflow remains constant.

Without the above, the industry will never obtain the efficiency required to meaningfully increase programmatic direct deals and decrease the reliance on the spot market.

Cultural hurdles stand in the way of expanded use of programmatic direct deals. Publishers are not used to publishing this information publicly, and buyers are not used to making high-value purchases automatically.

But getting over these hurdles would decrease the value erosion of the spot market and simultaneously reduce fraud and privacy concerns by cutting out intermediaries in use cases where they are unnecessary and allowing publishers to sell high-value inventory on their own (high-value) terms. Buyers would also get something in this scenario: efficient means to access premium inventory and preferred access from trusted partners.

The Big Picture Behind the High Cost of Adtech Intermediaries

SSPs play a crucial role in programmatic advertising, especially for publishers without the staff required to make direct deals. It would be wrong to write them off as too expensive in all cases.

But they are expensive as a primary distribution strategy for premium publishers with direct deal capabilities. If publishers were able to connect directly to electronic demand, rather than relying on intermediaries to make those connections, they would be able to decrease costs, or at the very least put downward pressure on supply side intermediary pricing.

For their part, DSPs able to play a role in connecting sellers and advertisers would be able to increase buyer access to upfront programmatic deals, providing them a competitive advantage and advertisers transactions with better conditions such as guaranteed pricing and impressions.

Higher-value deals await publishers with inventory — and audiences — worth paying for. The question is whether they can access the technology and make the updates required to their practices to maximize that inventory’s value.