Thursday, April 17, 2008

Media auctions are taking off

A version of this piece was published in Marketing in 2008

Time was, if you wanted to buy space in a particular national newspaper and it was after lunch, you needed the number of the pub in which the sales director did business.  You needed to know him, of course, he wouldn’t have taken your call otherwise, and your rates depended on the strength of your relationship with him – a factor not unconnected with your handicap.

Golf’s perhaps a little less important nowadays (that’s probably going to cause more upset than anything else) but what’s changed almost beyond measure is the buying environment, which has become more professional but has perhaps lost some of its vigorous trader culture.

Better research, international competition and increased shareholder and client scrutiny have pulled media’s socks up – but despite all this, it’s still a business that runs on relationships.

It’s not surprising then, that people brought up in this environment struggled with the bare logic of the Google auction.  Google challenged the industry because it required a fundamentally different approach - a real-time process that needed continuous input – not the ‘set it and forget it’ approach of traditional media.  Pricing is governed not by leveraging scale, but by skill at managing the auction and by quality of technical input through SEO.  And the outcome is measured in terms of sales, not discounts.

But if some investors are right, these skills aren’t going to remain the province of search – they’re coming to media itself, as media auctions start to gain traction.

Google’s acquisition of Doubleclick was partly driven by the belief that they could drive their successful auction model out into display advertising, a belief that lay behind their earlier deal to buy Dmarc, a radio trading platform, and agreements to sell newspaper advertising.

They’re not alone.  Last year, Yahoo took control of RightMedia, paying $680m for a business that’s expanding out across Europe.

But buying media at auction isn’t for the faint-hearted.  Predicting volume is often unreliable, and there are no guaranteed deliveries.  The web interfaces of some auction businesses are fiercely complex – revealing the level of sophistication available in targeting, but at the same time providing a training and skills challenge for customers.

For auctions of online media, every individual impression is sold separately, meaning that publishers can set rules within their own adservers to prioritise customers based on yield – the system will serve a high-yielding direct-sold ad if one is available, followed by a lower-yield run of site ad, a network ad and finally an ad from the auction if none of the above is available or the auction yields a better return for that ad impression.

Adding behavioural targeting into the mix makes auctions more effective still for online media – improving yields for publishers and performance for advertisers.

So the auction is an efficient way of trading remaindered inventory – sellers get what the market will bear for their surplus advertising, buyers get cheap media with no guarantees, and market liquidity improves for both.

The system is attractive, and is likely to make headway in media markets – but it’s not going to take over the world.

Auctions work best when the value of a commodity can’t readily be established, and whilst this is true of remaindered inventory, the majority of value will continue to be traded where planners want to specify the location, timing and delivery of advertising.

And far from reducing transaction costs, auctions are likely to increase agency overheads, as greater monitoring, complexity and new skills are required.  These were the very factors that held many agencies back from investing in online media in the first place, and they’re significant obstacles for success here too.

To thrive in these new marketplaces, advertisers and agencies will need to fuse competencies from search (auction markets), data (behavioural targeting and predictive modelling) and financial markets (real-time dealing). It’s going to make media more complex – but it could be a revitalising force for the sector.