Bill Urschel is the CEO of the internet advertising exchange, AdECN. William spoke to a Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link gathering on 14 November 2007, about the development of AdECN, its role as an exchange market for internet advertising space, and the future of internet advertising. This article is based on Bill’s talk, which he gave in a personal capacity.
Development of AdECN
William Urschel first realising the market potential for computer/internet ventures when writing computer books. He has started a number of software/internet businesses since, and looks for three things in a new venture:
- Market: Something to address of a manageable size, with an overall growth trend (“the rising tide lifts all boats”).
- People: 1-5 people with either technology or business backgrounds, and the correct attitude and work ethic.
- Product: Address a need… and it is nice if it works.
Historically, advertisers would pay an advertising network, who would then display adverts using the advertising inventory on publishers’ websites. It was common for the network the advertiser dealt with to run adverts across multiple networks. Often business flowed from network to network to network, before an advert actually appeared on a publisher’s site. This resulted in reduced revenue for the publisher, as each network “middleman” took their share: Perhaps for every $1 of advertiser’s money spent, just $0.18 would reach publishers. Waste still existed in the market: Half of the display advertising market was either going unsold or “under-sold” (sold for a significantly lower value than it could attain, simply to fill the space).
How AdECN Works
AdECN was launched in 2002, but didn’t “get moving” until 2004. Its role is to act as a stock exchange for network-to-network advertising deals. The ECN part of the name, meaning Electronic Communication Network, is derived from financial stock markets.
Networks continue to deal directly with their own advertisers and their own publishers. The process will first try and match an advertiser’s demand to a publisher’s inventory within the same network. When advertising demand and publisher inventory within the first network are mismatched, AdECN steps in to broker a deal between different networks. The result is that advertisers get their adverts published, and publishers fill their inventory with paying adverts. The whole auction process takes place in 6-7ms, at the time the publisher’s page is viewed.
AdECN has been careful to make itself an ally of the networks, not a competitor to them:
- It does not deal directly with advertisers or publishers – it has a distinct role in providing the infrastructure for the exchange.
- Networks split the commission on the deals between them, just like stock brokers.
- AdECN levies a flat fee, so is neutral to whoever wins or losses the auction.
The neutrality of AdECN is seen as their main competitive advantage over Yahoo and Google: AdECN isn’t an advertising network in its own right. [Although as described later, AdECN may simply be becoming the new breed of advertising network, in a marketplace where advertisers will increasingly deal directly with publishers. I did not get the chance to query this apparent contradiction.]
Contextual and Behavioral Data
Adverts can be targeted contextually or behaviorally:
- Context considers simple variables such as time of day or location (typically the country viewer is resident in).
- Behavior (or, behaviour, or “profile”) considers variables such as the age of the viewer and their search patterns.
Currently 95% of all targeting is contextual because it has historically been difficult to match behavioral information in a fast and ethical manner. In the next “3-5 years”, behavioral advertising will move to dominate 80% of online [display?] advertising.
AdECN capture a lot of data, which is increasingly the added value it can offer networks. By design it does not store data: Data is used only in the (near-instant) auction process. Individual networks/advertisers can bolt on their own “black boxes” to AdECN – bespoke software they design to utilise auction data so that their advertising spend is optimised. The most common use of black boxes is to split Cost per Click (CPC – advertiser pays when someone click the advert) and Cost per Action (CPA – advertiser pays when an action is completed, such as an enquiry form completed, or product sold).
Privacy remains a key issue. Self-regulation is seen as the way forward. This is based on not keeping personal data, and instead focusing on core questions like “what is the consumer going to buy?” The history of Gator (spyware installed which monitored browsing habits) shows that consumer pressure will eventually win over advertising network which don’t stick to reputable privacy practices.
For the first two years of the venture, AdECN did not perform well. For an internet startup, two years is a long time. In the early years, AdECN’s team were “too abstract and too technical”. The software was eventually rewritten. Fortunately the venture’s backers were able to see the long-term potential. The lack of barriers to entry into the exchange did allow many networks to trial it, which allowed business to slowly build.
By 2004 they were “in the right place, at the right time”. They were bought by Microsoft. Bill Urschel couldn’t reveal specifics, but stated that there was “no b” in the price paid. His final round of investors received a x9.7 return over four months, so nobody was complaining. They sold “too early”, but in practice they had to sell: Similar (although William claims not actually exchanges) competitors Rightmedia and Doubleclick sold to Yahoo and Google respectively. It became inevitable that Microsoft had to buy an exchange.
The underlying market is expanding, and forecast to continue to grow. Critically:
- Online advertising accounts for only 7% of total advertising spend, yet occupies more than 7% of consumers’ time: Advertisers are behind the trend, and will logically seek to catch up.
- Display advertising (on publishers’ sites) is growing faster than search advertising (on sites such as Google search results).
- With exchanges such as AdECN, display advertising now has the same data/targeting advantages search had 6-7 years ago. Real-time auctions and targetting have taken much longer.
The industry itself will like change, particularly what is meant by the term “ad network”: Advertising agencies can now deal with publishers directly, and use the exchange to handle excess supply or demand – there is no need for the old middlemen, the advertising networks.
The average CPM (Cost per Mile, where a mile is a thousand advert impressions) rates are likely to remain the same where already high (for example, rates around $25 will see little change). However, targeting will allow undersold inventory to be utilised much more effectively, so space sold closer to $0.25 will increase in value. As noted earlier, behavioral/profile targeting is likely to develop such that it dominates within 3-5 years.
Could exchanges move into the television and print advertising arena? Current systems could be improved, but the exchange really needs real-time auctions to flourish.