Advertising Exchanges And Auctions Are Missing The Mark
The idea of bringing e-commerce to the advertising industry isn't a new one. This idea, commonly referred to as
ad-commerce, has been around since 1995, when the industry's various governing bodies began to publicly ponder how the Internet could make the extremely inefficient, error-prone and mistake-ridden process of buying advertising more efficient. Since that time, the industry has seen the birth (and, more recently, the death) of dozens of start-up companies dedicated to making
ad-commerce a reality.
Much to the chagrin of the entrepreneurs, industry players and venture capitalists behind these start-ups, attempts to revolutionize this technologically antiquated industry have met with great skepticism and reluctance from the advertising community. The industry's reluctance to adopt the so-called solutions it has been offered is forcing many of the ad-commerce upstarts to throw up their arms in frustration and close their doors. Some, more persistent players have found themselves willing to carry on the fight but have found themselves without a paddle as their venture backers, unimpressed by the industry's reluctance to embrace
ad-commerce, have withdrawn their financial support.
With so much attention and so many capable, well-funded entrepreneurs focused on tackling the challenges of ad-commerce, why have so many start-ups in this industry found themselves out of time and money and closing their doors? Why has no single player risen to the forefront and established a platform or standard for e-commerce in the advertising world?
The answer has more to do with what these companies are trying to solve than how they're going about solving it. Like many traditionally noncommodity industries with middlemen and brokers, advertising is priced and sold in ways that make e-commerce "exchange" operators cringe. As a result, nearly every ad-commerce start-up to date has come to market with a strategy of changing the way the industry prices its inventory. From auctions to reverse auctions to one-rate inventory pooling plans, these companies have followed the lead of such B2C pioneers of pricing efficiency as Priceline and eBay. Much to the surprise of the industry outsiders behind these ideas, the industry has yet to bite.
Advertising time is one of many goods and services that could certainly be priced more efficiently. Buyers could get better deals, and middlemen could disappear. While pricing inefficiencies do exist, however, it isn't pricing that keeps us up at night while we ponder what it will take to upgrade Madison Avenue to the 21st century. Pricing simply isn't top of mind for those who understand the advertising industry and how it functions. Instead, the formula for success in ad-commerce lies in addressing the inefficiencies that plague the process of buying and selling advertising. Only by tackling the process and workflow inefficiencies and leaving pricing up to the buyers and sellers can ad-commerce become a reality. While this directive may seem intuitive and obvious, most ad-commerce providers to date have failed to follow it and have found themselves gaining little or no traction as a result.
So why is the industry more concerned with fixing the ad campaign process than optimizing the pricing of advertising inventory? First, and most important, industry processes are in a greater state of disrepair than industry priciing. (In fact, as many sellers would likely claim, pricing isn't in a state of disrepair at all.) While the current way of buying and selling has worked for decades and continues to work today, the growth of e-commerce and EDI outside Madison Avenue has made industry insiders painfully aware of the backwardness of the way they do business.
A recent Nielsen study showed that an e-commerce-enabled, workflow-enhanced buy can take as much as 70% less time to execute than an offline buy. To be sure, the processes and workflows associated with the buying and selling of advertising are in need of a major overhaul. While pricing may be an interesting intellectual exercise, it is not pricing that buyers and sellers bemoan day after day as they spend hour upon hour over the fax machine and pouring over paper-based records and files. What plagues this industry is how people do their jobs, not how they price their inventory.
The second reason for the demise of the exchange model comes from reluctance and resistance from media sellers. Exchanges require seller liquidity in order to function most efficiently and effectively for their buy-side customers. Most exchanges require sellers to post their inventory for sale to an open universe of public buyers. The problem with this model is that truly savvy media sellers will never reveal their inventory to the buying community. Doing so completely undermines their scarcity of product selling strategy and prevents them from maximizing the value of their inventory. Some companies tried to address this issue by constructing "blind" auction that protected the identity of the seller, but these, too, failed because sellers were only willing to post distressed inventory. And while some exchanges have gained limited traction in the unsold or perishable inventory market, this type of inventory represents such a small percentage of the overall industry that it has proven too small to support an entire business plan. Instead, selling unsold inventory stands the greatest chance of success as a subset of a larger, more comprehensive buying and selling tool focused on traditional prime inventory.
The third and, from the seller's perspective, most important factor that has stunted the growth of the ad-commerce "exchange" has to do with good old-fashioned salesmanship. In an effort to optimize the way sellers price their inventory, auctions and exchanges remove all contact between a seller and a buyer. Needless to say, this is something no self-respecting GM or GSM will ever subscribe to. In fact, the only type of ad-commerce offering sellers will eagerly adopt is one that enables them to better sell the value of their media property. An ad-commerce tool, in order to win the endorsement of media sellers, must demonstrate its ability to improve sales force productivity and optimize seller-buyer exposure. This is something that an exchange simply cannot offer and has a lot to do with the industry's reluctance to subscribe to the exchange idea.
Does this mean that ad-commerce will never get off the ground? Hardly. What it means, though, is that ad-commerce requires a great deal more complexity and industry understanding than the existing auctions and exchanges have put forward. Successful ad-commerce must address the workflow inefficiencies of the traditional advertising process and must cater to both buyers and sellers. It must allow distinct, point-to-point communication that allows buyers and sellers to maximize value while saving time and money through faster, more efficient processes. It must make people's lives easier without demanding that they change the fundamental nature of how they do their jobs. In short, it must have more to do with workflow and process than pricing or anything else.
So, if this is such a great idea, where are all the workflow providers? Well, they're out there, and their message is catching on. In fact, their message actually originated ffrom within the industry, but none of the early entrants listened. Only now, as the industry has made it more clear what it needs, has anyone changed their tune and shifted their strategy from exchange to workflow and from disintermediator to collaborator. Unfortunately, for many of them, it may be too little too late. Workflow automation is an extremely complex undertaking that requires an intimate familiarity with the industry that many of the existing ad-commerce players simply don't have.
The advertising industry has been slow to awaken to the benefits of e-commerce partly because of it own reluctance to embrace technology but mostly because none of the early ad-commerce entrants offered what the industry truly needs. Whereas exchange and auction businesses models predicated on optimizing consumer pricing originally seemed transferable to the B2B landscape, recent history has proven otherwise, especially in the advertising industry. More than price, buyers and sellers of advertising are plagued by inefficient processes and workflows. Only those providers who can master the workflow automation game will have a shot at delivering a solution that this technologically coy industry will ever accept.