- The US$550 billion ($758.6 billion) global advertising industry is undergoing a seismic transformation from what used to be a “spray and pray†approach
- A brand advertiser selling BMWs or Rolexes would spray a lot of ads across the media spectrum and then pray that someone watching or looking at the ad might buy the car or luxury watch — to what is known as “programmatic advertisingâ€, where the algorithm makes sure only the person who is looking to buy the BMW or Rolex gets to see the message
IF you are looking for the best-performing tech stock this year, don’t look at the usual suspects like ÂFacebook, Amazon.com, ÂApple, Netflix and Google’s parent, Alphabet — the so-called FAANG names. Up over 211% this year, The Trade Desk sits at the crossroads of advertising and technology. In some ways, it is a competitor of Facebook, Google and Amazon. But more than that, this nemesis of old media — print newspapers, radio and TV — is helping transform the whole advertising landscape, including who sees ads, and where and when they see it.
The Trade Desk is a highly automated electronic marketplace where brand owners who want to place ads and publishers or website owners who are seeking ads make deals. Essentially, its algorithms help its agency clients purchase advertising programmatically, cutting out the human element. MoreÂover, it does not operate the arbitrage model that many ad exchanges do, like buying ad inventory and selling it to clients for more. Instead, it simply charges its clients a fee based on total ad spend.
Two years ago, The Trade Desk launched its IPO at US$18 a share. It was, at the time, barely making money and investors seemed lukewarm about its prospects, betting that internet giants such as Google, Facebook or Snap would beat anything that the upstart could do. Fast forward to today, even as Facebook and Google have seen their own ad revenue growth start to flatline, The Trade Desk has beaten profit forecasts quarter after quarter for two years now. The stock is currently trading at US$147 a share, or up over eightfold since its IPO. The Trade Desk has actually tripled since early May, just before it reported spectacular first quarter results. Jefferies analyst Brent Thill expects it to report US$68 million ($97 million) in profits this year, up 35% over last year.
The big story since the Internet boom of 2000 has been the shrinking of old media, with ad-supported small-town newspapers, big-city magazines and terrestrial TV now a shadow of their former selves having lost advertising clients and revenues. The old model was based on eyeballs, reach and circulation, which helped media owners leverage on advertising. The new media model is subscription-based, and whatever little advertising garnered is just the cream on top. Brand owners now have all the data they want and are able to precisely target their ads to just the audience they want to reach rather than the pie in the sky promised by old media firms.
Seismic shift
The US$550 billion ($758.6 billion) global advertising industry is undergoing a seismic transformation from what used to be a “spray and pray†approach — where a brand advertiser selling BMWs or Rolexes would spray a lot of ads across the media spectrum and then pray that someone, somewhere watching or looking at the ad might buy the car or luxury watch — to what is known as “programmatic advertisingâ€, where the algorithm makes sure only the person who is looking to buy the BMW or Rolex gets to see the message.
If I regularly search for BMW dealers in my city or recently googled a price comparison for Rolex, the algorithm would push relevant ads to me. If, however, I have been searching online mainly for a second-hand Toyota, the advertiser would be wasting time, money and effort trying to sell me a BMW even though I might be living in some fancy upscale neighbourhood. Programmatic advertising basically helps cuts through the chase, avoids wastage and connects sellers with real buyers at a fraction of the cost of “spray and pray†advertising.
Ads are more targeted, though we feel we are no longer inundated by them. There are fewer newspapers and magazines. Those that have survived are thinner. There are fewer ads on TV and radio, and subscription channels such as Netflix have no advertising, although Amazon is reportedly planning an ad-supported video service to complement its ad-free Amazon Prime streaming movies and videos.
Yet total global ad spending is still growing. Research firm PQ Media estimates that global ad and marketing spending will increase 4.6% in 2019 following 5.5% growth this year, the fastest since the 2008 financial crisis. Traditional ad spending is expected to rise just 0.8% compared with an expected increase of 10.7% in digital spending ad spending. Magna Global forecasts digital ad spending will grow to US$250 billion this year, or 45% of total global ad spend.
The likes of Google and Facebook are still growing their total ad revenues at a 25% annual clip. By next year, half of all digital ad spending could be programmatic, Magna Global notes in a recent report. Brand safety concerns and anxiety over recent data scandals are not having any discernible impact on digital advertising growth, the report says. Programmatic ad spend is forecast to grow to over 57% of digital display ad transactions by 2020, from just over 40% currently.
Rise of the ‘Math Men’
Advertising used to be dominated by crazy, creative types symbolised by the fictional Don Draper from the award-winning period American TV serial Mad Men, set in the late Sixties and Seventies, which ran for eight years until mid-2015. Back then, advertising agencies were conglomerates of sorts. They produced TV commercial jingles, display print ads and also picked the media where the ads were placed. With the rise of global media-buying agencies such as MediaÂCom, Mindshare and Zenith, the media men got into the driving seat after the creative part of the agencies split from the media buying part two decades ago. Now, increasingly it is the “Math Menâ€, coders or software engineers who empower the algorithms that make most of the major decisions in the ad agencies — like how much money needs to be allocated to what media and how a brand owner can precisely target the exact demographics they want to reach.
In his recent book, Frenemies, The Epic Disruption of the Ad Business (and Everything Else), veteran media watcher Ken Auletta notes that the rise of programmatic advertising is helping coders “transform what was an instinctual art into a scienceâ€.
To be sure, the advertising industry has long used technology and data to carefully target ads. But it was not until the arrival of Google and Facebook, which not only collected a ton of very personalised data but were able to slice and dice it to maximum effect, that the advertising industry moved from being a relationship business to one that is data driven. Nowadays, it does not matter what the circulation of your newspaper is, how many households your TV station reaches or how many clicks a clickbait website gets, the algorithm already has it all figured out who gets to see the ads. While there was once an information arbitrage that media owners could presumably milk to their advantage, now there is none.
So, what exactly is programmatic advertising? Think of it as the automation of online advertising to allow the buying and selling of ad inventory electronically. “Programmatic ad buying is not just efficient, it also enables more sophisticated and carefully targeted ad campaigns,†notes Mark Mahaney, internet analyst for RBC Capital in San Francisco. Once confined to mostly display ad inventory, programmatic advertising has grown to include mobile, audio and video inventory as well. Moreover, programmatic ads once the domain of developed markets like the US and Europe are now driving ad spending in Asia, including Japan, China, Korea, Southeast Asia and India.
Here is how most of the ads we see online are delivered these days: Let’s say you surf a news website. As the site’s content starts loading on your screen, the publisher, through the use of cookies it has placed inside your device, finds that it has a lot of information stored about you. The publisher then sends the information to the ad server asking it whether there is an ad campaign available targeting someone like you. If there is none, the server seeks to match the impression programmatically, requesting responses from selected traders, ad networks or supply-side ad platforms. If the impression is not cleared, the request is sent to an open ad exchange which, in turn, sends a bid request containing information about your browser and the website you are surfing as well as the ad type to multiple bidders including traders, ad networks and demand-side platforms.
Each bidder processes the bid request, overlays it with additional user data as well as marketers’ targeting and budget rules. Each bidder’s algorithm evaluates the request, selects the ad and sends it along with the optimal bid price to the ad exchange, which selects the winning bid. The ad exchange sends the winning ads’ URL and price to the publisher’s ad server, which tells your browser which ad to show. The whole process takes up to 200 milliseconds.
Programmatic campaigns are particularly popular among finance, technology and automotive brands. Google, ÂApple, Samsung Electronics, ÂProctor & Gamble, L’Oreal, Unilever, Amazon and auto insurer Geico were among the top programmatic advertisers last year, but banks such as JPMorgan, and telco giants like ÂVerizon and General Motors are pouring more of their ad dollars into programmatic advertising.
Targeted advertising
Ad tech firms like The Trade Desk are helping to enhance targeted advertising as Google, Facebook and Amazon use their massive data sets to help advertisers focus on customers with more detail. Algorithms allow ad buyers to set consumer-targeting parameters like, say, women between 25 and 35 who buy at least two pairs of shoes every three months, matching brand advertisers’ demand to a publisher’s supply at instantaneous market-clearing prices.
I recently bought a leather office chair online. Since then, I have been inÂundated with ads from online furniture retailers such as Wayfair, Birch Lane as well as Amazon before I watch Youtube videos, as well as ads from home decoration firms.
Last week, ads from companies selling wallpaper suddenly started to appear each time I logged in to the New York Times website. Combining data sets with correlated behaviours and trackable purchase outcomes is what makes Google, Facebook and Amazon so important in the advertising world, and an increasing disintermediation threat to the ad industry because data analyÂtics was once a key competitive advantage of media buying agencies.
If you want to understand how the global advertising industry is being transformed, look no further than WPP, the world’s largest advertising holding firm, which earlier this year fired its long-time CEO Sir Martin Sorrell. Its stock has plunged 39% from its peak 18 months ago because investors believe ad agencies are no longer powerful middle men as they once were. Large clients are increasingly in-sourcing some of the work they used to farm out to advertising groups because they now have a lot of data themselves and are loathe to have an outside firm collect their data, slice and dice it and tell them what they need to do.
Investors are betting that with their falling margins and diminishing intermediary role, ad giants such as WPP deserve to be de-rated. Last week, WPP named Mark Read to replace Sorrell, who at 73 has gone on to set up his own tech-focused ad group, and remake the firm into a leaner, meaner outfit that can thrive in a world where advertising is increasingly programmatic.
Source: http://www.theedgemarkets.com/article/tech-programmatic-ads-are-changing-media
View original content: 
