9th
How much will Online Media look like Wall Street?
A recent NY Times article highlights innovative companies like Varick Media Management (VMM) as “bringing Wall Street-like analysis to Madison Avenue, exploiting the huge amounts of data produced by the Internet to adjust strategy almost instantly.” Darren Herman, the Founder and President of VMM acknowledges “When VMM first launched, we called ourselves the first ‘advertising hedge fund,’ so I guess the tag-line works.”
Ad Exchanger covered the story as well, plying the Wall Street analogy to yet another traded commodity - pork bellies: “With Clifford clearly connecting the dots for readers between similarities in the stock exchange and this new era of media, pork belly haters’ heads must have been spinning.”
The Wall Street analogy is certainly evocative, and begs the question whether online media will some day be bought and sold in the same manner that stocks, options, commodities, currencies and futures today are traded today.
Of course, some fundamental differences exist between online ad impressions and financial assets, and this suggests that the online ad markets could and should evolve differently.
Impressions have real, but transitory, value
When you’re talking about trading online media at the impression level, it’s incumbent that the exchanges match a buyer and seller for ad inventory with little to no latency to minimize “dropping” the impression. When an ad is traded, the ad server better be ready to serve an ad into that ad slot, otherwise that impression is wasted - the ad is never seen and there is no value created for the advertiser or publisher. One startup to watch that is focusing on this space is Invite Media, which is providing a universal buying platform called Bid Manager, that allows an agency, ad network or media buyer to automatically buy and manage display media across multiple ad exchanges through one interface (via AdExchanger interview with Invite President Nat Turner).
Ad impressions aren’t similar to commodities like oil. There’s no way to park and store ad impressions the way you can warehouse barrels of oil, something that oil traders have been doing by buying tankers to warehouse oil bought at the cheaper spot market rate and sold forward at higher rates for future delivery (the contango trade).
Nor are ad impressions similar to financial securities like stocks and bonds. Holding shares of stock overnight in your brokerage account won’t mean those shares will turn worthless - the way an unserved and unseen ad impression evaporates.
Of course, there are other markets besides commodities and equities with which some may wish to compare the future “ad impression” trading market. We’ve seen markets emerge for Over-The-Counter (OTC) securities like Credit Default Swaps (CDS) or Weather Derivatives that pay off on measureable events like a bond issuer defaulting on interest and principal payments or on number of days that temperature falls below a certain temperature level.
Will hedgers, speculators and market-makers start trading contracts (taking counter-party risk) based on identifiable events in the online advertising space? What might those contracts and identifiable events look like? Would people be willing to invest (bet) on volume metrics, like the number of ad impressions served through a third-party ad server? Do people trust the data enough to enter those transactions? Does this type of trading invite fraud (computer bots clicking on web sites to generate false traffic and supply into which ad impressions could be served)? What about pricing data? Could there be verifiable price indices for advertising impressions’ value that are tradeable by counterparties? And in light of recent efforts to bring OTC securities onto an exchange (i.e. Chicago Mercantile Exchange’s efforts to serve as a clearinghouse for Credit Default Swaps), will there be standardized derivative contracts around ad impressions that can be exchange-traded in the future?
My personal view is that people will pretty much bet on anything if given the chance, especially if it’s someone else’s money. We’ve seen from the current credit crisis, that giving people the opportunity to trade a bank’s or insurance company’s balance sheet, and expropriate compensation based on (phantom) profits without sharing the risk of potential losses, will lead to risk seeking behavior. It’s clear that whatever lessons have been learned from the current market and regulatory environment should be applied to building the exchange model of the future for online ad trading, as we certainly do not wish replicate the mistakes of the past.
Thankfully, most of the innovation we’ve seen in the online media space today is not based on rampant speculation, but based on matching natural buyers and sellers of inventory (agencies, advertisers, publishers and networks) to eliminate friction, improve efficiency and effectiveness of the advertising itself.
Congratulations to Darren and John on the great coverage in the NYT of their efforts.
(Photo of contango oil curves courtesy of SeekingAlpha article - “Oil Contango - Roll Yield Rewards”)
