The economic rules governing the advertising technology industry can seem a little counterintuitive when referring to pixels and cookies versus physical goods or financial instruments. Further, when it is as easy as installing a snippet of JavaScript on your page to start making money, companies can seem more like pyramid schemes than players in a fundamentally sound market. However, believe it or not, the advertising technology industry is governed by the same economics that govern most every other industry. And supply, demand, price, and quantity are some of the most fundamental economic concepts that can be applied to ad tech with just a little translation.
Ad “inventory” is essentially synonymous with “supply.” This is the available ad space on a website. Thus, publishers are the suppliers of the industry. And the price a publisher is willing to accept varies depending on content, seasonality, audience, location of the ad zone on a page, and many other variables. Considering the way that ad serving works, with an individual advertisement being passed from advertiser to network, to exchange, to SSP, to publisher, etc, this might seem backwards. But the best way to think about it is the way the money flows. Ad “inventory” is available for purchase, just like product inventory in a store or a warehouse.
On the other side is “demand.” “Demand” is essentially advertising spend. “Demand” by advertisers also varies based on seasonality, content, audience, etc. for the same obvious reasons. Where the supply and demand curves meet is the nexus we use to identify “price” and “quantity.” Of course, we, the ad tech industry, have our own word for “price” which is “CPM.” And we express the concept of “quantity” with terms like “ad traffic” and “fill rate.”
Once you boil the industry down to these fundamentals, it seems less populated with buzzwords and more with terms reflective of actual economic opportunity. Terms like “demand side platform,” “supply side platform,” and “ad exchange” make sense despite the fact that they sound more like they come from Wall Street than Silicon Valley or Madison Avenue (or Boulder, Colorado in our case). In fact, these terms are reflective of a healthy and fundamentally sound (although ridiculously dynamic) market with incredible economic opportunity for years to come.
Just take a look at LUMA Partners‘ Display Advertising Technology Landscape to get a sense for the sheer number of companies involved in this highly competitive and fast growing market:
The latest numbers from eMarketer estimate that the US online ad market will see dramatic growth this year with spending to increase 20.2% to $31.3 billion. eMarketer also predicts that by 2015, total US online ad spending will reach $49.5 billion, more than 58% higher than this year’s estimate. Now those are some ad tech economics!
-
Jayati
-
Joe Quaglia
-
Brady Sadler
-
Joe Quaglia
-
Manager