This industry loves to invent new phrases. Needing to explain the differences between DSPs, DMPs, SSPs, ad exchanges, ad networks, data exchanges and the like provides plenty of material for the conference circuit. Let’s focus on the difference between two closely related and trending buzzwords: programmatic and real-time bidding.
Programmatic is an umbrella term for using computers to automate buying and selling. This automation can happen in many areas far outside of online advertising. High frequency trading is one example of how programmatic methods have replaced the traders who used to fill the “pits” of stock markets. What once was done in carefully choreographed chaos has now been replaced by machines that are able to take advantage of tiny arbitrage opportunities in a fraction of a second. Going way outside the mainstream, NPR did a piece on how programmatic buying is transforming the way space is bought on cargo ships.
Another use of programmatic buying is the purchasing of ad inventory. This is where real-time bidding (RTB) comes in to play. RTB is a method of buying that allows purchasers to bid on individual ad impressions. An ad exchange — like AppNexus, OpenX, Google’s DoubleClick, or Yahoo!’s Right Media Exchange — hosts an auction for a particular ad placement for a specific user. In less than a tenth of a second, participating bidders tell that exchange how much they are willing to bid and what ad they want to show. The ad impression goes to the highest bidder (subject to some restrictions the site might set). Most exchanges use a second price auction to determine the clearing price, but that is a conversation for another time.
They say a picture is worth a thousand words, so here’s one I put together:
Originally RTB was limited to remnant inventory that publishers could not sell through their direct sales team. As more and more buyers enter the RTB space, publishers are finding higher quality advertisers and higher clearing prices. This leads them to open more of their inventory to RTB, creating a positive feedback loop resulting in 40% of display impressions now being bought via RTB.
Programmatic buying and RTB have had a huge influence on the online ad industry, and their impact will only continue to expand as more and more ad inventory becomes accessible via ad exchanges.
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