What Is an Ad Exchange?

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There are a lot of moving parts (or players) in an ad tech[15] stack. You’ve got DSPs, SSPs, ad networks, ad exchanges, and so on. There are also a lot of different tools involved, but that’s an article for another day.

Now that we’re in the realm of post-header bidding[6], defining each player in the ad tech stack is becoming increasingly difficult. One question many new publishers and advertisers have is “what exactly is an ad exchange[7] and how is it different from an ad network[8]?” 

In this article, we’re going to define ad exchanges for you so you can be sure of what they are, how they work, and what they can do for you once and for all. Keep reading to learn more.

What Is an Ad Exchange?

Put simply, an ad exchange is a digital marketplace that acts as a platform for publishers and advertisers to come together to trade (or buy and sell) digital ad inventory[16][9]. The inventory can include several types of ad formats including display, native, video, mobile, in-app, and so on, and the trading is carried out as an auction. 

Auctions in ad exchanges happen in real-time, and they’re powered by real-time bidding[1] (RTB) technology (also referred to as header bidding). More importantly, ad exchanges don’t favor the buyer or seller — it works as an automated platform that simply facilitates programmatic ad buying and selling.

How Is That Different From an Ad Network?

Ad exchanges and ad networks are fairly similar, which is why they’re often confused for one another. As the ad tech world and programmatic ad buying and selling evolve, the lines between the two continue to blur even more. 

However, despite using somewhat similar tools and having almost the same function in programmatic ad trading, there are some very definitive distinctions. 

For example, you can think of ad exchanges as more of an online marketplace — almost like an online shopping mall. Publishers sell their ad inventories and advertisers buy them within this marketplace, and the ad exchange platform takes a small percentage of what publishers make from those inventories. This means publishers have a better chance of naming their price and selling their ad inventories at a higher amount 

Ad networks, on the other hand, act as a broker or a middle man. They buy up ad inventories directly from publishers (and at the lowest possible price) and then turn around and resell them to advertisers for the highest possible price. Their revenue is generated from the difference between what they’re buying and selling, and the deals are mostly favorable for publishers with remnant[17] ad inventories — not premium inventories.

It should also be noted that most ad exchanges function as open marketplaces. As the name suggests, open exchanges allow anyone to bid on publishers’ ad inventories. This provides a certain amount of anonymity on both sides, as well as a tremendous amount of impressions for advertisers to bid on.

How Do They work?

Ad exchanges work using an automated process that involves RTB, but that doesn’t mean there isn’t any human involvement. Here’s the play-by-play of how ad exchanges work:

  • The publishers make their inventory available through a server-side platform (SSP[2]) as well as the full details on that inventory. This would include page location, audience segment topics, URL, and so on.
  • Once a user visits the publisher[18]’s website via website or mobile app, an ad impression[10] will be delivered automatically since the auction is happening in real-time. Therefore, the data about the individual user gets collected as soon as they visit the page, and that information is transferred from the publisher’s server to the ad exchange.
  • From there, the ad exchange sends a bid request[11] to the demand-side platforms (DSPs) and ad networks. Each platform inspects the bid request and all of the data attached to it. After inspection, these platforms decide whether the impression is viable for the advertiser[12] in question. If the impression is viable, the DSP[3] or ad network will send a reply to the ad exchange with a maximum bid amount as well as the location of the advertising copy that’s to be delivered in the publisher’s ad space.
  • Next, the ad exchange will review all the advertisers who bid on the impression. The advertisers who don’t meet the publisher’s criteria are eliminated.
  • Once all the data is gathered and analyzed, the ad exchange will analyze each bid and sell the impression off to the highest bidder[19].
  • The advertiser who wins will get to display their ad content on the publisher’s website directly in front of their target audience. 

All of this happens in a matter of milliseconds, which means that the user seeing the ads is unaware that the entire ad exchange process is happening.

What Are the Benefits For Publishers and Advertisers?

As previously mentioned, ad exchanges are beneficial for both publishers and advertisers. 

These are the benefits for publishers:

  • They get to curate the ads they want and choose buyers according to their specific criteria. This allows for full autonomy, which also enables publishers to restrict access to any undesirable parties.
  • They earn the highest revenue possible by ensuring their ad space is sold to the highest bidder possible. Ad exchanges also utilize floor pricing, which ensures that no publisher gets less than they want for their ad inventories.
  • They get the flexibility to choose display locations and make other customizations to increase engagement. 

These are the benefits for advertisers:

  • They get to select from an incredibly large pool of ad inventories. This opens up a world of endless possibilities for buyers, and virtually guarantees premium inventory for each bid.
  • They get more autonomy over where their ads are placed, which gives them more control over their advertising campaigns.
  • There’s a greater opportunity for ad optimization[13] as they can use several different strategies for user targeting[20] including geotargeting[14], behavioral targeting[4], dayparting, inventor targeting, cross-platform targeting, and more. All of this ensures optimal engagement for their ad campaigns.

Ad exchanges are an essential platform in the ad tech stack, and they’re only becoming more beneficial to publishers and advertisers as time goes on. This is especially true as ad exchanges now offer the opportunity for private marketplace[5] deals. 

Terms
1. real-time bidding. Real-time bidding is a technology-driven auction process where ad impressions are bought and sold almost instantaneously. Once an advertiser wins a bid for an ad impression, their ad is shown on a website. Real-time bidding plays a crucial part in the digital advertising ecosystem together with other players such as ad exchanges and supply side platforms.
2. Supply-Side Platform [SSP] ( SSP ) A technology platform that provides outsourced media selling and ad network management services for publishers. The business model resembles that of an ad network in that it aggregates ad inventory, however they serve publishers exclusively and do not provide services for advertisers (e.g., FreeWheel, SpotX).
3. Demand-Side Platform [DSP] ( DSP ) A Demand Side Platform or DSP is a platform where advertisers can buy digital inventory to easily and more directly connect with sellers in a programmatic and real-time ecosystem.
4. behavioral targeting. Uses data from visitor browsing habits such as search terms, sites visited or purchases to display relevant ads and offers
5. private marketplace. Private Marketplace deals or PMP is a direct deal made between a publisher and buyer for programmatic ad inventory. A PMP can also be called Preferred Deals. This practice contains much more human interaction unlike the alternative of selling ad inventory through an ad exchange. Often higher rates for ad inventory can be negotiated through this method.

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