The Walled Gardens Are Eating Open Programmatic – Here’s How They Do It

Beyond the money they mint with their owned-and-operated inventory, Google, Facebook and Amazon are, each in their own way, bidding into nearly every programmatic auction that takes place across the open internet.

Although programmatic is growing year over year, independent ad tech players are increasingly fighting over the remaining crumbs while the walled gardens cut themselves larger slices.

Here’s how Facebook, Google and Amazon are tapping into the ad network model to beat ad tech at its own game.

Numbers don’t lie

Ad tech consultancy Jounce Media estimates that global programmatic ad spend on the open internet (not including walled garden OO, which industry reports often do) will hit $49.8 billion in 2019.

Together, the top walled garden ad buying platforms – Google Ads (formerly AdWords), Display Video 360 (Google’s DSP), Facebook’s Audience Network and the Amazon Demand-Side Platform – will claim the lion’s share of that, around $33.6 billion.

In other words, the combined spending power of every independent buy-side platform and ad network out there is just a smidge over $16 billion – and shrinking. The non-walled garden share of RTB has declined by roughly $1 billion a year for the last three years.

“If one DSP grows by $1, that means another DSP is declining by more than $1,” said Chris Kane, founder of Jounce Media. ”That will remain the same as long as the walled gardens keep growing the way they’re growing.”

Secret sauces

Facebook, Amazon and Google each enjoy certain advantages when they participate in an open auction.

They have direct integrations with thousands of publishers, so they can access programmatic impressions without having to transact through a third party. There’s almost always a middleman – an exchange, for example, or group of resellers – between any DSP and the publisher. (Criteo, which has direct-to-pub integrations, is a notable exception, Kane pointed out.)

More important is how these platforms price inventory before they resell it. Most DSPs price on a CPM basis, whereas the big three usually sell on clicks or some other performance-related outcome.

“The fact that the walled gardens can charge advertisers on a CPA or CPC basis and pay publishers on a CPM basis gives them extra leverage in terms of arbitrage,” said Lizzie Chapman, VP of media at VaynerMedia.

Say a marketer pays Facebook for a 50 cent CPC and Facebook buys impressions from a publisher at a $5 CPM. There’s no guarantee that the people who visit the publisher will click on the ad, so Facebook is taking on a small amount of risk. But when clicks do happen, Facebook makes its money back and then some.

And because Amazon, Facebook and Google have “an immense amount of data at their disposal,” Chapman said, they’re good at understanding yield and knowing who will take a certain action or click on an ad, so they don’t mind paying high CPMs, which keeps publishers happy.

On top of all that, the walled gardens are in a position to spare buyers the ad tech tax, said Ben Tregoe, SVP of revenue and business and corporate development at Nanigans.

“There’s a lot going on in the supply path from a DSP, which means I can only bid so high, since I have to factor in other costs,” Tregoe said. “The only factor that impacts a walled garden’s ability to price is how much margin they want to make.”

Undisclosed margin, of course.

“Google exposes its tech fee in the contract – but you don’t know what Google takes if and when there’s arbitrage,” said Chip Schenck, SVP of data and programmatic solutions at Meredith. “And the same is true for Facebook and Amazon.”

Facebook’s leverage

Facebook makes the bulk of its revenue on its OO – more than $50 billion last year and likely in excess of $60 billion this year primarily through Instagram and the core Facebook platform – but its ad network is a growing business.

Audience Network will net around $4.8 billion worth of programmatic ad spend this year, up from $4 billion in 2018, according to Jounce.

Reach extension through the Audience Network is a simple affair. Advertisers only have to click a button within Ads Manager to participate, chiefly on a CPC basis, in nearly every header bidding auction across Audience Network’s roughly 50,000 mainly mobile publishers.

Every time an impression becomes available on a Facebook publisher, Facebook evaluates the likelihood that someone will click on the ad. If Facebook judges that a click is likely, it buys on a CPM basis betting it will earn a hefty CPC from an advertiser willing to pay for that particular impression at just that moment.

Facebook is very good at making these calculations, and its seven-million-strong advertiser base – many of them small businesses – gives Audience Network an edge, Kane said.

He explains it this way: “Facebook isn’t using its buying power to push down prices, it’s just that Facebook often can pay the most. They have the scale in order to have the opportunity to offer hyper-targeted ads.”

Facebook explains it slightly differently: “We find the right advertiser for the right placement across our family of apps,” a spokesperson told AdExchanger. “This doesn’t necessarily mean the highest bidder’s ad will be placed on a publisher’s site or app, but the one with the right bid combined with an ad most relevant to the site or app visitor will win out.”

Regardless, the average eCPM is on the rise for publishers that sell their inventory through Audience Network, where the median increased more than 91% year over year in Q1 to $7, according to AdStage.

Facebook’s margin, however, is a total mystery.

Matt Burgess, manager for business development and programmatic partnerships at PCH/Media, the digital advertising arm of Publishers Clearing House, asks his Facebook reps roughly once a quarter for a little clarity on the margin front, but “they’re very buttoned up,” he said.

“There’s no transparency around the revenue split, which seems to be on a sliding scale, and any time we try to have a conversation with them about this, it’s awkward, to say the least,” Burgess said. “I would love to know, but the performance is so strong, we’re willing to sweep that question under the rug.”

For the record, AdExchanger also asked Facebook if it would ever share its Audience Network margin. “This is not something we disclose,” the spokesperson said.

Publishers are only inclined to push so hard. Audience Network isn’t the best option every time – an SSP like Rubicon or OpenX performs better on mobile web, for example, Burgess said. But when PCH/Media is looking to sell in-app inventory, Facebook blows the competition out of the water.

“That’s an easy story for us to tell internally to the folks that matter, even though we assume Facebook is making a healthy margin,” Burgess said, “and it gives Facebook leeway in terms of not being transparent.”

Google’s upper hand

The same thing is happening at Google.

Within its stack, Google’s enterprise-grade demand-side platform, DV 360, is mainly used by larger advertisers that demand extreme transparency, limiting the opportunity for arbitrage.

But it’s also got an ad network called Google Ads (formerly AdWords), which is split into two separate networks, one for search and for one display (aka, the Google Display Network or GDN). A subset of the demand from the roughly 4 million advertisers that use Google Ads runs across the display network.

Jounce estimates that Google will slurp up $24.4 billion in open programmatic ad dollars this year, mostly via Google AdWords with a little DV 360 thrown in.

Google gets a leg up, too, from its hooks into the supply side and the fact that it has its own widely-used ad server, said Justin Scarborough, programmatic media director at PMG. That, rather than RTB, is where arbitrage can enter the picture.

Although Google has invested a lot of time and effort into establishing DV 360 as its main programmatic platform, it still relies heavily on GDN for a lot of small and mid-sized advertisers, Scarborough said.

“GDN is a huge source of revenue for Google, and it’s very easy for unsophisticated advertisers to expand their reach without having to onboard a large DSP, like DV 360,” he said. “Google has the ability to nudge into the open ecosystem because of its scale.”

Like Facebook, the scaled proprietary demand that comes flowing in through AdWords (sorry, Google Ads) is built off of a large base of small advertisers.

But GDN is analogous to Facebook’s Audience Network and Amazon’s version (see below) in another way – “it’s also totally opaque,” Kane said. “Publishers have no idea what advertisers are paying.”

For his part, Scarborough has asked what the margins are for Google’s ad network multiple times with no luck.

“Google claims they don’t take anything from the buyer on the AdEx side, but what happens on the publisher side is very opaque to us, and to the extent they are disclosing on the publisher side, they only have to worry about the party they’re dealing with directly,” he said. “A PubMatic or a Rubicon are willing to disclose their take rate if we sign a deal with them and commit spend, but Google doesn’t have to – I mean, why would they?”

Amazon’s advantage

Although Amazon’s ad revenue growth rate is starting to level out as the platform matures, it’s still growing, and Jounce expects Amazon DSP to make $4.4 billion in open programmatic ad spend this year.

On the surface, Amazon’s ad network functions like Audience Network or GDN, because it has direct integrations with publishers. But Amazon will also bid into exchanges for off-platform reach, and it’s got a big advantage in Transparent Ad Marketplace (TAM), its highly-penetrated server-side header bidding solution, which means it doesn’t have to work with an exchange to get into the wrapper – and it doesn’t need to pay an exchange fee. Amazon saves even more in tech fees by using its own homegrown DSP.

“Amazon is really smart in how they integrated with supply through server-side technology,” VaynerMedia’s Chapman said. “In order to get demand directly from Amazon, you’ve got to integrate directly, which is a supply chain advantage, but means less transparency.”

Amazon can also use data about its advertisers’ audiences and off-platform site placements to feed its own retail marketplace and inform its own private-label brands, not to mention that ads bought through Amazon’s ad platform direct people back to Amazon’s own site or app, where it can get a cut of the transaction fee if a purchase is made.

Any buyer that cares about shopping and retail data “would be silly not to try and utilize it if they can to buy some Amazon ad inventory,” Chapman said.

The thing is, Amazon is transparent about third-party partner spend, but not necessarily about its own.

Although Amazon’s TAM positions itself “as a transparent passthrough that uses their data to create buying opportunities,” Meredith’s Schenck said, it’s unclear how much of a publisher’s inventory is being consumed by proprietary Amazon budgets compared with Amazon client budgets.

“While arbitrage is a part of our industry, those that run a platform that monetizes third-party inventory – an SSP, for example – and also run a media sales staff – Google, Amazon and Facebook – have a responsibility to keep a clear distinction,” Schenck said.

Regardless, publishers like Dotdash are psyched about the Amazon opportunity. When Amazon runs promotions for events like Black Friday, Cyber Monday or Back to School, for example, the prices it pays for inventory are great, said Sara Badler, head of programmatic revenue and strategy at Dotdash.

“They’ve perfected their open strategy and the next phase they’re looking at is programmatic direct,” Badler said. “Partnering with Amazon even more strategically – that’s a big goal we’re working toward.”

Google and Amazon did not respond to a request for comment.

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