MSFT Rolls Out AdECN ‘Federated’ Pilot

I was given a briefing a couple of weeks ago by the folks at ad exchange AdECN, now owned by Microsoft. Since the acquisition of AdECN in July of last year, Redmond has poured development resources into building up the back end and beefing up the platform.

Yesterday the company announced a “pilot program” for ad networks involving its “federated system”:

The federated system is an extension of AdECN’s existing exchange platform and will provide functionality not currently available in any online exchange, including the ability for ad networks to use their own proprietary technology, such as behavioral and demographic targeting, and optimization tools.

Like the New York Stock Exchange model, the AdECN exchange acts as a neutral auction house that automates the buying and selling of online display advertising. A neutral exchange is one that brings together multiple ad networks, agencies and online brokers to create a marketplace where all participants access a larger pool of supply and demand for online advertising inventory.

Unlike other exchanges, with the addition of the new federated system, the AdECN exchange will now allow its members to price every ad impression in the auction, so display ad impressions aren’t undervalued or overvalued. For instance, once an auction is initiated within the exchange, all of the members can bid equally for that ad impression and the highest bid wins. The exchange will also continue to provide a hosted technology service for other ad networks, brokers and agencies.

There is also a forthcoming hosted offering for smaller networks and aggregators.

Basically an exchange is an uber-marketplace where impressions are bought and sold across ad networks. An exchange greatly enlarges the pool of available ad inventory and potential audiences (eyeballs, clicks, views). In theory these audiences could be sliced and diced in finer or more unconventional ways as well.

The analogy, as the quote above implies, is to the stock market, where all players can come in and bid on public company shares — here ad impressions across the Internet.

The term “exchange” has been widely adopted and is thus somewhat confusing. For its part, AdECN sees and divides the world of exchanges into three categories:

1. Advertiser-publisher exchanges: essentially a big ad network (it cites TraffIQ, ADSDAQ as examples)
2. “Hybrid” exchange: involves both publishers and advertisers directly, as well as ad networks (i.e., Right Media, DoubleClick Exchange)
3. Ad Network exchange: publishers and advertisers don’t get direct access but their “brokers” do (i.e., agencies/ad networks). AdECN falls into this category according to Microsoft

The various companies mentioned above might well take issue with this scheme. But this is how Microsoft organizes the competitive landscape.

The ambition is for AdECN to become the New York Stock Exchange of online ad exchanges. Microsoft points out that the NYSE has 75% of the market, while the NASDAQ has 20% and other exchanges have 5%. Because the entire concept of an exchange is predicated on scale there can really only be two or three major players; otherwise you’re a regular old ad network.

The presentation I saw a couple of weeks ago was impressive, although I didn’t see any demos and can’t evaluate any of the technical claims (because I’m not an engineer; I take them at face value). The primary values of the exchange are convenience/efficiency and liquidity. Right now, with display ad rates falling and an apparent abundance of supply, liquidity isn’t so much the problem — although there’s considerable inefficiency in the market, one could argue.

The exchange concept is powerful and has the force of inevitability as online advertising continues to mature. The question for AdECN is whether its platform and model are superior to its competitors and thus whether it can attract a critical mass of ad networks to participate.

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In terms of local: theoretically one could buy a much wider range of geotargeted display inventory through an exchange than through a single network.