Pros and Cons of Programmatic Advertising

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Programmatic ads can bring campaigns to a much larger audience, for better or for worse.

Between 1990 and 2000, the number of websites on the internet increased dramatically.

Advertisers used to contact websites directly to negotiate the terms of purchasing available ad space when the internet was first created. However, the stratospheric growth of the internet quickly outpaced human teams’ abilities to keep up, with millions of websites and their tantalizing legions of visitors still out of reach.

These agencies and startups began around 1995 and allowed advertisers to purchase ad space from "ad networks."

Ad exchanges began using a system of automated auctions to sell available ad space in 2005. Auctions are initiated each time a user loads a page on a website, transmitting information about the site, the ad space and the user to the ad exchange, which disseminates it to advertisers and announces the auction. The winning bidder's ad will be displayed on the user's browser by the time the page finishes loading.

Pros:

• Allows selling at higher volume
• Small pages can make money on ad exchanges without sales team
• Targeted ads can be administered

Cons:

• Risk of fraud is higher with automated ads
• Lack of transparency caused by complexity in the industry
• Privacy concerns

Real-time bidding, a method still widely used today, can place an advertiser's ad on any website participating in the exchange, greatly expanding the range of an advertiser's audience. The use of automation in auctions allows for separate negotiation of each purchase, even when sales volume is high.

The Rise of Targeted Ads

Advantages that ad exchanges have over traditional ad sales are touted by the companies operating them. The increase in sales volume is indisputable: real-time bidding is often compared to the stock market, but an average day of trading on the New York Stock Exchange sees 4.5 billion transactions, while a single ad-tech company, Fiksu, reportedly sells 32 billion ad spaces daily.

The rise of programmatic ad sales has democratized the advertising industry, allowing small unknown websites to sell their ad spaces alongside well-known publishers and make some money.

Those in favor of programmatic advertising argue that it also leads to fair prices for both publishers and advertisers. By participating in auctions, publishers can be confident they are getting the best possible price for their ad spaces, at least among the ad exchange’s advertisers. Advertisers can make purchasing decisions on a case-by-case basis and not waste money showing ads to users who are unlikely to buy their products.

For example, an advertiser who is selling women's shoes may tell the ad exchange to only submit bids if the user is a woman, and to bid more if the user has previously visited the advertiser's website. This type of ad transaction, in which advertisers decide whether to purchase ad space and how much to purchase it for, based on information about the user, is known as "targeted advertising." It makes it possible for users to see advertisements that are relevant to them, depending on their personal characteristics, location and web browsing history.

Programmatic ads offer the advantage of allowing advertisers to pay based on how well an ad performs, rather than traditional methods which only allowed for measurement of success after a significant increase in sales. Pay-per-click (PPC) or pay-for-performance (P4P) advertising is a type of programmatic advertising where advertisers only have to pay if the user performs a desired action, such as clicking on the ad or making a purchase.

Attention Is Difficult to Quantify

In order to move to real-time bidding from the traditional way of advertisers assessing potential ad space, a way to quantify the quality of ad spaces was required so the time-intensive assessment step could be removed.

In his book Subprime Attention Crisis, technology policy researcher Tim Hwang discusses the concept of the "commodification of attention." According to Hwang, real-time bidding required standardization so that "the amorphous, shapeless concept of attention [was] transformed into discrete, comparable pieces that can be captured, priced, and sold."

The Interactive Advertising Bureau published a set of standards in 2004 defining how to tell whether an ad was consumed by a user. According to Hwang, attention can be measured in different ways, one of which is page load. If an ad is present on the user's page upon completion of loading, then the user is considered to have consumed the ad. If the ad is at the bottom of the page, the user may never see it.

How can we be certain that the user is engaging with the ad, or taking in the information presented?

The current IAB standard for viewable impressions is an ad that is 50 percent viewable on a user's screen for more than one second. Even with this definition, how can we be sure that users are actually looking at the ad, or registering what they are seeing?

Hwang argues that the industry benefits from having an easily measurable definition of ad "impressions." However, this standardization is forcing something that resists easy quantification. He predicts that the industry's foundations have created a bubble that could burst at any time.

The outcome of that is yet to be seen, but the speed and scale of real-time bidding did give rise to an unwanted phenomenon: ad fraud.

How Can Companies Weed Out Ad Fraud?

Ad fraud can be prosecuted criminally, as in the 2015 case of a man extradited from Estonia to the United States on wire fraud charges. More often, however, it is the subject of civil lawsuits.

Due to the fact that it is easy for websites to sell ad space on ad exchanges, some individuals realized they did not actually need to attract audiences to earn ad revenue — instead, they could use bots or click farms. According to ad-fraud consultant Dejan Tatic, those who engage in ad fraud can list thousands of sites on each ad exchange. Botnets are used to repeatedly load webpages and earn money from ad impressions, or click on ads to get pay-per-click revenue.

"The automation of the internet has allowed bad guys to also scale the fraud," Dejan said.

Juniper Research, a market research company, released a report estimating that ad fraud cost the industry $42 billion in 2019. According to a study, it is estimated that 40 percent of programmatic ad money spent was spent on fraudulent sites.

The average click-through rate for ads on Google Ads was 0.46% in 2018. Out of the webpages you load every day, how many have ads? And when was the last time you clicked on an ad?

The director of fraud prevention at marketing analytics company Adjust, Andreas Naumann, said in a previous interview that many in the industry were resistant to the idea because there are a lot of jobs at stake.

If the marketer chose to look more carefully at their own analytics, they would be able to see many things that are out of place and don't seem to make any sense.

Ad exchanges stand to benefit from fraudulent publishers due to the typical structure of deals between ad exchanges and advertisers.

"The exchange will find every possible means of spending it all,” Dejan said. Exchanges will not mind this change, as it will help them to generate revenue more quickly. This is because their profits are based on the amount of activity that takes place on their exchange.

While there are tools available to measure the amount of fraud occurring within an exchange, such as DoubleVerify, Dejan said that these tools are unreliable and are often used more to appease customers than anything else.

"According to Dejan , sometimes marketers don't want to be aware of fraud." They just buy the fraud detection programs and hope it solves the problem.

He said that finding and stopping ad fraud is not difficult and does not require fancy technology — most of the time, it is obvious. He has helped clients examine their own analytics and discovered instances where 100 percent of a website's traffic comes from Android 10, rather than the usual mix of devices from real users. He has observed that there are always high levels of traffic throughout the day.

"If the marketer chose to look more carefully at their own analytics, they would see many things that are out of place and don't make sense," Dejan said. "All you have to do is identify sites that are cheating and then say 'OK, let's turn it off.' You don't need anything special, you just need to look."

Real-time bidding is just one way to advertise.

In May 2020, the Incorporated Society of British Advertisers released a study examining the programmatic advertising supply chain and expressing concerns about the industry's operations.

The study found that programmatic advertising, which is premised on the idea of being more data driven and targeted than traditional advertising, was almost impossible for advertisers to get the data to understand how their money was being spent within the exchanges.

The study found that publishers only received 51 percent of advertiser spending, with the rest going to various fees — including 15 percent of total advertiser spending that researchers were unable to account for. In its announcement of the study, ISBA expressed concerns over "the depth of the supply chain's lack of organization and complexity," and the report recommended that the industry work "urgently" to reduce its amount of complexity and improve transparency and standardization.

Real-time bidding is just one type of programmatic ad sales - the others being "preferred deals" and "automated guaranteed" deals. These methods are "programmatic" because deals are still automated, but they give publishers more control over who they are selling ad space to, and advertisers more control over which publishers they are buying from.

The means of acquisition is not as significant as the source.

Publishers are increasingly selling ads using programmatic methods, rather than real-time bidding. In 2019, eMarketer reported that advertisers have been spending less on real-time bidding compared to other types of programmatic advertising year over year, with real-time bidding down to 38 percent of all programmatic advertising spending.

In real-time bidding, publishers have also been moving away from "open exchanges" to "private marketplaces." Private marketplaces have garnered greater percentages of sales compared to open exchanges year over year.

For advertisers, it is more important to know their publishers than how they buy ads, Dejan said.

"It is not as important to consider the method of purchase as it is to consider the seller," he said. "If you purchase an item directly but from a fake site, you are still at risk of being scammed."

Advertisers should use publisher allowlists to ensure that their ads only appear on known and vetted websites, regardless of purchasing method.

The industry must adapt to a post-third-party cookie world

Another problem that programmatic advertising is facing is the negative reaction to the use of cookies to collect information about users’ internet habits. User behavior information is valuable for programmatic advertising because advertisers make decisions about purchasing ad space based on user data. Data management companies that provide this information typically use cookies, which are often called “third-party cookies,” to track users’ behavior as they move around the internet.

In order to address concerns about third-party cookies, the European Union enacted General Data Protection Regulation in 2016 and the state of California enacted the California Consumer Privacy Act in 2018. Both of these pieces of legislation regulate and constrain how companies are allowed to collect user information. Some browsers, like Firefox and Safari, have chosen to block third-party cookies by default, while others, like Chrome, are planning on phasing out third-party cookies altogether. Companies within the industry are looking for ways to still track user behavior, without using third-party cookies.

User information is important to programmatic advertising, but the data collected by third-party cookies is not always accurate.

"It is often the case that a particular cookie is designated as both male and female, because they cannot ascertain the gender properly," Dejan said. "If the data you are buying will not improve your chances by more than 50 percent, it is not worth paying extra for. What can you infer about a person from their choice of CNN or Walmart? What might be some accurate conclusions?"

Third-party cookies restrictions are one of the biggest challenges facing the industry, according to Vice President Brent Carter at OpenX. Under GDPR, users have the right to opt out of having their data collected. However, websites in the European Union are required to allow users to continue using the site if they decline cookies.

In 2018, Ster, the exclusive sales house for the public broadcasting company in the Netherlands, saw a decrease in the use of third-party cookies of 90 percent within one week of implementing changes to be compliant with GDPR. Ster's use of Google Ad Manager resulted in a sudden loss of user data, which made advertisers less interested in purchasing ad space from the publisher.

"Within one week, we saw a drop in revenue of approximately 90 percent," said Tom B., Ster's former head of programmatic advertising.

Tom's team decided to build their own way to sell ad space, without going through an ad exchange or collecting user information. "We had no idea what the cost-per-impression price should be, so we started with a 50 percent discount of our regular fare," Tom said. "Within one or two months, we made 100,000 euros."

The prototype was successful, and Ster soon partnered with a tech company to build a fully functional ad server that didn't rely on user data. Tom, who is now Ster's manager of digital strategy, said his experience contradicts the industry's conventional wisdom that cost-per-impression earnings are higher for publishers that have access to user data.

"We are likely the most expensive publisher in Holland, without using data," he said.

Two years after Ster began selling ad space using its new programmatic method, Tom is glad to be rid of the ad exchanges — instead, Ster is evangelizing the system to others.

He does not believe that the current predominant method of selling ad space, which uses more data on users in real time, is better. In fact, the system's frequent mistakes often result in laughable mistakes.

“I booked a holiday two weeks ago, and the ads have been following me ever since,” Tom said. “I returned home seven days ago, but I’m still getting airline offers on every website I visit."