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In a constantly growing online advertising ecosystem, it seems everyone is buying more and more media through ad exchanges. Marketers, advertisers, agencies, publishers, and people alike are all after a piece of their own ad exchange goodness, perhaps more than ever before. However, there’s often a certain level of misunderstanding and confusion about what an ad exchange actually is, what its role is, how it works and differs from the rest of the advertising ecosystem. With this post, we aim to answer those burning questions.

The Basics

The definition of an ad exchange is a simple one: it’s an online marketplace that allows advertisers and publishers to buy and sell advertising inventory, often automatically through real-time bidding. They’re used to buy and sell various types of digital ad formats, like display, video, and native desktop and mobile ads. Google’s DoubleClick Ad Exchange is an example of a major ad exchange, but there are also many independent exchanges like The Rubicon Project, AppNexus, PubMatic, and others.

Ad networks are increasingly buying inventory from ad exchanges as well, which adds another layer of confusion to the whole operation, seeing as the two are quite similar. You might want to check our ad network vs ad exchange post for further clarification. In a nutshell, an ad network aggregates inventory from signed up publishers and then offers that inventory to the advertisers at a slightly higher price (their markup) as a way to charge for the service. An ad exchange is an evolved form of that process, usually built around the inventory from multiple ad networks. There are more flexibility and transparency embedded in the entire process, aspects which we’ll discuss further on.

The Process

Basically, anyone can buy from an ad exchange if the marketplace allows it. Consider it as a big pool of impressions where two parties are involved. Publishers add their ad impressions into the pool, aiming to sell them. They typically use a supply-side platform (SSP) to make their inventory available. As soon as a user visits a page on a website or in an app, an ad impression is up for auction on the exchange. On the other hand, buyers sort through and pick impressions they wish to purchase using technology like a demand-side platform (DSP) or its own bidding devices. These decisions are made in real-time, based on certain available targeting options, which help figure out if it’s worth to bid on the impression and if so, how much. For instance, information such as user behavior, specific demographics, device type, ad position, and much more, across a large number of publishers.

Depending on the marketplace, buyers rarely know in advance where their ads will display, while sellers also sometimes don’t know who is buying their inventory.

How Ad Exchanges Differ from SSPs

Now, if you think all this sounds strikingly similar to what SSPs do, you’re right. Also, you get an extra point for discovering where a great deal of confusion comes from. The difference between the two gets smaller and smaller each day, as technology advances and SSPs work their way to attract more and more publishers. Along with facilitating ad transactions, SSPs present more encompassing entities, in that they can connect multiple ad exchanges and networks or any combination of open exchanges and private marketplaces (we’ll get to these in a minute) and feed them with inventory, not compete against them.

In addition, they offer tools specifically designed for publishers (the selling side) to optimize their sales efforts and sell more ads. Thus, the main difference is the perceived use – publishers mainly use SSPs to access multiple marketplaces and open their inventory to a wider audience, instead of working with just one. You’ll also find the latest fashion in the industry: ad exchange/SSP hybrids that offer a full range of support for both the sellers to auction impressions and buyers to bid on them. ONE by AOL is an example of such a platform that caters to both sides.

Open vs Private Exchange

The term open exchange refers to an open marketplace accessible to all buyers. Compared to an ad network, there is more transparency at play here in terms of bidding and who is buying and selling. Still, with fraud being a persistent problem in online advertising, both sides regularly want to be a bit pickier. Advertisers want more control over where their ads appear, whilst publishers want more control over who has access to their inventory. The need for a more closed environment led to the creation of private exchanges, where publishers can allow access on an invitation basis (a favorite advertiser or a preferred agency), as well as set pricing floors (minimum bids). As a result, private exchanges aggregate a higher quality inventory as opposed to that found on open exchanges.

Why Ad Exchanges Matter

With the marketing world moving closer to buying audiences to power their efficiency level set against buying specific media, ad exchanges matter more than ever before. They have grown into an important, almost essential tool for advertisers to buy ads across a wide array of websites at once, rather than negotiating directly with particular publishers. In the end, the entire ad exchange principle revolves around delivering a more efficient and effective way to buy and sell advertising inventory.

The general notion of an ad exchange is a simple and noble one: to create a digital marketplace where the previously wearisome buying process is upgraded to an automated fashion. No more going to Dullsville (or Inefficiensburg, depending on how you look at it) for your media buying and selling or one-on-one negotiations with sales departments and marketing representatives. As a result, both the buying and selling side benefits. Publishers get to set rules on what ad types and formats they accept, as well as set pricing floors. From a buyer’s standpoint, they gain access to a variety of available inventory to bid on. More flexibility in the overall process means targeting is done more accurately. That, in turn, affects ROI for the better.