If the ad tech market is a mess in the U.S., it is worse in China.

Agency trading desks in the States received much criticism when last year’s Association of National Advertisers’ media transparency reports shined a light on sketchy ad tech deals. Much that was in the reports was an open secret; there has also been much lip service paid to reform.

But in China? “They are 10 times shadier here than in the U.S.,” said one programmatic vet who held a high-up position at a big holding group’s China office, and now works on the vendor side.

In today’s Confessions, where we grant anonymity in exchange for honesty, the executive parsed the nitty-gritty of ad tech in China.

Below are excerpts, light edited for clarity.

You say that trading desks in China are shadier. How so?
Trading desks in China are essentially ad networks where agencies are buying low and selling high. Agencies usually buy inventory from local demand-side platforms. Those DSPs consolidate remnant inventory on behalf of agency trading desks. It lightens agencies’ workload because instead of talking to 20 or 30 publishers, they can just strike deals with two or three DSPs. But the revenue model becomes blunt. For instance, an agency can go to a DSP can say “I will invest one million in your platform every year on condition that you give me 30 percent rebate.”

Rebates are a problem in the States too.
Another China-specific shady way to make a profit is when a client signs a 1 million yuan ($145,000) programmatic deal with an agency, for example, the agency will keep half of the money as actual profit and then give its DSP partners another half for media. Clients are usually required to sign a non-disclosure agreement, meaning that they don’t have audit rights. Almost every trading desk is doing this in China: Typically, 30-50 percent of a client’s media investment is taken off straight upfront.

Interesting that you say trading desks in China are ad networks. Isn’t the growth of programmatic supposed to come at the expense of ad networks?
Yes. But a big difference is in the U.S., trading desks usually have their own technology but in China, they don’t have any tech stack.

Here’s some background on how trading desks were formed in China: Big agencies started setting up trading desks in China around three years ago. When my employer at the time was trying to enter the Chinese market, one big hurdle was its technology stack didn’t work here because everything was built upon Google and Facebook. [Facebook is still blocked in China while Google’s ad tech business is pretty small there]. So while my agency could boast their proprietary technology in the West, it didn’t have one in China.

Meanwhile, when it just started doing programmatic in China it wanted to make money right away and hire more people. With these two constraints, my agency decided to use the group’s buying power to buy remnant inventory in bulk at a base price, say 10 yuan ($1.45) per CPM or lower and sell high. It’s essentially an ad network model. 

Can trading desks in China develop their own technology at all?
Until now, trading desks are just aggregating ad networks and taking a cut in the middle. But I believe that technology will come to play this year and next year. As far as I know, big ones are starting to localize their global technology stacks in 2017, while some are looking for white-label technology support.

If trading desks don’t provide value, why don’t clients work directly with DSPs?
Many clients tried but working directly with the vendor is still a sensitive topic in China. Lots of things are based on relationships. When you work with your agency of record on media, everything is traceable and compliant. Even though trading desks don’t provide value most of the time, bigger clients have global deals with them so they’re inclined to work with their agencies on the regional level.

So it’s just a cultural issue.
No, because the DSPs themselves are a problem, as well. Most DSPs in China evolved out of traditional ad networks. Like I said before, the whole ad network model is buying low and selling high. Most DSPs are not actually bidding anything. If they buy in bulk, of course, they want to sell their purchased inventory first. If they don’t buy in bulk, they operate like agencies. For instance, a DSP can go to a publisher and say “I will invest X amount in your inventory if you offer a fixed price as opposed to bidding.” So real-time bidding is just a story.

Rebates are everywhere.
Yeah, and unethical practices pop up when clients look for performance-based key performance indicators like leads and e-commerce sales. For example, a car company pays a DSP X amount for generating Y leads, the DSP may reserve some of the media spend and pay college students to be fake leads, answering phone calls when the brand wants to verify. All those tactics have nothing to do with optimizing your media buying with data.

It looks like the whole system is broken. How to drive transparency then?
Big advertisers in China usually ask for bidding logs from DSPs and form relationships with ad exchanges operated by Baidu, Alibaba and Tencent. While some strike programmatic direct deals with publishers. This way, brands can have direct conversations with publishers about deal specifics, while trading desks or DSPs simply facilitate the process — they have nothing to do with the commercial side of the business like inventory quality and price. Medium-sized advertisers just start to understand programmatic and smaller ones are still being fooled, or they just don’t care about rebates.

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