Here’s a riddle: How can a transaction have different prices to the buyer and the seller? Welcome to digital advertising.
Although sell-side platforms have recently been under heat for reselling inventory and allegedly charging publishers hidden fees, programmatic pricing mysteries also extend to the buy side, where ad buyers get squeezed by their demand-side platforms through the fine print buried in their contracts.
Digiday spoke to three ad buyers and four programmatic platform execs who described three DSP practices that skirt the lines: 1) using their own definition of clearing price when they bill; 2) sneaking in additional audience segments with unclear markup; and 3) arbitraging inventory.
“The fees are getting more complex and worse in some cases,” said an ad buyer requesting anonymity. “As these programmatic companies are put under more pressure from Google and Facebook, a lot of them are going, ‘Oh crap, our money is going that way. We need to find other ways to find cash flow.'”
The fuzzy clearing price: The clearing price is typically defined as the price that wins the auction on an open exchange. But some DSPs use a definition of clearing price that benefits them at the expense of ad buyers, said a DSP exec requesting anonymity. That’s because some bill based on a clearing price for the auction that occurred within the DSP’s platform that can be higher than the price that won the impression on the open exchange, and the DSP will keep the difference.
Before submitting bids to the open exchange, DSPs will run an auction within their own platform to determine the highest bidder. The DSP will then single out the highest bid and then submit it to the open exchange (transferring all of the bid data for each request would strain the DSP). But since many exchanges use second-price auctioning, where the second-highest bid determines the clearing price, the clearing price on the exchange can be lower than the clearing price in the internal auction.
For example, if a buyer bids $10 in a DSP’s internal auction and the second-lowest bid is $9, then the buyer will win the internal auction at $9.01. But if the second-highest bid in the open exchange is only $5, then the clearing price on the exchange will be $5.01. Rather than report back the $5.01 that the DSP bought the impression for, the DSP will report $9.01 back to the buyer and pocket the $4 in the middle, unbeknownst to most ad buyers, according to the DSP exec.
“Many buyers are unaware of how demand-side platforms make their money,” said a DSP exec. “The [Association of National Advertisers] shined a light on agencies, and the Rubicon-Guardian lawsuit shined a light on the supply side. But no brand has taken on the Guardian’s role and challenged the DSPs yet.”
Marking up add-ons: Aside from programmatic buying, DSPs also offer additional services like ad serving and targeting. But it is unclear how much DSPs profit when they offer these services, said Charles Cantu, CEO of programmatic platform Huddled Masses.
“If you agree to use a DSP’s BlueKai data segment and they charge you an additional $1.50 CPM, there is nothing that tells you whether BlueKai is actually charging the DSP that much,” he said. “It’s possible that BlueKai only charges the DSP $1, and the DSP makes 50 cents on the transaction.”
An ad buyer requesting anonymity said DSPs try to change a few words in their contracts so these segments get added. By changing “margin” to “fees,” DSPs can tack on pre-bid costs related to targeting. By adding the word “plus” to “media cost,” the DSP can stipulate that ad buyers pay for “media cost plus data,” regardless of whether the third-party data gets used, the buyer said.
Arbitraging inventory: DSPs sometimes strike deals with SSPs that can lead to additional fees that get passed to buyers. This isn’t necessarily nefarious. Since SSPs work with publishers, they have greater insight into the quality and quantity of the impressions that publishers clients are offering, said Tom Shields, chief strategy officer at AppNexus, which has both DSP and SSP products. Working directly with SSPs can give DSPs more visibility into their inventory, which can help DSPs avoid duplicative bids.
Another way DSPs and SSPs work directly together is when a SSP brings a private marketplace deal to the DSP, and the DSP charges buyers a higher price than what gets reported back to the publisher. The fee itself isn’t the issue, since ad tech companies deserve payment for their services and these PMPs can help buyers avoid brand-unsafe content like gambling and hate speech on the open exchange. These deals become problematic because the markup on these PMPs is usually not disclosed to buyers, said a former DSP exec requesting anonymity.
While acknowledging arbitrage problems on the supply side, an anonymous SSP exec said, “Some DSPs have legacy, arbitrage relationships in place.” In these instances, the DSPs are making money by simply repackaging it like old ad networks, the exec said.
DSPs offer a plethora of services, so their fees and pricing structures vary. Self-service DSPs usually charge between 7 percent and 25 percent of the clearing price, according to four programmatic platform execs. DSPs that sell managed services will charge at least 25 percent.
The three ad buyers who spoke to Digiday were miffed by the disconnect between the low fees that DSPs pitch in sales meetings and the higher margins they end up making. After going public, it came out that Rocket Fuel’s gross margins were 44 percent and TubeMogul’s were 66 percent. Buyers suspected that privately owned DSPs, which are not required to disclose financial statements, have higher margins.
One DSP exec said programmatic platforms are pressured to increase margins wherever they legally can. Since there’s little difference between many of these platforms, it is hard for them to compete in an environment where most of the digital ad spend runs through Google and Facebook. One way to increase revenue is to finesse the contract to increase the amount of money that goes back to DSPs.
“Digital media is a complicated process, so it’s not that ad tech is an especially big tax as many claim,” said an ad tech exec requesting anonymity, “but rather that the complexity and lack of stringent controls and technical understanding allows for a greater leeway for many vendors to take as much as they can, far and above what they state.”