Last updated on July 20th, 2022 at 11:19 am
Every year, there are hundreds of ad networks which are rising and many of them don’t have their own advertisers, agency partnerships etc. In the ad tech ecosystem, if your product is adding value, you are going to stay, else, eventually, you’ll have to shut down. Amidst the publishers and advertisers, there exist middlemen like agencies, trading desks, DSPs, ad networks, SSPs and many more. Arbitrage, as a business still exists much as there are brokers, there are middlemen in ad tech who siphon a substantial ad revenue. However, this is changing and the ecosystem is moving forward, which, however, might mean that arbitrage is going to be more complex than what it exists today. Today, we are doing to discuss ad network arbitrage aka ad exchange arbitrage.
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According to Brain O’ Kelley, Founder of Appnexus–
It is increasingly difficult to arbitrage inventory at a profit. In the past, this was a profitable strategy for a few reasons:
- Not every buyer and seller were connected, so an intermediary might “connect the graph”
- Intermediaries could have different yield management or creative quality settings that would allow cheaper or less-restrictive demand
- Bidders bid slightly differently on every ad call, meaning that an intermediary may see a higher price than the original seller
These opportunities are disappearing:
- Network density is high (most buyers connect to most sellers)
- Reselling is increasingly prohibited (see AppNexus and LiveRail policy changes in late 2015)
- Algorithmic improvements are increasing bid stability
One interesting note: human traders still seem to allocate spending by exchange, not by underlying domain/app, meaning that there is a valid exchange arbitrage opportunity. I expect smart traders to rethink this strategy in 2022.
Brain, who is an ad tech pioneer agrees that “traders need to rethink their strategy” and it only showers some light on the fact that arbitrage would become more complex eventually. However, before we discuss more Ad Exchange arbitrage, let us take a look at the various levels of traffic arbitrage which exist currently at the ad exchange level. The reason why ad exchange arbitrage or ad network arbitrage still exists and will continue to exist is because of the difference in demand vs supply. On some networks, the supply is higher and demand is low for certain geographies, which results in low CPM or CPC rates which are used by marketers to implement this strategy.
There exists CPC Arbitrage, CPA Arbitrage, and CPM Arbitrage
A CPC arbitrage is where a click is bought at a lower value and upsold at a higher value. Buying a click from a traffic provider at a certain page and selling that click at a much higher rate to the advertiser.
A CPA arbitrage is where one purchases a lead for $7 and sells that lead at $10 to a buyer who needs it.
CPM arbitrage is done by buying traffic from an ad exchange at a lower rate and selling it off to a different ad exchange at a higher price. Normally, remnant traffic is bought at a much lower price from exchanges and then using smart bidding algorithms to sell that traffic at a higher CPM rate. The result is a good volume of return which is generally the difference between the buying and selling price.
How Does Ad Network Arbitrage or Ad Exchange Arbitrage work?
The scale to which Ad network arbitrage has risen is not mentioned in most of the blogs mainly because people aren’t aware of the same or don’t really have an idea of the impact of these exchanges. It is similar to hiding under the shadows of ad tech, and till now we are being partially aloof to this. Any ad exchange buyer can purchase 100’s millions of impressions a day at $0.01 CPM and resell that to $0.04 CPM in other exchanges and make a profit of $3000 a day without having anything to do. Even if you consider the ad serving cost, still the buyer ends up with a profit of at least $2000 and the entire model is practically on autopilot. There are several exchanges which are prohibiting resellers like Appnexus, however, smart buyers are still coming up with techniques to bypass the rules set by Ad Exchanges or even something smarter enough. It really depends on the dynamics of the market and since ad tech is still at a very nascent stage and is constantly evolving, the loopholes will continue to exist for the next few years unless the industry consolidates and work on the ways to eradicate the bad players in the exchange.
Is Ads.txt the Solution?
Most of the Ad Exchanges and DSPs should be stringent enough to vet the actual buyer and not the campaigns since resellers who are just using the arbitrage model should be chucked out of the ecosystem.
While Ads.txt brings more transparency in the ecosystem and enables more control on the site level, chucking out phishing sites and fake sites, Ad Exchange arbitrage needs to be controlled from a buyer-side and not from a supply side.
Can Open Exchanges Shut Ad Network Arbitrage?
The very fact that we are moving to private marketplaces and PMP deals are gradually evolving with programmatic direct implies that brands need more transparency as to where their advertisements are being displayed. Open exchanges need to be more cautious of both brokers and SSPs since a lot of misinterpretation can go and the middlemen and the brokers can soak a lot of money which in turn should be in the hands of the publishers and marketers. Thus open exchanges need to be more cautious and create policy checks to curb ad network arbitrage.
Benefits of Ad Network Arbitrage?
As you see, arbitrage is almost everywhere in the industry. Native ad networks run on an arbitrage model where visitors are directed to websites which make revenue from display ads and video ads. It exists in CPM, CPC, and CPA models, it exists in the display, native and video as well. Adtech without arbitrage is still a question that would require deep thinking. The very fact that arbitrage exists is because of the fact that traffic is not valued at the same pricing and the complexity of the ad exchanges gives rise to a model that works. The concept of arbitrage is nothing new and is employed by a lot of players in the ad tech ecosystem. So, why not you. We are listing the benefits of ad exchange arbitrage here…
Quick profits- Arbitrage can be a cash printing machine if you do it correctly and definitely, you’re not doing anything bogus or wrong as long as your sources of traffic are not fraud and bot traffic. This is something you need to be very careful of while buying traffic from the exchanges.
Autopilot model- It hardly requires you to monitor the performance and work 24/7. Pretty much works on an autopilot model.
Can be scaled easily- Since there is a plethora of supply-side inventory, you can scale your buying quite easily once you crack the golden formula.
In Fact, you can learn a lot from arbitrage and build scalable models and algorithms which handle arbitrage mathematically if you are a pro at statistics and ad tech.
The model of arbitrage would continue to exist as long as there is a disparity between the exchanges and that is something which ad tech needs to take care of. While, not always, buying traffic can be considered bogus, since programmatic ads wouldn’t be shown to the user if the user wasn’t really relevant to the brand at the first go. We would continue to monitor Ad Network Arbitrage in 2018 and will see the developments in the ecosystem. Until then, wait for our next series of articles on arbitrage. We have an interesting article on traffic arbitrage guide which you may consider reading if you’re a publisher.
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