Buzzword alert: advertising supply chain optimization
Fewer partners can pay big dividends
Programming note: One is now on a monthly schedule. You can expect the same timely deep dives you've grown accustomed to in your inboxes around the third full week of each month. Happy reading!
Ad tech moves in cycles, and it's important to always know where we're at.
Right now, we are nearing the end of a third epoch in programmatic: After the initial exuberance of new technology that unlocked new revenue, followed by a “Wild West” period, we’re now at the point where programmatic has become the default way of advertising transactions; with that came the need for regulation, removal of bad actors, and an overall “sheriff comes to town” shift. At the same time, we are flirting with a global recession, which is driving advertisers, publishers, and ad tech platforms to optimize their advertising supply chains. Rather than trying to connect with everyone, today it’s all about working with fewer high-value partners.
What does that look like in practice? Ana recently had the pleasure of exploring supply path optimization at Adweek’s NexTech conference with buy-side and sell-side veterans—Lisa Arnold, VP of programmatic strategy at Dentsu Aegis Network, and Greg Watkins, founder of AllHipHop.com—on a panel moderated by Adweek senior media reporter Mark Stenberg.
It was an interesting conversation that connects to several issues we've previously introduced: Be mindful of the cycle and choose your partners wisely.
Everything is a cycle
Before we can chart a path forward, it’s critical to understand where we’ve been.
In programmatic, the cycles tend to span about seven years, with the first beginning around 2003 when Right Media—the industry's first online ad exchange—was founded. Digital had been afterthought relative to traditional channels, but perceptions began to shift as technology enabled publishers to extract value from what had been worthless remnant inventory.
Consolidation and investment followed. A second epoch beginning around 2010 had a distinct “anything goes” attitude. Companies innovated quickly. As technology evolved, online ad auction mechanics were largely waterfall-driven. Publishers were encouraged to work with as many partners and demand sources as possible, which led to numerous purchase paths to the same ad inventory. But all of those paths were not created equal, and many were not economically advantageous for neither buyers nor publishers.
In 2014, the publisher hack header bidding emerged to disrupt the waterfall and allow all demand sources to compete simultaneously in a single auction. Header bidding helped publishers increase their yields, but it also created other problems. "We thought it was going to make our lives so much easier—everything was going to be great," Dentu’s Arnold said during the Adweek panel. "But then as we started digging into some of the different supply paths that we were taking to access the inventory, we realized that we were duplicating a lot of our efforts."
By the time the third epoch in programmatic began around 2017, more than half of digital display ads were being transacted programmatically. There was a shift toward maturity and regulation. In 2018, the EU's General Data Protection Regulation went into force, followed by state-level privacy laws in the US.
The pandemic also inspired companies to refocus on the supply chain, said Watkins from AllHipHop. "A lot of the DSPs said, 'Hey, wait a minute. These duplicate auctions are running up our prices, they're running up our costs. You need to figure out a way to pick a supply path and kind of own it."
The golden age of optimization
The supply paths today are being optimized from all directions: supply path optimization (SPO) for buyers and demand-path optimization (DPO) for publishers. There is widespread recognition that publishers don't need to sell their inventory everywhere, and advertisers can buy the inventory they want through a handful of valuable partners.
Every operation is unique, of course, so advertisers and publishers are defining what optimization looks like for them individually and evaluating how many steps and intermediary partners they really need to execute any given transaction. Larger marketers, in particular, are gravitating toward direct deals with a select set of publishers. Maybe all that complex ad tech infrastructure built over the last 10 years is no longer as necessary as it once was.
So while the programmatic pipes are essentially in place, the industry is reconstituting who's connecting where. Marketing is shifting away from vertical suites that are structured around a full technology stack (hello, marketing cloud) or a clearly defined mix of integrated point solutions, as we’ve previously written. They’re gravitating toward a fluid orientation that provides the flexibility to mix and match functionality from different providers in more of an API approach.
As the market also moves away from third-party cookies and data toward first-party data, audiences will become the greatest asset for both marketers and publishers. That asset can be leveraged across the organization—not just for marketing—which will require a connective orchestration layer that will drive additional technology innovation in the coming years.
The fewer the better fare
As advertisers and publishers squeeze their supply chains to wring out unnecessary partners, the companies that stand to lose the most are pure-play platform intermediaries that insert themselves into transactions and create duplicate auctions. Many do, however, serve a purpose. For example, some may help long-tail publishers garner brand interest that they wouldn’t be able to attract on their own. The supply chain becomes more complicated the further you move toward the long-tail end of publishing, but the calculus will be much simpler for large premium publishers. They will have fewer partners and be able to more easily see exactly which companies are in their ads.txt files.
A company's objective and how they can buy media will influence who they would work with. That's good news for companies that rely on that kind of optionality in the market. At some point, there's an aggregator step that needs to happen, but where that point is exactly is shifting.
As we transition toward a fourth (!) epoch of programmatic, all companies should be evaluating and reevaluating their current and existing partners. Industry shifts can happen quickly, so your technology partners may have pivoted into a different direction than what you originally bought them for, or your initial contract terms may have changed and are not as favorable as they once were. As a result, all companies should have a review process and understanding of their marketing goals in relation to their advertising supply chains, perhaps connecting those goals to team member KPIs.
The macroeconomic environment has provided the impetus for companies to scrutinize their advertising supply chains this year if they haven't done so already. Optimization is directly related to a company's revenue. Advertisers that fail to optimize may be forced to cut media spend. Don’t do that. Coming out of a recession, you won’t know whether something you’ve done in your media mix has really impacted your ability to sell your products.
One question
After streamlining their advertising supply chains, how far will companies take their optimization efforts? Will their desire to work with fewer partners extend beyond the advertising and marketing functions?
Dig deeper
To Thrive In Programmatic’s 3rd Epoch, We Must Rethink Partners And The Tech Layer
The Rise Of ‘Header Bidding’ And The End Of The Publisher Waterfall
The New Marketing Infrastructure Layer
Thanks for reading,
Ana, Maja, and the Sparrow team
Enjoyed this piece? Share it, like it, and send us comments (you can reply to this email).
Who we are: Sparrow Advisers
We’re a results oriented management consultancy bringing deep operational expertise to solve strategic and tactical objectives of companies in and around the ad tech and mar tech space.
Our unique perspective rooted deeply in AdTech, MarTech, SaaS, media, entertainment, commerce, software, technology, and services allows us to accelerate your business from strategy to day-to-day execution.
Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.