The murky world of ad networks

There’s a scene in The Big Short where Margot Robbie talks to the camera and explains mortgage-backed securities — tranches of premium mortgages that were packaged sneakily with many other high-risk mortgages and sold together as a premium investment. The premise of the scene is that it takes having Margot Robbie explain it for people to pay attention to something so nuanced and “inside baseball” from the financial sector. But while the perverse incentives in mortgage-backed securities had a devastating impact on our global economy in 2008, in retrospect it’s clear that some people inside the industry were busy benefiting from it, and outsiders simply didn’t understand what was going on until it was too late.

I’m afraid that the exact same thing is going on in advertising and I wonder what it will take for our industry, and the world, to pay more attention.

I’m talking about the pervasiveness of the nontransparent ad network monetization model in advertising. The model is not new — many of you probably think it’s a relic of the time when RocketFuel and AdRoll ruled the digital media plan. Ad networks aggregate advertising inventory from multiple publishers and broker it for advertisers. The key benefit to the buyer of the ad network model is that it can offer a more scaled pool of ad inventory for the advertiser than publisher-direct buying. But the drawback, which became clear in the era when RocketFuel ruled, was the obfuscated and nontransparent content being bundled and sold for a flat cost (CPM or performance-based). In this world of murky ad networks, a great ad on great content costs the same as a garbage ad on garbage content, as long as it “performs.”

So why, in 2024, am I talking about the 2008 financial crisis and still picking on RocketFuel (RIP)? Because today most digital ads (by volume) globally are sold by walled gardens using a similar nontransparent ad network monetization model. I wish more people understood this outside of our industry, and I wish more people inside of our industry cared.

The math is embarrassingly simple. An ad network can package enough low-quality ads to perform against a given KPI (ad measurement), and then mark them up as much as a buyer will pay for them. This can commonly yield 60% to 70% profits for whoever is running the ad network. Google runs the biggest ad network in the world called Google Ads.

I skipped a lot of my college economics classes but I do remember that uncertainty benefits the seller. But what does that uncertainty mean for an advertiser or a publisher whose content is being bundled?

• For the advertiser, it could mean that while some of your ads are showing up against higher-quality video inventory, like SNL clips, that is likely only a small part of a package that includes much more no-cost, low-quality inventory, like videos of me playing “Glycerine” by Bush on acoustic guitar (please don’t look it up) or awful political diatribes. And that’s the stuff (the truly low-grade stuff) that’s highest margin/highest profit for whoever is running the ad network.
• For the publisher, it may mean that ramming more low-quality ads on pages yields higher returns than having fewer, high-quality ad experiences. And yet we wonder why so many digital ads are low-quality. And we readily punish publishers for operating in a system of incentives that was not of their design — but to which they have become beholden.

There’s been a lot of debate lately about the impact made-for-advertising (MFA) inventory — low-quality ad inventory that shows up on low-quality sites characterized by poor content and ads that pop up and refresh at alarming rates. The Association of National Advertisers (ANA) believes that more than 20% of open internet ad inventory is MFA. According to the ANA, advertisers tolerate MFA impressions because they “prioritize cost over value, sometimes to their own detriment. They chase cheap CPMs. The primary incentive driving programmatic media buying behavior is cost — getting the most impressions for every dollar […] Common sense should tell buyers that not all ‘cheap’ inventory is ‘quality’ inventory.” I think that’s correct, and I love what they’re after, but I do think the dialog that the ANA started too often points at the symptoms of our flawed industry (like MFA) rather than the root cause — or the systematic sickness behind the symptoms.

But let’s use MFA as an example of the issue. Who is the largest purveyor of all this MFA inventory? According to Adalytics, the biggest ad network in the world is of course the biggest contributor by a factor of 5 times.

And this stands to reason. If advertisers, in pursuit of cheap reach, as the ANA puts it, will tolerate low-quality ad impressions dressed up with a little premium content, why wouldn’t companies keep doing this?

As an industry, we should be doing so much better. I see many people trying and I know that no one will ever be perfect. No company will ever completely eradicate bad behavior, just like no mayor of New York will ever completely eradicate crime. But it is in all our interests to move toward a more open, transparent and competitive marketplace for digital advertising. It’s best for advertisers, publishers, the ad tech ecosystem and consumers if we make good advertising on good content better performing and more profitable than a poor advertising experience on low-grade content.

In 2024, it’s become clear that advertising funds global access to information and content. There used to be a debate about subscriptions versus Ad-funded models. That debate is over. Advertising, love it or hate it, determines what kind of content people all over the world have access to.

So if that’s the future we’re heading for (and already in), let’s talk about the different paths we can go on from here. The open internet, where you can control and understand your digital supply chain using programmatic standards, and walled gardens/ad networks where you can’t.

So let me go on record: I think that for as long as the companies that control the gateways to the internet make most of their profits from using a nontransparent ad network monetization model, then our global media ecosystem will continue to be characterized by:

• User-generated content, which is cheap to produce and therefore yields the highest returns for the ad networks;
• Low-quality ads — the cheaper, the better — which can be bundled and sold for higher markups than higher-quality/more expensive ads;
• Faulty ad measurement, built to reward the most inexpensive advertising available, often measured by the ad networks themselves (“Your ads performed amazingly well, you’ll just have to take my word for it”);
• Deprioritization of editorially curated, fact-checked news and journalism;
• A degraded consumer ad experience. We often lose the thread on why so many ads are poor-quality. It’s because of toxic incentives in our industry that make a poor-quality advertising experience profitable.

So let’s talk about MFA, and where it all comes from. Let’s talk about the digital supply chain and hold one another to higher standards. Let’s talk about viewability and in-banner, auto-play video. Let’s talk about video quality standards and writing good specs that we can all agree on. But let’s not lose the thread on what’s behind all of it.

When I joined The Trade Desk in 2012, part of what excited me was that it felt more and more like advertising was a buyer’s market. I think that’s much truer today than it was then. Look at the flood of inventory entering connected TV and premium video. So why are buyers — who have more options than ever — still putting up with this?

Some buyers are less and less willing to. Even though walled gardens running nontransparent ad network models dominate digital advertising today, shifts are happening. The year 2022 represented the first in more than a decade where Facebook and Google did not account for more than half of all digital advertising spending. And that trend continued into last year.

I honestly believe that our capacity as a society to distribute content that represents our values is directly tied to our ability to pair it with strong ad product. Let’s get to work.

The Current is owned and operated by The Trade Desk Inc.