Ad arbitrage

WTF is advertising arbitrage?

This is the latest in a series of articles that explains, in plain English, new technology tools and platforms that are changing the face of digital media. See other entries here.

The rise of programmatic advertising and agency trading desks means more people than ever before are discussing arbitrage, a practice that has no shortage of critics. Often it is used as a talking point for one rival to imply, without quite saying so, that the other rival is doing something shady with clients’ money. More importantly, many people just don’t know what it is. Or choose to declare they don’t practice it at all. In this latest installment of WTF, we’ll break down this controversial practice, its proponents and its critics.

Someone asked me if my agency is doing arbitrage. WTF is it?
When online advertising exploded, the amount of remnant inventory did too — there were an infinite number of webpages and, in theory, an infinite amount of inventory. Networks then began to increase the value of ad inventory by, for example, placing cookies or writing algorithms. The problem comes when agencies start doing it as part of their programmatic strategies.

I studied Economics 101 in college. I thought arbitrage was something completely different.
That’s true. That’s why you’ll sometimes see people terming it “arbitrage.” Arbitrage, in economics, is just an opportunity to buy an asset for a low price, then turn around and sell it at a higher price in a different market — pocketing the spread in price. You can do it when you have one item, but different markets for buying and selling. You can do it when you have two goods — American dollars and Canadian dollars — but in one market. In the real world, currency arbitrage is common, often with multiple currencies.

In the agency world, arbitrage, on its own, is a dirty word — most shops say they don’t do “arbitrage, ” which inherently implies that the agency is biased because it is both buying and selling, and implies a lack of transparency about the process. For example, Xaxis is called an “audience-buying company.” Many others say what it does is arbitrage.

For many, arbitrage bears a resemblance to the Wall Street practice of front-running, when a broker trades equity based on information she already knows, but her clients don’t. It’s illegal, but it’s not what is happening in the ad business. Many agencies will even go on to say that they don’t arbitrage at all, even though their models are akin to the bare-bones definition.

So where do the agencies come into play?
Ad networks do arbitrage by going to publishers, negotiating a low price on impressions or inventory, then reselling them. That’s a well-known fact. They even do some amount of value-add. The problem happens when agencies start playing with this model.

Rob Reifenheiser, North American head of media at Essence, puts it this way: Agencies, especially those owned by big holding companies, are being squeezed by clients on fees. So they’re looking for other ways to make money. So what agencies are doing, in some cases, is buying media, adding something into it, then turning around and selling it. Agencies say that they add value on the ad buy and then resell it as a “better” product, commanding a higher price. It’s not just turning around a commodity or good, which is what arbitrage is. And, in theory, an agency is buying media before actually getting paid for it, taking on a risk.

What are the critics saying?
Critics say that there is an inherent bias in arbitrage. If an agency is making recommendations on where media is placed but also buying the media, it is potentially biased. “My targeting is better than anyone else’s out there, but so is my inventory, ” said Reifenheiser, whose agency does not use the model.

Does it matter if everything is disclosed?
That’s a sticky one. Some agencies will not say how much they paid for the original inventory, meaning that clients have no idea what the markup is. In response, agencies say they are adding value. Brian Gleason, managing director at Xaxis (who also chooses not to call what it does as “arbitrage”) said that it’s like creating and packaging a product but not saying how much the raw materials cost. “We are a programmatic media platform, we take inventory, put packaging on it; the outcome is a product, ” he said. “Do I disclose the price I pay for the media? No.” Gleason added that his agency takes on a tremendous risk by buying inventory upfront without orders behind it — like buying up thousands of apples in the summer without knowing if apple pie is going to be something people will make in the fall. “What we do isn’t arbitrage.” GroupM’s chief digital officer, Rob Norman, has gone on the record to say that clients of the agency know what’s going on, and only if there is a specific contractual consent will the agency operate without disclosure about pricing schedules.

Related video
Solo Ad Arbitrage 2 interview with Andrea Fulton
Solo Ad Arbitrage 2 interview with Andrea Fulton
Solo ad arbitrage
Solo ad arbitrage
Glossar und Erläuterungen zur BWL: Finanzierung & Investition: Begriffe, Formeln und Erläuterungen für die Bachelor- und Masterstudiengänge BWL (B.Sc. und M.Sc.) (German Edition)
eBooks (GRIN Verlag)
Arbitrage Underdog Update | Craigslist Ad Was FAKE
Arbitrage Underdog Update | Craigslist Ad Was FAKE
Solo Ad Arbitrage | Solo Ad Arbitrage Review
Solo Ad Arbitrage | Solo Ad Arbitrage Review
Related Posts