The Death of the Direct Deal

Programmatic Direct is Taking Over

In 2016, programmatic display advertising will generate ad spends of $20 billion in the US alone. Compared to 2013, the market will have grown by 500 percent. Similarly aggressive trends are predicted pretty much all over the world. The single biggest driver of this has lately been programmatic direct. Let’s take a closer look why.

An Abbreviated History of Ad Server Prioritization Chains

Online publishers fill ad positions in their ad server chains by assigning different priorities to different layers of the chain. For example, if an ad position is bought neither programmatically nor through a traditional (non-programmatic) direct deal, a publisher’s house ad or long-tail affiliate ads could be shown. In a simplified and outdated example, a given publisher could prioritize the accessibility of inventory as follows:

  1. Direct Deals
  2. Programmatic Buying
  3. House or Affiliate Ads

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In the past, publishers often prioritized direct deals over programmatic because these deals provided fixed spends and CPM pricing (cost per 1000 impressions), which generated a fairly predictable yield. However, some publishers started to invest heavily in programmatic in light of the intuition that an auction-based way of selling inventory can generate higher revenue.

As a result, ad exchanges worked on ways to give publishers more control, and so the so-called “private auction” was born. Therefore the simplified ad server chain illustrated above changed accordingly:

  1. Direct Deals
  2. Programmatic Buying
    1. Programmatic Direct (Private Auction)
    2. Programmatic Open Auction
  3. House or Affiliate Ads

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It took both publishers and buyers a while to get acquainted with inviting select buyers to private auctions. Fully automated real-time selling would now be enhanced by manual negotiations—what our industry calls “programmatic direct”.

The result? The single biggest acceleration of programmatic buying to date.

With the Programmatic Direct Auction, All Players Win

Publishers started doing the math. If a $5 non-programmatic direct deal with a single buyer is placed in the ad server chain with highest priority, will it really create the highest yield? It certainly won’t. That’s why, in recent months, more and more publishers started to assign the exact same priority to the private auction. A CPM floor price (minimum price accepted for a bid to be won) of $5 with an underlying auction will always make the publisher more revenue than a single-buyer direct deal worth the same CPM.

In most cases, if the programmatic direct auction does not exceed the floor price, then the slot is either handed to the direct deal OR passed down to the next link in the ad server chain—in this example, the programmatic open auction. As in the previous examples, if the slot is not sold in the open auction, then it is filled with house or affiliate ads.

Given the advantages for both publishers and buyers, the industry’s largest ad servers are now even starting to facilitate the prioritization process. Most publishers are therefore currently moving to a model similar to this:

  1. Programmatic Direct (Private Auction) vs. Direct Deals (competing on the same level)
  2. Programmatic Open Auction
  3. House or Affiliate Ads

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This creates a win-win-win situation. First of all, publishers maximize yield by reaping the benefits of the auction, clearing above the CPM floor price. Second, more buyers get access to high-quality publishers in a fairer and more transparent way. Finally, advertisers who choose pure programmatic-only partners will now be able to generate vastly improved ROI.

As a result, big ad exchanges and ad servers are increasingly advocating the prioritization of programmatic along the ad server chain. Moreover, almost all publishers realize that they can increase revenues and attract additional premium buyers by deprioritizing or even deprecating direct deals. Consequently, it can be expected that the vast majority of publishers engaged in programmatic will soon start to prioritize programmatic direct over old-fashioned direct deals.

At Sociomantic, we’ve reacted to this trend by introducing Sociomantic Direct earlier this year. Thousands of programmatic direct deals have been signed to enable our advertisers to reap the benefits of what we regard as the single most aggressive shift towards programmatic since its inception.