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Ad Exchange - The What, How, and Why?

Apr 07, 2021  ·  6 min read
Dereck Mushingairi
Dereck Mushingairi, Copywriter at Epom

Once upon a time, advertisers had to contact publishers directly to place ads on their site. Fortunately, today such a cumbersome process is avoidable with the help of ad exchanges. But how do they work, and most importantly — how do they stack up with other ad technology? Let's dive right in with this ad exchange tutorial!

It all started in 1994 when AT&T made the first bold move. The company purchased the first banner ad from the commercial web magazine, HotWired, for $30,000 with a run time of three good months. In fact, those were historical months since the click-through rate was averaging 44% — something today's advertisers would kill for compared to their meager 0.37% as of 2021.

Even though these pioneers in advertising enjoyed enormous click-through rates, the whole process was tiresome, slow, and inefficient. You can imagine how taxing this would have been for modern websites with 200+ ad campaigns running simultaneously, targeting distinct demographics and in different time zones.

There was a need for a middle link, an ad marketplace where both advertisers and publishers could have their needs met quickly. This was the birth of an ad exchange.

Contents:

What is an Ad Exchange? Debunking the Definition

An advertising exchange serves as the middle link in the RTB process. It's an ad marketplace where advertisers and publishers come together to buy and sell ad publishing space.

In the case of publishers (website owners and app developers), they are selling the ad space to the highest bidder. Merchants (marketers, ad networks, advertisers, or ad agencies) are buying the ad space.

What Does an Ad Exchange Do in Media Buying Process

The ad exchange facilitates the buying and selling of ads automatically, leveraging real-time bidding (RTB) auctions. RTB technology forms the backbone of programmatic advertising. This is why the platform can also be called a programmatic ad exchange, or an RTB ad exchange.

It's important to note that not everyone can work directly with an ad exchange. Most digital ad exchanges only work with publishers that have high traffic and revenue. This means that small and medium-sized publishers cannot reach the bar.

This is where ad networks, supply-side platforms (SSPs), and demand-side platforms (DSPs) come into the picture.

To connect to the ad exchange, publishers use an SSP, in which they list their ad placements, set floor prices, and automatically engage in the RTB auction. Advertisers, on the other hand, have a DSP for their media buying activities — setting up campaigns and bids.

How an ad exchange works

The digital ad exchange has a vast network of publishers and advertisers. Thus it drastically streamlines the sales process. Today, publishers simply indicate the available ad space to the ad exchange through the SSP. They usually don't have direct access to an ad exchange, but the SSP enables them to get listed in all ad exchanges that work with the particular SSP.

From the advertiser's end, here's a typical scenario: John, an advertiser, approaches the ad exchange through the DSP. John requests 100,000 monthly impressions from a specific audience, using targeting settings. The ad exchange will receive his ad request and share it with its large pool of SSPs and publishers who have available ad space until it achieves John's requirements.

The upside of using RTB, and ad exchanges together, for advertisers is that they get access to a large variety of publishers and can easily target a specific audience. The users are grouped according to their internet browsing behavior, demographics, device, location, and interests among other factors.

How Does an Ad Exchange Work? Key Steps:

To put this into perspective, we'll break the process into six steps:

  1. A user visits an in-app page or website.
  2. This triggers the user's browser to send an ad request to the SSP and ad exchange as the result.
  3. The ad exchange passes it to the demand-side platform, a tool for advertisers.
  4. The DSP analyzes the data coming from the publisher and defines whether the space is worth purchasing for the advertiser.
  5. Advertisers whose CPMs fit the publisher's requirements bid on the inventory.
  6. The ad exchange matches the ad placement to the highest bid from the most suitable advertiser.

Since the whole process occurs in less than a second, prior to the auction, the buyer has to configure the bidding platform in such a way that it will automatically bid on favorable ad inventory.

Common Types of Ad Exchanges: Open, Private, Preferred Deals

Like the rest of the technology around us, the ad tech world is advancing at a meteoric rate. Over the years, we have come to classify ad exchanges into three broad categories:

Open Ad Exchange

Open ad exchange is an open virtual marketplace that comprises a repository of listings acquired from various publishers. The only downside is that, unlike a private marketplace, specific publishers' information will not be revealed to the buyers.

While this is certainly a notable caveat, on the upside, the open ad exchange receives the most impressions among them all. Theoretically, this means publishers have an infinite source of media buyers and consequently a better chance to sell their placements for a higher price. However, with the spread of ad fraud and low-quality creatives, open ad exchanges are quite vulnerable and increasingly losing popularity for both supply and demand sides.

  • Open Ad Exchange PROS: Better publicity, low entry barrier, access to a wide range of traffic/inventory, complete automation.
  • Open Ad Exchange CONS: ad fraud, low-quality creatives, lack of control, less reputable partners.

Private Ad Exchange

For publishers who want significant control over their placements, private ad exchanges are the next big thing. Here publishers can take control over the terms and conditions of the bid.

That means they can choose which buyer will be able to place a bid with, the minimum floor price of the bid, and other specifics. Thus, the inventory here is sold via a private RTB auction.

Often, the private ad exchange is operated by one publisher who invites buyers of their choice to the platform. With total control, the publisher has the power to block any third-party from accessing the available pool of impressions.

Another reason why private exchanges trump open ad exchanges is the inventory slot quality. Private ad exchanges offer the best quality and are certainly the preferable option at the moment. This is fueled by the growing concerns around digital ad fraud in open ad exchanges.

  • Private Ad Exchange PROS: High inventory and creative quality, high control over placements, carefully selected partners.
  • Private Ad Exchange CONS: Lack of variety, longer negotiation time, high entry barrier.

Preferred Deal Ad Exchange

This is the only ad exchange platform that allows publishers to sell their ad inventory to advertisers of their choice. Not only can publishers choose who they would like to work with, but they can also negotiate the price and other terms and conditions. Instead of bidding on inventory via an auction, advertisers engage in fixed-price deals with publishers, which is also called programmatic direct.

The preferred deals offer a sense of stability for publishers since they have control over the whole transaction system. Some advertisers, besides the quality inventory, will also appreciate the stable cost-per-mile (CPM) prices that preferred deals often offer. On the other hand, they will have no chance to pay less, as the CPMs are fixed (kudos to open auctions here).

  • Preferred Deal PROS: 1:1 relationship, full control over bid price and placements, stable CPMs, premium inventory.
  • Preferred Deal CONS: High CPMs, a lot of manual hassle, rigid prices for advertisers.

Types of ad exchanges

Who Uses Ad Exchanges? Platform Primary Purpose

Ad exchanges mostly act as a middle link between SSPs and DSPs, or are used by ad networks for traffic arbitrage. These platforms are usually built by programmatic ad tech providers to connect their own supply (or demand) to the large pool of supply/demand coming from their partners.

Still, publishers and advertisers also encounter ad exchanges while launching their programmatic campaigns, even though the auction process is invisible for them. Let's see which benefits ad exchanges implicitly bring to both.

Ad Exchange Advantages for Publishers

Most importantly, programmatic ad exchanges allow publishers easy access to advertisers. With the help of an ad exchange, publishers don't have to hunt for advertisers. They have one single platform (DSP) at their disposal, which is usually connected to an ad exchange. The latter one has an almost unlimited number of advertisers ready to buy their ad inventory. This means their ad space will never remain unsold.

During a programmatic auction, publishers sell their inventory to the highest bidder. If the publisher has high-quality inventory, the value will undoubtedly increase exponentially.

The ad exchange does not always deny publishers the freedom to choose who can and cannot sell their ad space. This is very important in today's increasingly compromised advertising landscape, as it protects the brand from undesired advertisements.

Having the ability to set floor prices, ad exchanges also help publishers increase their monetization revenue automatically.

In summary, trading inventory through the ad exchange helps publishers:

  • Automate their website or app inventory monetization.
  • Access a large pool of offers from advertisers without making any real effort.
  • Set up the minimum CPMs (floor prices) for inventory units.
  • Set parameters, ad style, and ad formats that will be accepted on their web pages.
  • Block ads that contain sensitive information or inappropriate content in PMP exchanges.
  • Determine where they should have the ad placed on the web page.

Are There any Ad Exchange Advantages for Advertisers?

Ad exchanges offer advertisers a wide variety of ad space, enabling them to choose the most ideal inventory for their criteria. Since the media buying process happens in real-time and within tiny fractions of a second, marketers and advertisers can reach as many people in their target audience as possible.

In summary, trading ads through an ad exchange helps advertisers:

  • Automate their media buying and get access to a large pool of publishers.
  • Have total control over the bidding process, from behavioral profiling, price settings, setting budget pacing options; to choosing targeting options and bidding capabilities.
  • Retarget their ads on multiple ad exchanges.
  • Calibrate the frequency by which the same user sees an ad.
  • If needed, blacklist a particular audience or website.

Differences Between Ad Exchange vs. Other Ad Tech Players

Now that you know what an ad exchange is, the next important step is understanding how it integrates with other key ad tech players.

Ad Exchange vs. Demand-Side Platform

Both ad exchanges and DSPs are platforms that leverage real-time bidding technology to help advertisers distribute their ads on the internet. However, ad exchanges and DSPs are not the same things.

While advertisers can purchase directly from an ad exchange, they usually connect through a DSP. The goal of the DSP is to automate the whole process and let advertisers manage their campaigns transparently. It grants advertisers access to more sophisticated data analytics, targeting tools, and machine learning-based optimization that significantly improves campaign performance.

An ad exchange is where the publisher-advertiser matching process happens after receiving the data from both sides. It's sort of the back-end-only Tinder for ad tech! But since “matching requirements” in media buying are much more complex than in online dating, and they are not the same for supply and demand, advertisers use DSPs exclusively for campaign management.

Ad Exchange vs. Supply-Side Platform

As mentioned earlier, marketers use demand-side platforms (DSPs) to bid on impressions. To sell these impressions, publishers use what's known as a supply-side platform (SSP).

The SSP distributes the publishers' ad space among ad exchanges. And then, the ad exchange links advertisers who want to bid on the publisher's inventory.

Today, most ad tech companies integrate ad exchange functionality into their SSPs. This can also happen the other way around. For publishers, this makes inventory management much easier; they can sell it through real-time bidding from one platform.

Ad Network vs Ad Exchange

Ad exchanges are platforms that serve as middle links between publishers and advertisers. An ad exchange is simply an open marketplace where the buying and selling process occurs through DSPs and SSPs by means of real-time bidding (RTB) technology. These platforms often belong to ad tech providers that also have other software offerings.

On the other hand, an ad network is a company that acts as an intermediary between publishers and advertisers. (Using our analogy of Tinder, it's more of a marriage broker). This means it's the ad network's responsibility to collect the publishers' ad space and then offer it to the most relevant advertisers. Basically, ad networks are there to do the ad serving job instead of their clients, so they could not bother setting up campaigns in-house.

Feature Ad Exchange Ad Network
Purpose Enables advertisers and publishers to buy and sell available advertising space Aggregates available ad inventory from publishers and sells it to advertisers
Essence Open marketplace Intermediary
How it works Directly links publishers and advertisers Brokers sale of ad inventory between buyers and sellers
Base technology RTB Can be any, or even none
Who needs it Mostly ad networks and ad tech providers Publishers, advertisers, ad agencies
Level of transparency High Low
Benefits for publishers Best prices for inventory

Complete control
Hassle-free inventory management

Full-serviced ad serving
Benefits for advertisers Advanced ad targeting

No bid markups
Low entry-barrier

Full-serviced ad serving

Ad Exchange vs. Ad Server

Remember that 1994 story? Back then, the ads had to be hard-coded by hand on the publisher's websites. You can imagine how tiring and inefficient the process must have been.

No wonder, just a year after, FocaLink Media Services released the first ad server. An ad serving platform helps advertisers place ads on various websites or apps manually and using direct fixed-price deals. Instead of hard coding the ads on their websites, nowadays, the publishers design the website leaving space where the ads will appear right from the site construction process.

An ad exchange and an ad server are creatures from different planets aka Programmatic and Direct. The only similarity between an ad server and an ad exchange is that an ad server can also track the nature of visitors to a website and then use this information to help advertisers customize their ads accordingly.

Major Ad Exchange Examples to Note

Over the years, tens, if not hundreds, of ad exchange companies have joined the scene. It's certainly not easy to stack them against each other since so many factors come into play. However, from our 10 years in the ad tech industry, we can certainly vouch for:

  • AppNexus
  • Google Ad Exchange
  • Verizon Media
  • OpenX
  • Rubicon Project
  • MoPub
  • PubMatic

The Mysterious Epom Ad Exchange and How to Use It

Epom ad exchange is an internal company product and is not available for direct usage by clients. However, we do allow clients to connect their Epom white-label DSP to Epom ad exchange and to buy traffic from our supply partners. In other words, Epom ad exchange is the place where trade between Epom DSP and SSP partners of our company occurs fluidly.

Epom self-serve DSP is completely based on Epom ad exchange, while a WL DSP allows clients to connect their custom partners — third-party SSPs and ad exchanges to their platform. However, it happens that custom supply sources are not enough to cover your needs for now.

Who benefits from connecting to Epom ad exchange? Brands and ad networks that want to use our WL DSP product but don't have any custom connections. Thus, they pay an extra fee to us, and we connect our partners to their white-label platform. Voila!

Ad Exchange: Frequently Asked Questions [FAQ]

  • What is an ad exchange?
    An advertising exchange is the middle link between advertisers and publishers, helping the two parties efficiently buy and sell ad publishing space via RTB platforms.
  • What is the difference between an ad exchange and RTB?
    RTB is a real-time auction for the buying and selling of digital ad inventory. It involves a demand-side platform, supply-side platform, and an ad exchange as the link between them. In short, RTB is a process, whereas ad exchange is simply a software-based platform — one of the essential participants of an RTB. Thus, it wouldn't be fair even to compare the two.
  • What are the types of ad exchanges?
    There are mainly three types of ad exchanges; open, private, and preferred deal ad exchanges. The first ones are based on oRTB auctions, the second one — on private RTB auctions, and the last one — on fixed deals or programmatic direct.
  • Who might benefit from building their own ad exchange?
    Ad networks and ad tech providers. These are companies that curate publisher ad inventory and then sell it to advertisers who match the space.
  • How do ad exchanges make money?
    There are several ways, but most ad exchanges rely on the following three:

    Setup Fee — This is a flat and non-refundable setup fee.

    Sell Margin — Ad exchanges get a markup for every sale. For instance, when you sell your inventory, they'll make you pay upwards of 10% or more. That means the advertiser purchases the inventory for $1,000, and you get $900.

    Buy Margin — In the same manner, the advertisers will also be required to pay a margin. Take the above example, for instance. They will buy at $1,100 to get your inventory. And in the process, they also gave away about $1000 as the exchange's margin.
  • What is the primary purpose of Epom ad exchange?
    Epom ad exchange is an internal product, mainly designed for self-serve DSP clients and white-label DSP owners who do not have their own SSP connections. The platform allows clients to trade between Epom WL DSP and Epom SSP partners.

    It's ideal for brands and ad networks who want to use our WL DSP product but don't have any custom connections. Thus, they pay an extra fee to us, and we connect our partners to their ad exchange platform.
  • Can I purchase Epom ad exchange as a white-label ad exchange product?
    Unfortunately, at the present moment, it's not possible.

Own an ad exchange? Good. Own a DSP + connection to custom ad exchanges? Even better. Set up campaigns, give out accounts, utilize bidstream data — on top of automated RTB matching.

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