Ad Exchange - The What, How, and Why?

Keep reading or watch Lina Lugova, Head of Marketing at Epom, explaining what an ad exchange is, the difference between an ad network vs. ad exchange and how to trade ads using this platform.

Once upon a time, advertisers had to contact publishers directly to place ads on their sites and deal with ad campaigns in spreadsheets. Today, the ad tech industry sees these as almost barbaric, no thanks to the coming of programmatic with its noble knights, demand-side platforms, supply-side platforms, and today’s star – the ad exchanges.

Despite being the cornerstone of programmatic advertising, the benefits of ad exchange often go unnoticed by an average ad tech plater. Everyone’s interested in how to buy and sell ads, not how the marketplace works.

But they should be! Knowledge of this ad tech is far more important than that Applied Psychology course you took in the first college semester. Digital ad exchanges define how programmatic deals happen, and once you know that, there is no stopping you from getting the best deals whether you buy or sell ad placements! No more yapping, let’s start!

What is an Ad Exchange? Debunking the Definition

An advertising exchange is an ad marketplace where advertisers and publishers come together to buy and sell ad publishing space.

The supply side (website owners and app developers) sells ad space to the highest bidder, while the demand side (marketers, advertisers, or ad agencies) buys it.

Why Is Ad Exchange Important? When Did It Start?

The craving for transparent and efficient advertising 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 0.08% for programmatic display ads as of 2024.

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 advertisers and publishers could meet their needs quickly. The mid-2000s marked the birth of digital ad exchanges as we know them today. Google’s DoubleClick Ad Exchange and Yahoo’s Right Media were the pioneers of this field.

What Does an Ad Exchange Do in the Media Buying Process

The ad exchange platforms facilitate 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 (without needing the ad tech) with an ad exchange. Most ad exchange companies 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 to 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.

The digital ad exchange has a vast network of publishers and advertisers, streamlining the whole thing.

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 exchanges that work with the particular SSP.

Here’s how it works from the advertiser’s perspective, in simple terms: John, an advertiser, approaches the ad exchange through the DSP. John requests 100,000 monthly impressions from a specific audience using contextual targeting. The ad exchange receives his ad request and shares it with its large pool of SSPs and publishers with available ad space until it achieves John's requirements.

For advertisers, the upside of using RTB and ad exchanges together 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?

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.
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

An open ad exchange platform is a virtual marketplace that comprises a repository of listings acquired from various publishers. This is the most widespread setup since, as you might’ve figured from the name, it is open. That means that anyone can bid on anything.

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. Theoretically, this means publishers have an infinite source of media buyers and 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 the 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 can place a bid, 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 ad exchanges trump their open counterparts is the inventory slot quality. The former 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 control the whole transaction system. Besides the quality inventory, some advertisers will also appreciate the stable cost-per-mile (CPM) prices that preferred deals often offer compared to open ad exchanges. 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.

Who Uses Ad Exchanges? Platform Primary Purpose

Ad exchange apps 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 to them. Let's see which benefits of ad exchanges implicitly bring to both.

Ad Exchange Benefits for Publishers

Most importantly, with the help of programmatic ad exchanges, 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 a high-quality inventory, the value will 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 platform 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 Benefits of Ad Exchanges Applicable to Advertisers?

What is a DSP without an ad exchange?

Rhetorical as it is, the latter offers advertisers a wide variety of ad space, enabling them to choose the most ideal inventory for their criteria. Since the DSP 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 platform 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, and setting budget pacing options to choosing targeting options and bidding capabilities;
• Retarget their ads on multiple banner ad exchanges;
• Calibrate the frequency by which the same user sees an ad;
• If needed, blacklist a particular audience or website.

Ad Exchange vs. Ad Tech: Platform Clash

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

Demand Side: DSP Ad Exchange Difference

Both ad exchanges and DSPs are platforms that leverage real-time bidding technology to help advertisers distribute their ads on the Internet. However, these ad tech tools are far from being the same.

While advertisers can purchase directly from an ad exchange app, they usually connect through a DSP. The goal of the DSP advertisers is to automate the whole process and let marketers 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! However, 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.

Supply Side: SSP Ad Exchange Difference

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, which later link advertisers who want to bid on the publisher's inventory.

Today, most ad tech companies integrate video 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.

Resell: Ad Network Ad Exchange Difference

The ad exchange vs ad network is easy to comprehend: the first is software, and the second is an organization that buys inventory from publishers and sells it to advertisers.

Ad exchanges are platforms that serve as middle links between publishers and advertisers. They are simply open marketplaces where the buying and selling process occurs through DSPs and SSPs using real-time bidding (RTB) technology. These platforms often belong to ad tech providers with 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 don’t bother setting up campaigns in-house.

Direct Deals: Ad Exchange Ad Server Difference

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 them 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 these ad exchange platforms:

• 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, our platform 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 even mobile 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, programmatic agencies, and ad networks that want to use our WL DSP product but don't have any custom connections. Thus, they pay us an extra fee, 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 three main types of ad exchanges: open, private, and preferred deals. The first ones are based on oRTB auctions, the second on private RTB auctions, and the last 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 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 product?
  Unfortunately, it's not possible at the present moment.