This is my fourth and final installment on programmatic in China. As always, let’s first define the terminology. “Open Exchange,” also known as “Open Auction,” or “Open Marketplace,” usually contains the lowest tier of publisher inventory.
Since the major publishers all have their own private exchanges, the open exchange mainly contains inventory from small and medium-sized publishers. On portals and verticals, open exchange inventory is usually made up of inner content page banners, or banners with low viewability that sit below the fold.
On OTV channels, the pre-roll inventory is usually UGC instead of TV shows or movies.
Due to the low pricing, the advertisers will also skew toward smaller brands or performance type advertisers such as e-commerce channels or registration-based social channels.
Because of inventory quality issues, the open exchange often poses brand safety issues for big advertisers. The first concern lies with the publisher and content quality. The advertising environment on many smaller publishers is cluttered and the content less controlled. An example would be a luxury brand pre-roll ad that appears in front of an inappropriate user-generated content (UGC) video.
Another concern is with the smaller advertisers that also advertise on the open exchange.
For many big brands, merely being associated with an unknown small brand damages brand equity, let alone inappropriate advertisers such as gaming, or online gambling companies that often buy through the open exchange.
However, this issue can be mitigated using technology that specifically scans the publisher for questionable content prior to an ad placement.
Open Exchange in China
Currently there are two big open exchange players in China: Doubleclick and Tanx (Taobao Ad Exchange).
Both exchanges connect to multiple demand side platforms (DSP) out on the market, for example iPinyou, Yoyi, etc.
Tanx started out as a traffic support product mainly targeting Taobao shop owners that wanted to bring in additional traffic from outside of the Taobao ecosystem. Hence, it is a popular exchange for e-commerce brands especially if they own a Taobao/Tmall shop.
These two exchanges are mainly dominated by display inventory across small and medium publishers.
For online television (OTV) inventory there is the Miaozhen Exchange that contains remnant resources from big channels like Youku/Tencent, or resources from the smaller channels like Ku6 and Funshion.
On the surface, there is nothing different about China’s open exchanges compared with the West, for they both seem to operate on the same principle: the consolidation of remnant publisher biddable formats. But as always in China, there are interesting local market “innovations” that are very specific to the market.
- Some open exchanges also directly procure non-biddable reserved inventory from publishers, essentially acting as a broker
- DSPs add significant mark-ups on top of open exchange cost-per-miles (CPM) as service fees
Open Exchange + Non-biddable Reserved Inventory
The whole premise behind an open exchange is that it only connects to remnant biddable formats from publishers.
Instead, some exchanges in China also procure non-biddable reserved inventory directly from publishers.
For example, Tanx contains mostly remnant biddable formats, but they also have reserved format similar to the way ad networks procure their inventory.
Where does this inventory come from? Besides being a publisher, Taobao is also one of the biggest online advertisers. So they buy huge amounts of ads through package deals with different media channels. Now whatever inventory that actually aired Taobao ads, it’s consumed. But the remnant inventory that doesn’t get used all gets thrown into Tanx, then resold through real-time biding (RTB) to other advertisers.
Essentially Taobao acts as a broker trading on behalf of advertisers buying through DSPs. If the advertisers buy this inventory directly through Taobao’s DSP, then they will throw on top their data management platform (DMP) data that can help the advertiser better target based on transaction history.
The model makes a lot of sense for Taobao to maximize revenue, but it creates channel conflict if the advertiser also directly invests on one of the media channels in Tanx.
In this case, the media channel will have a “blacklist” of clients that can only buy direct, instead of going through Tanx as a broker. Hence, the advertiser will either have to pay direct CPM rates for Tanx inventory, or, the media channel won’t air any ads booked through DSPs on Tanx.
Of course, this only happens for big advertisers where procurement transparency is of utmost importance. Smaller advertisers will gladly go through Taobao as a broker if the CPMs are indeed lower than going direct. The media channel within Tanx will be forced to air the ads or risk losing the investment entirely, on top of damaging its relationship with Taobao.
DSP Open Exchange Markups
Another interesting phenomenon is how DSPs are positioned in the Chinese market.
DSPs in the West are technology platforms that realize open exchange procurement. Hence, the control of bidding and exchange inventory selection lies in the hands of agencies/advertisers. But in China, DSPs mainly operate on a managed service model instead of self-serve.
In this case, they commit to a fixed CPM much like an ad network, and they balance the bidding price to fall within the range.
However, this model gives up the control of bidding and exchange/inventory selection entirely to the DSPs. Hence, they add a significant mark-up as “optimization service fee.”
In the case where the DSPs do open up the platform for agency operation, their margins are sometimes built into the exchange floor price. There’s incentive for both the DSPs and open exchange, hence the exchange will almost never directly approach agencies/advertisers with pricing transparency.
This situation is mainly due to the immaturity of the programmatic market in China, where there’s a shortage of talent across agencies that can actually operate bidding platforms.
As programmatic gains more adoption, more independent DSPs will surely arise and provide for advertisers’ transparency needs.
Programmatic in China
As I wrap up this series on China’s unique programmatic landscape, let me summarize the key points of programmatic in China below:
- The selling point of programmatic in China is less about automation, and more about precision/results.
- China’s programmatic scene is packed with hybrid “one stop shops”: Ad Network + DSP, DSP + DMP, Private Exchange + DSP, etc.
- Along with these hybrids, there is greater conflict of interest for advertisers due to a lack of boundary/transparency across disciplines.
- But also with these hybrids, advertisers can quickly experiment with programmatic without heavy investment/understanding in technology.
Lastly, I want to conclude with the following thought: From a Western perspective, China’s ad-tech ecosystem is non-transparent and sometimes downright shady.
Although I admit there are many things that we need to fix (transparency, conflict of interest, to name a few), I wholeheartedly believe that we will develop our own flavor of programmatic. While the ecosystem may not resemble that of the West, it will most certainly be the best fit for local market needs.