Everybody’s an ad exchange (The Thin Exchange, 1)

Everybody’s a DSP? Everybody’s a marketplace.

There’s this confusing moving about in the marketplace. AdECN was a pure exchange, and is now part of a publisher. Right Media, same thing. OpenX was a publisher tool, and is now running an exchange. AdMeld similarly. AppNexus was an exchange and is now a DSP (I think.) Same with Turn (who was first an ad net before raising money to become an exchange.) Glam and FIM are publishers and now have some features of an exchange. Several of the ad agency holding companies are making unlikely noises about building their own tech. And AdEx, well… they’re doing pretty much everything.

It was so confusing I made a picture of companies moving about.

A good entrepreneur will change strategies as they learn the lay of the land. But some companies who weren’t exchanges are becoming exchanges and some companies who were exchanges are becoming something else so, um, how does the land lay?

Here’s what I think:

  1. The ad exchanges know that running a marketplace should not command what they are charging, and lie awake at night fearing that their customers might someday come to the same awful conclusion.
  2. The customers already have.

Why did the exchanges add other functionality? Because they know that they won’t make much money as an exchange. I don’t have much to add to my analysis in the linked post, other than to say that it seems all the exchanges agree with me, if you look at what they do rather than what they say.

Why is everyone becoming an exchange? Because it’s just not that hard to add exchange-like functionality and escape the 20% transaction fees being levied by Google et al. An exchange is a low marginal cost, high fixed cost system. Once you’ve built the system, you just need to amortize the cost over a sufficient volume. That means that anyone with good volume is better off building their own than paying someone else.

If you extend this economic logic into the future, you arrive at an inevitable conclusion. Someday, someone will garner a huge amount of volume by offering exchange services at the lowest possible price, somewhere just north of marginal cost, probably in the 1% to 5% range of transaction fees. Everyone else will find that it is cheaper to use this single exchange than it is to run one themselves. Non-exchanges will stop reinventing the RTB wheel. And exchanges will be glad they moved into other lines of business.


  1. Great analysis and agree with your conclusion. Also, can’t help but think of parallels to @fredwilson’s analysis of twitter 3rd parties. Feel like most DSP’s are filling holes in the exchange functionality/ feature set – a good starting point but need to innovate beyond filling the obvious “holes”

  2. Platforms always have the temptation to gobble up their ecosystem. But if Twitter could charge a fee for every tweet, they might not feel the need to expand; even if they charged a tenth of a cent a tweet, they would be an extremely profitable company. (I think… I don’t really know their cost base, though, so I could be wildly wrong.)

    It’s interesting to think about the balance of power between the core and edges. I recommend Isenberg’s paper.

  3. Do you think another way to look at this is to say that these companies are “networks 2.0”? In other words, serving the same business purpose that networks originally did (connect buyers/sellers), but with new features and functionality (i.e. RTB, better targeting, etc)?

  4. Jeremy–

    I think the ad nets were a temporary solution. Read Brent Halliburton’s analysis (

    We’re taking what the ad nets and Google have done and carving it at the joints. That way a bunch of innovative companies can take a crack at doing each piece better.

    So networks 2.0? I wouldn’t give the networks that much credit.

  5. Ha – fair point. I definitely think the work exchanges are doing is improving the results for both publishers and advertisers by doing it better in each phase of the process. I guess I’m just wondering if there’s any real behavior change for the end buyers/sellers or if they are just seing different names on the checks they send/receive.

  6. That is an excellent question.

    I sure hope so, but it’s a slog changing behavior. There are definitely more pieces that need to be built to make the ecosystem work better for both the marketers and publishers. Closing the loop will need dynamic feedback on value from both sides. There are precious few doing that now, and they aren’t integrated into the system yet.

  7. The ultimate question for me on this one is whether these changes can cause marketers to re-allocate dollars from search (and emerging social) back to display. That would be a real game changer on a number of levels.

    Thanks for engaging my questions. I really enjoy your blog.

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