What Is RTB?

by | Feb 13, 2020 | Education

In simplest terms, real-time bidding (RTB) is the automated process of buying ads. A common analogy used to describe it is the stock exchange, but for an ad campaign.

But there’s a lot more to it than that, and its impact on how humanity communicates has been, well, immeasurable.

If you use the internet, real-time bidding impacts your life on a daily basis. It’s the technology allows personalized ads to populate on web pages in fractions of a second. For better or worse, this was a (maybe the) major factor in the rise of the “click economy” where clicks and impressions (i.e., eyeballs viewing your site) are the media industry’s bread and butter.

Let’s dig into what this all means, both for your next campaign and the campaigns you’ll run in five years’ time.

What is RTB? What It Means to Buy and Sell Impressions Eye Icon

What it means to buy and sell impressions:

At the end of the day, publishers sell the attention of their audience. This attention is approximated as “impressions” in digital advertising. This core currency of attention is what real-time bidding is built around: publishers sell impressions that advertisers are looking to buy. Advertisers buy these impressions through a bidding process.

Real-time bidding automates this bidding process to make it cheaper and to make it happen in real time. That’s the idea anyway.

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Newbie Note

Impressions are the measurement of how many people see your ad (i.e, the size of the audience for your ad). They’re bought on a CPM basis (cost per mille/thousand). So, a $2 CPM means it costs $2 to put your ad in front of 1000 sets of eyeballs.

To make this automated buying and selling of impressions happen in real-time, a constellation of technology cropped up, creating a very complex market media buyers have to navigate in order to purchase ad placements. We have a simplified overview in our Beginner’s Guide to Programmatic Advertising article, but the gist is in this graphic:

Programmatic Ecosystem

When a user goes to a website, the website owner (i.e., publisher) has an ad space (usually multiple ad spaces) available for purchase, called ad inventory. A set of tools and platforms, called Supply-Side Platforms (SSPs), help the publisher manage their ad inventory, package it as impressions and get it all ready to sell at a decent rate. An ad exchange then facilitates the process of bidding on those impressions. To make those bids, an advertiser will use their own set of tools, like a Trade Desk and a Demand Side Platform (DSP).

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Nuance Note

There is a lot more technology involved in this supply chain, such as ad networks, the ad server being used and more. For an overview of how it all works, again, read our Beginner’s Guide to Programmatic Advertising.

Along the way, decisions are made based on what is known about the user — if they’ve visited this page before, if they’re interested in travel, if they’re currently shopping for shoes, etc. Advertisers set parameters around what impressions they want to bid on (e.g., I sell sneakers and only want to buy access to people who play sports), which audience segments to target and more. Then the whole ad tech stack kicks into gear.

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Newbie Note

Ad tech, or advertising technology, is a catchall term for any piece of technology that facilitates modern advertising.

All of this happens in a matter of milliseconds, hence “real-time.” The technology behind it is as robust as it is complex. It’s a science in itself to master it all.

What is RTB? The Magic of Ad Exchanges - Exchange Icon

What do ad exchanges do?

None of this would be possible without ad exchanges. In fact, the invention of the first ad exchange, Right Media, made real-time bidding possible in the first place.

Ad exchanges function as a giant marketplace for impressions. Publishers throw in all the impressions they want to sell and advertisers bid on them.

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Ad Exchange vs Supply-Side Platform

“What’s the difference between an ad exchange and a supply-side platform?” is a question that gets asked a lot. The shortest way of putting it is that SSPs aggregate ad inventory from publishers. Ad exchanges aggregate SSPs’ ad inventory and DSPs’ bids.

But, as we mention in our Beginner’s Guide to Programmatic Advertising, the lines are becoming blurred. SSPs and DSPs are developing ad exchange-like capabilities. Some even predict that certain SSPs will eventually acquire a DSP, and vice versa. It’s all pretty complicated, so what’s in this article is as simple as we can get it.

The big innovation this introduced is that advertisers no longer needed a direct relationship with publishers to get their display ads seen. In other words, a mom-and-pop looking to expand their business nationwide didn’t need to have contact at New York Times to get their ads shown there — they’d buy some impressions through an ad exchange (this is an extreme example, but it illustrates the concept overall).

As you can guess, this had a huge impact on the landscape of digital advertising. Yes, the technology is complex, but there were some pretty fundamental power shifts this introduced that have wide ranging impacts.

We’ll dive into what exactly changed, but first, a few points of clarification.

What is RTB? The Magic of Ad Exchanges - Exchange Icon

What’s the difference between real-time bidding and programmatic?

If you’re thinking, “Hey, isn’t real-time bidding just programmatic advertising?” you’re not alone.

RTB is a type of programmatic advertising. If programmatic is an umbrella term, RTB is an umbrella term under the umbrella.

OK, so if RTB is an umbrella, what’s under that umbrella?

 

Open Exchange

Open exchange is a “free-for-all” where just about any publication can list their ad inventory for anyone to buy. The open nature makes it incredibly democratic, but also prone to fraud.

Private Marketplace

Private marketplace (PMP) advertising is much more exclusive. It’s a (you guessed it) private marketplace to sell and bid on ad placements in real time. Because it’s more exclusive, PMP advertising can be more expensive, but your risk of fraud and other bad stuff is much lower than with open exchange.

What is RTB? The Magic of Ad Exchanges - Exchange Icon

What are the types of auctions in real-time bidding?

As its name implies, the price of impressions in RTB is determined in real time depending on an incredibly complex set of factors including ad inventory quality, user demographics, location, relevant content, the size of the ad unit, etc.

The advertiser starts the bidding process by setting a maximum and minimum bid. The complex constellation of programmatic technology kicks into gear connecting these bids with inventory within that range.

In other words, the advertiser says “I’m willing to spend this much at most and this much at least to get this type of ad placement.” The RTB system will connect that advertiser with a publisher offering that has that type of ad placement within the advertisers range. Then the auction starts (keep in mind, this ad buying process is all happening in fractions of a second).

There are two types of auctions in the modern-day RTB ecosystem.

 

First-Price Auctions

A first-price auction is where the winner pays the highest bid amount. This is what most of the industry runs on today and the trend really gained steam after Google announced it will adopt first-price auctions in 2019.

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What is header bidding?

Header bidding (sometimes called pre-bidding) is an advanced first-price auction technique where a publisher makes their ad inventory available to multiple exchanges at a premium before opening it up to a second-price auction.

Second-Price Auctions

A second-price auction is where the winner of the auction pays the second-highest bid. This method has fallen out of favor in recent years and it’s demise was hastened by the widespread adoption of header bidding.

What is RTB? Impact - World Icon

What is the impact of real-time bidding?

Here is how we categorize the impacts (good and bad) of RTB:

Democratization

RTB makes incredibly powerful technology available to people who previously could never dream of access. What used to be a gate-kept process became much more open.

In the early days of the internet and online content (think early to mid 90s), buying “impressions” used to be done behind closed doors and over business lunches. Banner ads were treated like internet billboards and bought in a similar way. Some of the technology that underpins today’s RTB ecosystem was restricted to early paid search advertising.

You could kind of buy ad impressions in the way we do today, but it was really expensive, really manual and in many ways, probably not worth it.

Ad exchanges cracked the code in the early 2000s by applying RTB technology to display advertising. New York Magazine goes much more in-depth into the surprisingly captivating origins of Right Media, the first ad exchange as we think of them today.
The ultimate point is that RTB makes it easier and cheaper than ever to buy and sell impressions. On the surface, online marketing and advertising became more accessible than ever.

Quality

We’ve all seen more than our fair share of bad, annoying ads interrupting the content we actually want to see. While things are getting better thanks to the Coalition for Better Ads and others, there was a while there where the age old Jeff Goldblum quote rang true:

“Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.”

Because ad exchanges removed the traditional marketing and media gatekeepers, if you wanted an ad to go up and had the money, there wasn’t a whole lot stopping you. There were just a lot more ads out there and a good chunk of them just weren’t that great.

Overall, timing and placement started to take precedence over creative quality or context. The result is a less than optimal user experience for many publishers.

Fraud, Malware & Other Bad Stuff

One of the most striking quotes from New York Magazine’s article is when one of the founders of Right Media talks about the effect of ad fraud:

“One of the worst days of my life was getting a civil investigative demand from the state of Washington threatening to shut the system down because [our technology] was being used as a distribution engine for malware.”
-Mike Walrath, Founder of Right Media

As Confiant aptly puts it, some of the “most sophisticated advertisers [are] criminals using the industry for their own, selfish ends.” The same was true, if not more so, back then.

When you think about what RTB technology is capable of, it’s no wonder it became a honeypot for bad actors. It’s easy and relatively cheap to get your stuff, no matter how good or bad, in front of thousands and thousands of people.

The online ad industry adapted, but so have the bad actors. Things are handled for the most part. Most of the fraud originates from a minority of platforms, as Confiant reports in one of their 2019 Demand Quality Reports:

Almost 60% of Malicious ads came from just three SSPs.

The point is that RTB makes fraud an everyday reality in the world of modern marketing. Things are improving quickly, but it’s still an issue you need to take into account for each campaign by using brand safety and ad fraud vendors like our partners MOAT, IAS and others.

Privacy

The whole point of RTB technology is to hit the right person at the right time. But how do you know who to hit and when? Personal data. And lots of it.

Privacy is the hot topic here in 2020, especially in regards to Google and Facebook. The general public is becoming more and more aware of just how much of their data is given out and put up for auction.

The big development in the past few years is the passing of the EU’s General Data Protection Regulation (GDPR), which requires users to specifically opt in to having their data collected. In the US, the California Consumer Privacy Act (CCPA), which went into effect earlier this year, has similar requirements.

It’s not just governments trying to reign in the collection of personal data, companies like Apple are taking a strong stance against it with their Intelligent Tracking Prevention. Firefox soon followed suit. But the biggest news is that Google announced within two years, Chrome will no longer support third-party cookies.

And there is some interesting technology coming up that completely sidesteps RTB altogether, like Basic Attention Token in the Brave Browser and Solid from Tim Berners-Lee (the inventor of the world wide web).

How all these privacy issues shake out in the coming years will determine the future of the RTB model we’ve relied on this past decade or so. Some thought leaders like Ratko Vidakovic are even saying that with the death of the third-party cookies, a new age of digital advertising is here. He says,

“The 2010s were all about the real-time bidding (RTB) ecosystem. …The Achilles heel of this era, however, turned out to be privacy.”

As we move into the new era, the next big innovations in human communication is balancing the real-time strengths of RTB with the privacy we deserve

Complexity

RTB is complex technology and every year brings more complexity. In 2010, the infamous LUMAscape graphic, which outlines the entire ad tech landscape, had about 100 companies. In just seven years, that ballooned to around 5000 and hasn’t slowed down.

Ratko Vidakovic goes on to say, “[RTB] was incredibly complex, and only grew in complexity … Despite the intention of creating more efficiency around digital media buying, it ended up creating a great deal of inefficiency. The open nature of the RTB ecosystem and the misaligned incentives of the predominant business model also led to fraud, low-quality ad inventory, and low-quality data.”

(The quotes we use from Ratko are from his incredibly weekly newsletter, which we recommend you subscribe to.)

Put simply, it’s all too much for people to wrap their heads around, so they outsource it, hire huge internal teams or a mix of the two.

The complexity is due to many factors, but we can sum them up into three:

  1. the sheer amount and complexity of data
  2. the number of issues to account for (like ad fraud)
  3. walled gardens muscling out smaller players

All this on top of regulations, increasing consolidation, new ad formats and technological advancement.

It’s a lot to keep track of. It’s nearly impossible to get a real-time and accurate view of performance, despite RTB’s name. A good place to start is with a central place to get a handle of it all. That’s what we set out to create with LumenAd. Check it out and schedule a demo if you think it’s a good fit for your organization.

There’s always more…

There are many more impacts RTB has that we could write a whole textbook about, like giving rise to the click economy, the effect on newsrooms, walled gardens and more.

We’re huge nerds about this stuff, so subscribe below for more insights or schedule a demo if you want to pick our brains.

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