• by Jeff Green , March 7, 2013

Over a decade ago, someone had the brilliant idea to take housing mortgages and slice them up in different ways. They were bundled, and then sold as investments to Wall Street. So instead of just equity and stocks, investors could own little collateralized pieces of people’s mortgages, and then ride the wave of that era’s bourgeoning real estate appreciation.

The process was addictive. The banks started incessantly bundling and selling mortgages. The real estate market continued to go up, and this contributed to a bigger bubble. But do you know what unwound the mess and popped the bubble? Congress? AIG? The Fed? Moody’s? Banks leveraged by 40X? Each had a part in it. But the real trigger for the burst was even simpler: if you had asked nearly any investor, even the people who created the instruments, “What’s inside of these mortgage bundles?,” they wouldn’t have been able to give you a clear answer.

Investors eventually said, “I can’t buy something for that price unless I know what it is.” There was a growing scare, and it took the demand out of the market. The other pervading thought pattern was, “There are so many other things in this market that I know; I should just buy those instead.” Without knowing exactly what was bundled, the house of cards began to fall.

The solution for the mortgage market – complete transparency – is playing out in online advertising. A healthy market for mortgages has been created by selling them off, one by one and piece by piece. Similarly, ad exchanges and RTB have added transparency to online advertising, impression by impression.

This has created complexity for both mortgages and online advertising. But what’s more valued for people with deep pockets? Simplicity, or price discovery? Sophisticated money has always been complex. Consider what Warren Buffet’s tax return look like. Markets don’t evolve that way for investors because they have an affinity for complexity, but instead for accuracy and advantage.

It’s time for publishers to embrace RTB as the underlying technology going forward. What’s happening right now in the digital advertising ecosystem is that publishers are trying to create artificial scarcity by siloing their inventory into RTB and non-RTB (sold direct). Here’s what I say: Instead of any siloed inventory existing at all, there should just be one giant market of inventory, more like Wall Street. 

Some publishers are resistant. They don’t want buyers to know that they make 80% to 90% of their revenue on 10% to 20% of their impressions. So these publishers obfuscate pricing and create a different market, trying to make sure that pricing for certain impressions never informs other groups. One impression may go for $1 CPM, and another for $10 CPM. Some publishers do their best to hide this fact. They want to have their cake and eat it, too, with high sell-through rates AND high CPMs.

But publishers will eventually accept that RTB is not only here to stay, but is the best way to monetize their inventory. This isn’t to say that a forward market – which in today’s form is IOs – is going away completely. But it needs to co-exist with the spot market. The only way a forward market thrives if it’s built on top of a spot market. A buyer should be able to decide, “I bought a million impressions from a publisher in RTB, and it performed extremely well. Now, I’m willing to guarantee an even higher CPM for guaranteed inventory.”

Ultimately, there are only two choices here for publishers. Obfuscate as much as you can, and bet on continued opaque, uninformed media buying. Or be as transparent as possible, and allow the market to work itself out. You can’t have both levers compete with each other, and that’s what needs to be cleared in the immediate future as RTB and guaranteed buys begin to merge.