Ad-Tech Tax — What bracket are you in?

When a new technology is introduced to improve the efficiency of a business process, it involves a cost. The cost of garnering scale in the business involves an incremental cost that causes reduction in profit margins. If the implementation is successful, the overall profit goes up and benefits all parties involved in the supply chain of that product or service.

This can become a problem however when the implementation of this technology creates a big disparity between the original seller and end-buyer.

Thus is the case with programmatic: the disparity between advertisers and publishers involved in programmatic advertising has grown substantially to the point that the majority of the money goes to technology companies between the two parties.

Platforms and technology companies took 55% of the money spent by advertisers, with only 45% reaching publishers. (Footnote 1)

The cost of doing business in programmatic is costing both publishers and advertisers substantially, but that is the price paid for efficiency, scale, and advanced targeting.

If we take the example in Dhar Chart Fig. 3, above, we see that there is an advertiser puts a campaign into a DSP for $5 CPM.

Since the DSP’s profit margin to cover its costs of overhead, technology and staff, is 20%, the actual CPM bid placed into the exchange is $4.

The exchange takes a portion from the DSP bid, as well as ad-serving and a rev-share from the seller, which in this case is an SSP, which totals $0.50, leaving the SSP with $3.50.

The SSP deals directly with the publisher, who receives $2.50, because the SSP takes a rev-share of just under 30%.

So the publisher takes home $2.50 from the original bid of $5.

Each individual party in that example serves a purpose and adds value to the entity on either side of them in the transaction. But when you zoom out and look at the big picture, it looks troubling to see the disparity between advertiser cost and publisher revenue.

This is a simplified version of the usual chain of events because it does not involve any arbitrage, which will be covered in future posts.

(Footnote 1) 1 IAB/PwC Internet Ad Revenue Report, FY 2014. April 22, 2015 http://digital.pwc.com/insights/iab-programmatic-advertising-revenue-report/