Andrew Frank

Google’s long-awaited relaunch of DoubleClick’s Ad Exchange (see Official Google blog) marks its most visible attempt to-date to leverage its DoubleClick acquisition to take it out of its lucrative search niche and into the sketchy world of display. (More on the DoubleClick blog, The New York Times and paidContent.)

Launched just before the Google acquisition, DoubleClick’s Ad Exchange struggled to gain share in a market characterized by strong network effects (where scale of liquidity matters most) and dominated by Yahoo’s Right Media Exchange. DoubleClick’s secret weapon was its integration of the Exchange with DART for Publishers (DFP), which enabled ad sellers to automatically offer ads on the exchange that would only be pre-empted if a buyer on the exchange could beat the currently booked price, a no-risk proposition for publishers known as “dynamic allocation.”

As it turned out, this addressed the wrong issue. The display market had (and has) no shortage of supply of low-cost advertising inventory; its problems are on the demand side, and DoubleClick had much more trouble attracting ad buyers than sellers to its exchange. Google’s approach to this problem is apparently to leverage its huge customer base of search ads buyers by making it easy for them to migrate to display. Eric Schmidt has indicated on numerous occasions that he sees display as the next growth phase for Google, and has acknowledged that search must soon plateau in its growth. So the stakes are high as Google seeks to demonstrate to the market that it’s not a “one trick pony.”

There are two related challenges in this strategy. The first is the question of whether the bulk of Google’s AdWords customers – mostly SMBs for whom the channel is more about sales than advertising – will embrace the more indirect, brand-oriented medium of display, which requires, at minimum, some graphical execution. To address this, Google has launched a Display Ad Builder “to help businesses easily set up and run display ad campaigns.” Google goes on to say, “80% of advertisers who use that product have never run a display ad campaign before,” a claim that withers on double-take.

The track record of do-it-yourself ad creative tools is not encouraging. I recently spoke with Anupam Gupta, president and CEO of Mixpo, which had attempted a DIY video model for local merchants and marketers and had concluded unequivocally that bringing agency-produced local spot ads online was a much more promising model. Of course, Google is not putting all of its eggs in the DIY display basket, they’re also wooing ad networks and agency buyers who are more likely to invest in display media and creative services. For example, AdAge quotes Curt Hecht, president of the VivaKi Nerve Center, part of Publicis and a customer of Google’s platform: "Our view is display looks more and more like search every day. AdExchange makes it easier to buy without making a lot of calls to publishers or working with a lot of ad networks."

Which brings us to the second problem: agency buyers and ad networks, which often find themselves in “co-opetition,” are highly motivated and empowered to put considerable price pressure on additional intermediaries, especially if their name is Google. In its AdSense search business, Google has the advantage of opaque pricing and weak competition; in display exchanges, transparency reigns, and Google has plenty of competition. Agency buyers and ad networks, already feeling squeezed, have in common buying power and experience, which will drive exchange margins to a minimum. On the other side, publishers, especially those who consider themselves “premium,” are feeling even more squeezed, and are talking with agencies about private exchanges for their own networks that could minimize price friction in the value chain. Such developments will drive Google out toward the long tails of sites and advertisers, where display tends to lack the performance qualities of search.

Google is well aware of these challenges, and many have lost betting against Google. But the balancing act of pricing, advertiser support, and alliances among networks, agencies, and publishers in low-trust climate, with Microsoft and Yahoo! as competitors, will be very tough to pull off.

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