Arbitrage is a major concern in the advertising industry because it potentially places the agency in conflict with the advertiser it supposedly represents. For one, the discounted nature of the ad inventory being acquired might introduce bias, encouraging agencies to recommend using certain channels to distribute advertising that they otherwise would not. Second, arbitrage adds additional unnecessary cost to advertising budgets because the agency charges a markup with no justification. These costs would be avoidable if ads were easily acquired in the programmatic marketplace.
According to one industry veteran, these practices are “happening virtually everywhere in the U.S. media landscape.”18 A major independent study commissioned by the Association of National Advertisers (ANA) in 2016 concluded that “non-transparent business practices were found to be pervasive.” It went on to observe that “these practices appeared to be part of the regular course of business” across a cross section of major agencies and agency holding companies interviewed for the report.19 One former executive stated that the entire system of agencies and clients was “one massive arbitrage system.”20
Agencies remain a significant part of the digital advertising ecosystem and play a major role in coordinating advertising campaigns and spending. The prevalence of arbitrage means that these agencies have a strong incentive to aggressively inflate the value of the inventory they are selling. This inflates the market bubble even as the value of this ad inventory declines. Like the ratings agencies in the march to the subprime mortgage crisis, marketing agencies have conflicted incentives to give figurative AAA ratings to low-value ad inventory, because they profit directly from doing so.
This may explain why, despite growing concern from advertisers and its negative impact on major agencies, the arbitrage conflict has not been addressed in a serious way. In 2018, two years after the ANA report, the industry publication Digiday opined that “advertisers and agencies talk about transparency a lot but often look as though they’d rather blame one another for the lack of clarity than come up with a way to get it.” It quoted a representative of the ANA who noted that “trust between advertisers and agencies is lower than it’s ever been because agencies keep denying that there are transparency issues [around arbitrage].”21
Ad Technology
The opacity introduced by the speed and scale of programmatic exchanges doesn’t just make it more difficult to know where ads will end up online. It also makes it hard to determine why a particular unit of ad inventory commands the price that it does. Ad technology platforms, we will see, inflate prices in very much the same way that marketing agencies do.
As we discussed earlier, the programmatic marketplace relies on the interaction between two types of platforms. On the one hand, there are the demand-side platforms (DSPs), which help advertisers purchase ad inventory. On the other, there are the supply-side platforms (SSPs), which contract with publishers and obtain the privilege of offering their ad inventory to buyers.
These platforms are not neutral players in the marketplace. DSPs and SSPs have been known to work together to inflate ad prices in order to secure profit for themselves. Controversially, these practices are not typically disclosed to the advertisers and publishers whose interests the platforms ostensibly serve.
DSPs can sign bulk purchase deals to acquire inventory from their supply-side counterparts at a discounted price. This discounted inventory is then sold by the DSP at a huge markup with no disclosure of the increased cost. These margins, which are occasionally disclosed in the public Securities and Exchange Commission (SEC) filings of some DSPs, can range from 44 percent to 66 percent.22
SSPs, for their part, have in a number of cases misrepresented the relationships they have with various publishers and the types of inventory they are authorized to sell on their behalf. When a buyer goes to purchase this inventory, the platform simply resells inventory purchased from other SSPs.23 In these cases, the SSP is an unnecessary middleman, artificially inflating the price paid by the ultimate buyer.
Imagine that you’re a car company, looking to place an ad promoting your newest model. Using your DSP, you—or more likely an algorithm working on your behalf—identify a perfect opportunity to place an ad on Car Central, a prominent blog for automobile enthusiasts. As far as you know, the system works great: you bid on the spot, you win the auction, and your ad goes up on the website.
But sometimes, the DSP and the SSP are actually working against you. The DSP obtained the Car Central inventory at a much lower price and sold it to you at a significant, undisclosed markup. The SSP offering the Car Central placement might not even have access to Car Central—they bought the ad inventory from an SSP with access and then offered it at a significant, undisclosed markup.
In either case, you pay far more for your Car Central ad than you should. The cumulative effect of these undisclosed margins on price is massive. One study by The Guardian suggests that some 70 percent of the money spent by buyers is consumed by the ad tech platform, with the publisher retaining the remainder.24 Had you been able to negotiate directly with Car Central or with an authorized SSP selling inventory on its behalf, you might have been able to avoid the hidden fees.
This arrangement creates a significant price mismatch between what a buyer pays for an ad placement and what the publisher selling that ad placement actually receives. Some publishers have responded with legal action. In 2017, The Guardian sued Rubicon Project, an advertising exchange, for charging additional fees to buyers of Guardian inventory without disclosing them to the publisher.25 Though the case settled without any admission of liability, Rubicon Project has since eased up on the hidden fees.
Like the financial institutions that originated, packaged, and sold mortgage-backed securities in the 2000s, the operators of the programmatic advertising infrastructure have perverse incentives to keep prices high and the market
