In order to comprehend the black box of programmatic advertising we need to have at least a rudimentary picture of how it works.
There are essentially two ways to buy online advertising - directly and programmatically.
When you buy directly, you go to a website owner (publisher) and make a deal with them. When you buy programmatically you go to an ad exchange, hand over some money and some guidelines, and the exchange places your ad budget into an automated auction system. This, in theory, finds the best sites for your campaign at the best prices.
In the simplest possible terms, programmatic buying looks like this:
As we will soon see, in actuality the system is about a thousand times more complex than this diagram indicates.
Currently it is estimated that between 70 and 90% of online advertising is transacted programmatically. There are also hybrid versions of online buying - which feature elements of both direct and programmatic buying. For the sake of keeping an impossibly complex system comprehensible, let’s just agree that hybrid versions exist but let’s not get into detailed descriptions of them.
The online advertising ecosystem is, in reality, impossibly complex. I am reproducing something here called a LUMAscape, named after LUMA Partners, the company that invented it. You don’t have to fully comprehend it to get an idea of the insanely tortuous route a display ad may take from the time it leaves your desk to the time it appears on a website. As stated earlier, the system is so complex, it is essentially incomprehensible.
I believe it was British media expert Irwin Gottlieb who said, “In complexity there is margin.” In other words, at each step of the process, someone is taking a piece of your ad dollar.
When a system is complex, there may be good actors who actually add value. But there is also plenty of room for bad actors. Complexity is a crook’s friend. bad actors have more opportunity to insert themselves into the process, and therefore, more opportunity to act fraudulently. Complex systems also make it much more difficult for buyers to know where their money is going, who it is going to, what they are getting for it, or at what point it is disappearing.
Underlying the programmatic ad ecosystem is a process called real-time bidding (RTB.) RTB allows many advertisers to simultaneously bid on the same ad slot on a website as soon as a person arrives there. A computer driven online auction takes place in nanoseconds. The highest bid wins the auction, and their ad is placed in the slot and, at least in theory, delivered to the person.
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As an aside, RTB is unusually dangerous to privacy and to society. According to the Irish Council for Civil Liberties (ICCL) in 2022 RTB tracked and broadcast peoples’ online behavior and location 294 billion times a day in the U.S. and 197 billion times a day in Europe — ‘broadcast’ is the term used when an RTB entity transmits information. The average person in the U.S. had their online activity and location broadcast to thousands of companies 747 times every day. In Europe, RTB transmitted an average person’s data 376 times a day. These “broadcasts” go to thousands of organizations around the world, including Russia and China, and there is no control on how this information is used once it is sent.