The Ad Server’s Point of View – Selling to the Advertiser and Cost

So I thought a good topic, after recently dealing with a negotiation on price, would be to lay out what an ad server contends with as an operation and where the flexible and fixed costs exist so that as a buyer you can understand where they are coming from in deal.

Ad servers have a number of costs, like any business, costs of doing business.  I am not going to go into the overhead of people, facilities, marketing and the like.  Infrastructure or ad serving is where you should be enlightened.  For every ad served, there is a fixed cost known as bandwidth.  So depending on the size of the ad server, or depending on the deal they have with their provider, or depending on their physical locations globally, or a number of other factors that are not worth going into, an ad server has a fixed cost for bandwidth. 

Bandwidth is the pipe of data they can squeeze your ads through.  There is only so much data they can squeeze through the pipe before they need fatter pipes.  The more ads and the larger the file sizes of those ads, the fatter the pipes need to be.  So as file sizes increase, as rich media becomes more prevelant, as video becomes more popular, ad servers need more bandwidth to deliver services.  This translates into higher cost of delivery.

Back to the cost of goods served.  Ad serving has been an ever-increasing commoditized service.  I have mentioned in previous posts that Atlas is notoriously the most expensive, Zedo and Mediaplex the cheapest and DoubleClick and TruEffect falling in the middle.  Of course with that, Atlas is known for poor customer service, Zedo is known for kinks and inconsistent capabilities and optimization that simply does not work, and DoubleClick treats you like a numbered prisonmate.  Anyway, prices for ad serving have come way down.  Atlas used to charge $0.30+ CPM and now Zedo goes as low as $0.025!  But with rising bandwidth demand you will see a shift the other way or a continued decrease in anscillary services without additional fees. 

The average file size limits are 25-30K.  But ad servers will not be able to afford to provide services with rising costs as these limits are driven up.  I think that we may begin to see prices shifting the other way.  Most of the smarter ad servers have penalty fees or overage fees built into their contracts for average file sizes that exceed the limits.  When it comes time to renegotiate contracts, I think that advertisers and agencies will be surprised that the rates won’t be coming down if they seek higher file size limits.  Or they simply won’t be coming down as much.

One positive thing … bandwidth costs are decreasing.  This is a saving grace.  Bandwidth costs continue to decrease over time.  They do so slowly, but they do come down.  Smart ad serving companies continuously renegotiate these costs in an attempt to recapture margin and to put themselves in the position to be safe when it comes time to renegotiate with advertisers and agencies.  However the rate by which bandwidth is decreasing and the rate by which advertisers and agencies are driving up file size averages is no where near matched so the ad server is getting pinched.  With a squeezed margin rate the only other thing to do is cut services.  The bigger providers have already done this.  AKA DoublickClick, Atlas and Mediaplex.  You can see it in their customer service.  You can also see it in all of the extra fees they charge you for like training, setup and what not.  You are getting nickled-and-dimed because they are capturing revenue wherever they can since the CPM is getting squeezed. 

A word of caution, know how your vendors make their money.  The know how you make yours.  Leverage what you can, but also know where when you have someone’s back up against the wall because a good deal know can translate into a bad relationship later.

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