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Ad Tech Deconstructed: What is an ad exchange?

by Katy Jensen on Feb 15, 2018

The world of ad tech can be confusing—that’s why we’re bringing you our Ad Tech Deconstructed series. We’re putting ad tech under a microscope to examine exactly how things work. For today’s installment, we’ll talk about what exactly an ad exchange is and how it works.

In the digital ad buying space, there is a demand side and a supply side. Each side is made up of different components that facilitate the whole buying process. On the supply side are publishers, supply-side platforms, and ad inventory. On the demand side are advertisers, demand-side platforms, and advertisements. Most of the components of the ad tech landscape fall on either one of these sides, but there is somewhat of an intermediary: ad exchanges.

Now, like anything else in the ad tech world, it’s not really that simple. Let’s first understand what ad exchanges exist for: they allow publishers a place to make ad inventory available to potential buyers.

We’ve already talked about how demand-side platforms (DSPs) bid on ad space and supply-side platforms (SSPs) supply ad space to be bid on. So where do ad exchanges fit into this whole supply-and-demand structure? Ad exchanges are what SSPs and DSPs plug into to access and exchange ads and inventory from a wide variety of publishers and advertisers. Essentially, they’re the pool that impressions are taken from.

This can seem a little redundant—SSPs make ad inventory available, and so do ad exchanges—it’s like ad inventory-ception. Why? First, it’s important to realize that multitudes of DSPs and SSPs plug into ad exchanges, making many more options available to both publishers and advertisers. Further, DSPs and SSPs can be plugged into multiple ad exchanges, making the landscape that much more vast and ultimately creating that many more opportunities for both parties to monetize.

Second, ad exchanges serve a different purpose in that they “neutralize” the buying process, in a sense. They use regulations that are meant to make the whole exchange more transparent. For example, in ad exchanges, publishers can post the minimum price they’ll accept for an impression (called the “floor price”) in a real-time bidding (RTB) auction. Similarly, advertisers can set the highest price they’ll pay for the same impression. Data like this allows ad exchanges to automatically—and instantaneously—create the optimal scenario for both advertisers and publishers in any given transaction. DSPs and SSPs work with ad exchanges in this optimization process by automatically aggregating advertiser and publisher data before it’s released to the exchange.

Even so, as programmatic gains prevalence, the lines between some of these entities are blurring. The fact remains that both SSPs and ad exchanges post ad inventory for sale. Also, some platforms provide more than one of these services at once, so there are some redundancies in the ad tech world. Moving forward, we can expect these different platforms to shift and blend, allowing for the most efficient and streamlined programmatic ad buying process possible.

Katy Jensen is AppLovin’s content marketing associate.

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