What Facebook Instant Articles Means for Ad Economics

Facebook Instant Articles is back in the news this week. After a bit of a sleepy start, Facebook is expanding the list of participating publishers and increasing the number of users who have access to Instant Articles content. Lots of people are going to start consuming content directly in the Facebook app rather than through embedded webpages. And that has some big implications for ad economics.

As a point of reference, consider three consecutive ads delivered to me in the Facebook app:

These ads paint a picture of who I am — a small business owner working in the tech space. Targeted advertising at work.

Next, I tapped on a Business Insider article that was posted in my Newsfeed. This loaded an embedded webpage within Facebook’s app. Refreshing this same page a few times, I saw the following ads:

A Spanish language car promotion, a cooking ingredient ad, and an offer for a trip to the Catskills? Who do these advertisers think I am? The answer is that they have no idea who I am because Safari (the embedded browser in all iOS applications) rejects third party cookies. Ads served in Facebook’s native app can be targeted based on my device ID, but ads served in Safari don’t support any user targeting. Inside Facebook Newsfeed, advertisers know who I am and can employ highly targeted campaign tactics. But within embedded webpages, audience targeting goes out the window.

The result of this targeting disparity is that advertisers are willing to pay much higher rates for in-app inventory than mobile web inventory. Facebook knows this and so do publishers. Facebook Instant Articles brings in-app economics to mobile content consumption, unlocking audience targeting capabilities for advertisers and boosting yield for publishers. Sure, faster article load times, lower bounce rates, and greater sharing activity are nice. But the real value of Facebook Instant Articles is ad economics.

Facebook isn’t the only platform looking to provide in-app hosted content and monetization tools to publishers. Snapchat, Twitter, and even Google are rumored to be building content distribution platforms to help publishers migrate away from the mobile web. Apple’s plan to starve the web of cookies just might be working.

The Unintended Economics of Facebook’s Unified Ad Auction

At last week’s F8 conference, LiveRail trumpeted the benefits of its unified ad auction, but DSPs will carry a heavy economic burden

Waterfalls vs. Unified Auctions

Traditional publisher ad servers monetize inventory through a waterfall. Direct sold campaigns get first access to an impression. If a direct sold campaign does not fill the impression, the publisher’s ad server then gives access to a remnant demand source like an ad network or an RTB bidder. This process continues until the ad is monetized. The key characteristic of a waterfall is that demand is checked sequentially — priority level 3 is only notified of the ad’s availability after priority level 2 passes on the ad.

By contrast, a unified ad auction seeks demand from all potential buyers simultaneously. Every demand source participates in every ad impression, and the publisher’s ad server makes a yield-optimizing choice of which demand source should be awarded the impression.

Unified auctions drive better monetization than waterfalls because they consider the full range of potential demand sources, potentially awarding an impression to a high priced RTB bidder over a more modestly priced direct sold campaign. Publishers benefit from improved yield (including some very non-obvious optimizations), and advertisers benefit from improved inventory access.

Collateral Damage

The unified auction feels like a win-win, but DSPs bear an unexpected burden that could meaningfully damage their economics. The basic financial math of a DSP business looks something like this:

A typical DSP charges advertisers a percentage of the media dollars that flow through its platform. An advertiser that spends $10M per year might pay its DSP $1M. At the most basic level, DSPs make more top line revenue by growing advertiser budgets.

DSP expenses, however, have nothing to do with advertiser budgets. After covering overhead like people and facilities, DSP costs scale with the number of bids the platform must process. The core technology of a DSP becomes more expensive to operate as the volume of incoming bid requests grows. Every lost auction is pure cost to a DSP, driving down its profitability.

The trouble with unified auctions is that they drive up bid requests without bringing more revenue into the system. The value proposition of a unified auction hinges on increased bid density — more demand sources participate in every impression. But the byproduct of increased bid density is decreased win rates. Only one demand source can win an impression, so as more bidders participate, more of them lose. A spike in lost auctions is an economic crisis for a DSP.

DSPs are already struggling to prove their economic model in the face of commoditized technology and market saturation. Facebook’s LiveRail is not the first supply side platform to offer a unified auction to publishers, but it is the first that could capture a meaningful inventory footprint. If Facebook is successful in driving market adoption of unified auctions, pure play DSPs may have an even tougher road to profitability.