The “ad tech tax” - how the programmatic middlemen are raking it in

Pippa Chambers
By Pippa Chambers | 27 July 2015

Ad tech programmatic revenues outweigh publisher revenues, according latest industry study conducted by PwC and sponsored by the Interactive Advertising Bureau (IAB) in the US.

Released this month but based on the programmatic revenue pie in 2014, part of the study looked at the amount of revenues that were getting to the end publisher versus the industry players prior to the publisher.

Referred to as ad tech revenues vs publisher revenues, the IAB estimated ad tech revenues represented approximately 55% of the programmatic money pot in 2014, and approximately 45% of programmatic revenues ultimately found its way to the the publishers.

“We consistently heard throughout our conversations with industry executives that programmatic ad tech fees are substantial – generally close to 50% or more,” the report said.

It said these ad tech fees were often referred to as the “ad tech tax” in its conversations.

“Ad tech tax in this context refers to the fees imposed on buyers and sellers for leveraging ad tech technology, and/or value adds from agency trading desks (ATDs), demand-side platforms (DSPs), sell-side platforms (SSPs), ad servers and ad networks. In many instances, these fees get compounded as fees from one supplier get added to the costs of the next supplier in the programmatic value chain,” the report noted.

Transparency can be obscured

It went on to say that the ad tech fees imposed on buyers and sellers is not consistent, but instead can vary greatly depending on how programmatic inventory is bought and sold and the level of managed services being requested.

For example, an advertiser that uses a DSP to buy programmatic inventory on an ad exchange, which receives its inventory direct from the publisher, may have less ad tech costs in comparison to an advertiser who hired an agency that uses an ATD, who then licensed a DSP to buy the same inventory. Depending on the total mix of suppliers utilised throughout the buying process – ATDs, ad networks, DSPs, etc. – the amount of ad tech fees can increase substantially.

Because there are so many programmatic platforms and technologies offering a wide range of solutions from a fully integrated stack to niche mobile or video specific solutions, the IAB agreed that there is an increased number of touch points in which transparency can be obscured

“Fragmentation has also resulted in increased costs to the ad buyer with each touch point extracting a fee for the value added service being provided,” it said.

It went on to say that in the programmatic world, as we know all to well, the path from advertiser to publisher varies with multiple ad tech intermediaries along the way. Yet regardless of these challenges, one thing was “abundantly clear” in its discussions with the industry participants – that programmatic will likely continue its significant growth as more and more ads will be bought and sold through programmatic channels.

Other findings from the study showed that a large majority of programmatic revenues came from display banner ads in 2014. It estimates that approximately 80% of programmatic revenues in 2014 were from banner ads.

It said there are varying industry estimates to the degree in which mobile ad revenues are programmatically driven, with some reports indicating that there is a high degree of programmatic buying in mobile. However, the IAB said the survey and discussions it had found that this wasn’t necessarily the case.
Like mobile, it found that the adoption of programmatic digital video lagged behind that of display banner ads in 2014, partly due to the scarcity of available premium video inventory.

Increased conflicts of interest

While the IAB study said programmatic has become a strong contributor to internet advertising revenue - and that he potential for growth is clear, demystifying the programmatic landscape is critical to reach this potential and there are many areas that need addressing.

These include increasing advertiser trust; reducing confusion; increasing quantity of premium inventory, advancing cross device targeting capabilities; enhancing the quality and value of programmatic selling; the adaptability of publisher operations and consolidation within the programmatic ecosystem.

On the latter, the IAB said with the fragmented ecosystem adding to the lack of transparency, many believe the system is ripe for consolidation.

Despite the fact there has been significant acquisitions over the past few years, the pace of new company development seems to outpace the consolidation.

“Furthermore, some of the major players that are leading the consolidation also happen to be significant providers of content, which could lead to increased conflicts of interest,” the IAB said.

“The growth and consolidation of platforms that are independent of the buyers and sellers may be critical to maintain fair and competitive pricing.”

The report is representative of the 2014 programmatic landscape and does not address more recent programmatic developments such as the decentralization of agency trading desks (ATDs) or native programmatic.

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