W H I T E P A P E R R e a l - T i m e B i d d i n g i n t h e U n i t e d S t a t e s a n d W e s t e r n E u r o p e,

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1 Global Headquarters: 5 Speen Street Framingham, MA USA P F W H I T E P A P E R R e a l - T i m e B i d d i n g i n t h e U n i t e d S t a t e s a n d W e s t e r n E u r o p e, Sponsored by: PubMatic Karsten Weide October 2011 I D C O P I N I O N An IDC research project designed to assess the current and future penetration of display advertising sales with real-time bidding (RTB), based on interviews with 30 senior online advertising industry executives in the United States, the United Kingdom, Germany, and France, came to the following conclusions: Display advertising sales based on RTB will experience strong growth until 2015 in the United States ( compound annual growth rate [CAGR] of 71%), the United Kingdom (114%), France (103%), and Germany (99%). By 2015, RTB-based spending will account for 27% of total display advertising sales in the United States (up from 10% in 2011), 25% in the United Kingdom (up from 6%), 21% in France (up from 4%), and 20% in Germany (up from 4%). By 2015, the majority of indirect display ad sales revenue will be traded using RTB in the United States and the most developed European markets. The major driver of this development is an improvement in return on investment (ROI). Publishers stand to improve yield (i.e., revenue realized against a certain amount of inventory) while automating sales and thereby reducing costs. Advertising agencies and advertisers benefit because RTB trading improves campaign efficiency and thereby return on advertising spend (ROAS). The industry will also begin to use RTB to trade inventory that traditionally has been sold in direct, person-to-person sales. IDC believes that it is strategically inevitable for the industry to move into selling at least some of the directly sold inventory through RTB platforms. Increasing pressure for more profitability will force publishers to increase sales productivity, measurable in terms of revenue per head, by employing RTB, as long as RTB will not lead to a collapse of ad prices for directly sold inventory. Our forecast predicts that by 2015, only a relatively small portion of direct sales will be RTB based, but we expect continuing strong growth beyond that. The RTB segment in the United Kingdom is about a year behind the RTB segment in the United States in terms of development, and France and Germany are about 18 months behind. However, our forecast predicts that the three European markets will begin to catch up to the U.S. market further down the road. Japan has only just begun to explore RTB, with efforts having started as recently as July 2011 and an RTB market share of perhaps 0.1% in There are no RTB sales in the Asia/Pacific (excluding Japan) (APEJ) region yet.

2 M E T H O D O L O G Y This white paper estimates current and past spending on RTB-based display ad sales and forecasts spending until the year 2015 for the United States, the United Kingdom, Germany, and France. This document employed the following information sources: Interviews with a total of 30 senior online advertising industry executives in the United States, the United Kingdom, Germany, and France (Interview participants represented major publishers, ad exchanges, demand-side platforms [DSPs], supply-side platforms [SSPs], ad networks, and trading desks/advertising agencies.) Existing IDC research Other publicly available information The underlying model that generated the RTB data in this document employed the following methodology for each country: First, the model established total display advertising spending, including display ads proper (banners, skyscrapers, etc.), rich media ads, and video ads, based on IDC's Worldwide New Media Market Model, 1H11 (IDC #230024, August 2011). The New Media Market Model (NMMM) provides historical numbers for the years 2009 and 2010 and a forecast until the year Next, the model assumed that total RTB spending comprises two sources: RTB-based indirect sales of display ad inventory and, in future years, RTB-based direct sales of display ad inventory. By indirect sales, we mean the sales of inventory that has not been sold through a direct sales channel and is instead traded indirectly through ad networks, ad exchanges, SSPs, and DSPs. By direct sales, we mean sales of inventory that is being sold directly, in a person-to-person interaction. To estimate indirect RTB sales, the model first needed to assess the total addressable market (TAM) for it. RTB TAM is defined by the total amount of indirect sales of inventory that is traded through advertising exchanges because only ad exchanges offer the automation and the volume of inventory that is needed to make RTB functional (as opposed to pure ad networks). For this reason, the model estimated the revenue of RTB-based indirect sales in three steps. First, it estimated total spending through indirect sales; second, it calculated how much of that spending is channeled through ad exchanges; and third, it estimated how much of that revenue volume is RTB based. First, the model estimated total indirect sales (including RTB-based and non- RTB-based sales) as a stable share of total display ad spend. That share (between 30% and 40% depending on the market) was based on previous IDC research (for the United States), interviews with industry executives, and publicly available sources (for the United Kingdom, Germany, and France). 2 # IDC

3 Second, the model calculated the amount of indirect sales that is being transacted through advertising exchanges. For the years 2009 to 2011, this volume was calculated by estimating the size of the three to four major ad exchange platforms in each market based on interviews with advertising industry executives and extrapolating from that number the amount of total ad exchange based indirect sales. For future years, the share of ad exchange based indirect sales was grown to follow a natural growth curve. The general developmental level of the consumer Internet in each market, as well as local cultural factors affecting the speed of growth, was taken into account. Third, the model estimated the revenue share of RTB-based trading on advertising exchanges to arrive at the absolute amount of RTB-based indirect sales for each market. Again, for the years 2009 to 2011, that RTB share was based on interviews with industry executives. For the forecasts, the share was grown to follow a natural growth curve. While RTB-based direct display ad sales account for only a tiny portion of sales today, we expect that an increasing share of what are today person-to-person sales will migrate onto RTB platforms toward the end of the forecast period. We believe this will happen in order to achieve more integration and optimization of the value chain; make trading faster, more efficient, and less error prone; and ultimately improve ROI for both publishers and advertisers. This assumption dovetails with the feedback we received in our interviews with industry executives who expect this development to take place, provided that RTB platforms offer publishers more control over pricing and over which advertising clients run ads on their services. Programmatic RTB-based direct sales numbers are based on the assumption that they will account for 0.5% or less of total direct sales in 2012 (depending on the market) and will grow from there at growth rates similar to those of RTBbased indirect sales at similar points in their respective life cycles. I N T H I S W H I T E P A P E R This white paper estimates current and past spending on RTB-based display ad sales and forecasts spending until the year 2015 for the United States, the United Kingdom, Germany, and France. It also explores the factors that might accelerate or decelerate the growth of RTB. S I T U A T I O N O V E R V I E W R e a l - T i m e B i d d i n g RTB has attracted a lot of attention in the online advertising industry recently because of its advantages over the traditional ad exchange trading model (and over manual, direct sales of inventory as well), which translate into business opportunities and into potentially vast improvements of ROI for both publishers and advertisers IDC #

4 Anecdotally, industry executives know that RTB is quickly capturing an increasing revenue market share in the United States and other developed markets. But how much spending exactly is based on RTB today and how quickly RTB's market share will grow going forward is unclear. This is particularly true for Western Europe, where RTB is not quite as advanced as it is in the United States and less information is available to assess its size. RTB is an online advertising technology that enables market participants to trade display advertising inventory on an ad exchange platform on an impression-byimpression basis as each impression becomes available on a publisher's Web site (that is, in real time). RTB enables buyers and sellers to dynamically adjust their bids and asks as market conditions change and also based on real-time feedback on the effectiveness of an ad campaign. Typically, RTB is used in conjunction with user data, allowing for improved ad targeting and greater campaign effectiveness, which has led to the notion of "audience buying" rather than "inventory buying." RTB trading transcends the traditional ad exchange trading mechanism in which tranches of inventory (e.g., buckets of 1,000 impressions or multiples of it) are being traded at fixed rates. It also is a potential alternative to manual, direct sales of advertising inventory, in which advertisers buy inventory in vast quantities that the publisher will deliver only in the future. Generally, RTB allows integrating and automating a value chain that up to now has largely been manual. This makes it easier, less labor intensive, less error prone, and faster to set up and run a campaign for both agencies and publishers and reduces costs, thereby improving profitability. For publishers, RTB creates a bigger, more liquid marketplace with more bidders and greater demand. Greater demand improves inventory yield by leaving less inventory unsold and by increasing cost-per-mille (CPM) rates (i.e., increasing revenue per impression). Industry executives at both publishers and ad agencies reported an increase in ad prices of anywhere between 15% and 300% depending on the campaign in question, with the median being somewhere around a 100% CPM increase. Ad agencies using RTB get access to a vastly greater amount of inventory, which is also better targeted, while creating a more transparent marketplace. This allows agencies to find the lowest possible price for a given kind of inventory (or audience). However, this does not typically mean lower CPM rates compared with traditional methods of inventory trading. Most respondents at agencies reported higher CPM rates for RTB campaigns. But because RTB inventory is usually better targeted than non-rtb inventory and RTB campaigns are optimized in real time, these campaigns are more effective and thereby create a higher ROAS. Agency executives reported improvements in ad effectiveness anywhere between 20% and 150% depending on the campaign and the KPI employed (CTR, CPA, conversions). ROAS can further be improved by the use of dynamic ads that are custom-tailored to specific users and optimized based on real-time feedback on campaign effectiveness. Today, RTB is used almost exclusively to trade inventory that publishers are unable to sell directly. However, experimentation with using RTB in direct sales has begun. These are sales of inventory that otherwise would be sold in a person-to-person interaction. 4 # IDC

5 This experimentation is happening primarily through so-called private exchanges, which are run on the platforms of existing public ad exchanges but are restricted to just one publisher and to certain ad buyers. They offer greater control over pricing and over which advertisers and advertisements are featured on a publisher's site, which addresses publishers' two major concerns around RTB: protecting their current revenue base and making sure there are no inappropriate ads running on their services. The vast majority of ad slots traded are those for display ads proper (i.e., banner ads, rectangles, skyscrapers, and the like). Hardly any video ad inventory is being traded, largely because the volume of available video inventory is too small to make ad exchange and RTB trading possible. Publishers enable RTB trading by connecting their ad management and operations platforms with ad exchanges though APIs. All major U.S. advertising agencies have enabled their trading desks (in effect, agency-owned ad networks) in order to be able to interface with ad exchanges. The need to pool several ad exchanges' offers and find the best deal has led to the development of DSPs, optimizing ad agencies' media purchases, and SSPs, optimizing publishers' indirect media sales. R T B i n t h e U n i t e d S t a t e s a n d E u r o p e RTB is a relatively new technology. In the United States, it was introduced only about two and a half years ago. In the major European markets, players began to use RTB between 9 and 15 months ago, with a couple of majors having joined the fray as recently as September RTB also unfolds somewhat more slowly in the European markets than in the U.S. market because, one, the markets are smaller (which tends to dampen the upsides of a technology thriving on large volumes of inventory and a big number of bidders) and, two, the advertising industries of continental Europe are more conservative than those of the United States or the United Kingdom. Among the markets researched for this project, this held particularly true for Germany. With RTB's advantages, it is no surprise that it has found rapid adoption in the United States. IDC estimates that RTB-based display ad sales will account for $1.1 billion or 10% of total online display ad sales in 2011 in the United States, up by 203% from $0.4 billion or 4% of total online display ad sales in Within indirect ad sales, RTB will account for 28% in 2011, up from 11% in In Europe, among the three major markets, the United Kingdom is furthest along in adopting RTB. RTB-based display ad sales in the United Kingdom will account for $100 million or 6% of total online display sales in 2011, up by 552% from $15.3 million or 1% of total online display sales in Within indirect ad sales, RTB will account for 14% in 2011, up from 6% in Among the two continental European markets examined, Germany is ahead of France in terms of the absolute amounts spent on RTB, but only on the same level as its neighbor in terms of RTB's market share within both indirect display ad sales and total display ad sales. German RTB spending will be $62 million or 4% of total display ad sales in 2011, an increase of 288% from the 2010 spend of $16 million or 1% of all display ad sales. RTB's market share in indirect ad sales will be 11% in 2011, up from 3% in IDC #

6 In France, $30 million or 4% of all display ad sales will be spent using RTB, a growth of 374% compared with the 2010 spend of $6 million or 1% of total display ad sales. Its market share within indirect ad sales will be 11% in 2011, up from 3% in 2010 (see Tables 1 4 and Figures 1 4). F U T U R E O U T L O O K The major driver of RTB growth is that it promises to improve ROI for both publishers and agencies/advertisers. Publishers stand to improve yield (i.e., the amount of revenue realized against a certain amount of inventory) while automating sales and thereby reducing costs. Advertising agencies and advertisers benefit because RTB trading improves campaign efficiency and thereby ROAS. IDC expects strong growth for RTB-based display ad inventory trading over the next four years. The United States will see an estimated CAGR of 71%, a fast expansion of the segment by any measurement. However, the major European markets will see even faster growth, mainly because they are growing from lower bases as they are at an earlier stage of development than the United States. IDC expects a CAGR of 114% in the United Kingdom, 103% in France, and 99% in Germany (see Figure 1). F I G U R E 1 R e a l - T i m e B i d d i n g C o m p o u n d A n n u a l G r o w t h R a t e s, United States United Kingdom France Germany 6 # IDC

7 Today, about 10% of all display ad sales in the United States are RTB based. By the end of the forecast period, RTB's revenue market share will have broken through the 25% threshold. The three major European markets, while today at about half the RTB penetration level of the United States, will start to catch up toward the end of the forecast period, with the United Kingdom almost equalizing the United States. The reason they manage to catch up is that in the United States, RTB will have begun to exhaust the total addressable market in the exchange-based indirect sales segment (whereas that is less of a factor in the European markets), while the new RTB-based direct sales do not yet contribute enough revenue growth to sustain the United States' lead (see Figures 2 4). F I G U R E 2 RTB - B a s e d D i s p l a y A d S a l e s a s a S h a r e o f T o t a l D i s p l a y A d S a l e s, United States United Kingdom France Germany 2011 IDC #

8 F I G U R E 3 R T B - B a s e d I n d i r e c t A d S a l e s a s a S h a r e o f T o t a l I n d i r e c t A d S a l e s, United States United Kingdom France Germany 8 # IDC

9 F I G U R E 4 R T B - B a s e d D i r e c t A d S a l e s a s a S h a r e o f T o t a l D i r e c t A d S a l e s, United States United Kingdom France Germany U n i t e d S t a t e s The United States, as is true for all developed nations, is experiencing a dramatic shift of budgets that have previously been spent on traditional marketing channels such as newspapers, radio, and television into online advertising. This shift fuels dramatic growth in the online advertising industry. Even during the past great recession, total annual spending on online ads still increased, and with it spending on online display ads. Even in the crisis, online growth rates were better than traditional media growth rates by far. As a result, the market share of digital advertising within total advertising across all media continued to expand. IDC expects online advertising in general and display advertising in particular to continue to grow from 2011 to 2015 at a CAGR of 16% and 14%, respectively. Another effect of the economic downturn has been that ad agencies have sought and demanded that publishers and other vendors provide more effective means of online advertising. For that reason, ad targeting, ad exchanges, DSPs, SSPs, and in particular RTB have begun to rapidly penetrate the display ad segment. The looming threat of a double-dip recession will maintain pressure on the industry to rapidly adopt more effective ways to do business, including RTB IDC #

10 RTB-based spending has almost doubled in 2011 compared with the previous year, and we expect it to almost double again in Between 2010 and 2015, IDC forecasts that RTB-based spending will almost quintuple, growing at a CAGR of 71%. The share of RTB-based spending within the display ad segment will grow from 10% in 2011 to 27% in 2015 (see Table 1 and refer back to Figures 1 4). T A B L E 1 T o t a l O n l i n e A d v e r t i s i n g S a l e s, D i s p l a y A d S a l e s, a n d R T B - B a s e d D i s p l a y A d S a l e s i n t h e U n i t e d S t a t e s, ( $ M ) CAGR Total online ad sales Year-over-year growth 26, , , , , , , Display ad sales 7, , , , , , ,933.5 Year-over-year growth RTB-based sales , , , , ,076.1 Year-over-year growth Note: Display ad sales are a subsegment of total online ad sales. RTB-based display ad sales are a subsegment of display ad sales. M a j o r E u r o p e a n M a r k e t s RTB-based spending has grown much faster in the three major European markets than in the United States because it is at an earlier point in its life cycle. In 2011, it will grow by factors of 5.5x (the United Kingdom), 4x (Germany), and 5x (France). By 2015, IDC forecasts that RTB-based spending will quadruple from 2011 levels in the United Kingdom and quintuple in Germany and France CAGRs will be 114%, 99%, and 103%, respectively (see Tables 2 4 and refer back to Figures 1 4). 10 # IDC

11 T A B L E 2 T o t a l O n l i n e A d v e r t i s i n g S a l e s, D i s p l a y A d S a l e s, a n d R T B - B a s e d D i s p l a y A d S a l e s i n t h e U n i t e d K i n g d o m, ( $ M ) CAGR Total online ad sales Year-overyear growth 4, , , , , , , Display ad sales 1, , , , , , ,762.3 Year-overyear growth RTB-based sales Year-overyear growth Note: Display ad sales are a subsegment of total online ad sales. RTB-based display ad sales are a subsegment of display ad sales IDC #

12 T A B L E 3 T o t a l O n l i n e A d v e r t i s i n g S a l e s, D i s p l a y A d S a l e s, a n d R T B - B a s e d D i s p l a y A d S a l e s i n G e r m a n y, ( $ M ) CAGR Total online ad sales Year-over-year growth 4, , , , , , , Display ad sales 1, , , , , , ,502.9 Year-over-year growth RTB-based sales Year-over-year growth Note: Display ad sales are a subsegment of total online ad sales. RTB-based display ad sales are a subsegment of display ad sales. 12 # IDC

13 T A B L E 4 T o t a l O n l i n e A d v e r t i s i n g S a l e s, D i s p l a y A d S a l e s, a n d R T B - B a s e d D i s p l a y A d S a l e s i n F r a n c e, ( $ M ) CAGR Total online ad sales 2, , , , , , ,808.4 Year-overyear growth Display ad sales ,026.9 Year-overyear growth RTB-based sales Year-overyear growth Note: Display ad sales are a subsegment of total online ad sales. RTB-based display ad sales are a subsegment of display ad sales. O t h e r M a r k e t s Efforts to introduce RTB in Japan began only as recently as June Sales are still fairly experimental, and we estimate that total 2011 RTB revenue will be about $3 million or 0.1% of all display ad sales. IDC expects 2012 sales to be about $45 million or 2% of all display ad sales. As of today, there are no RTB-based transactions in APEJ, Russia, or Brazil. R T B - B a s e d D i r e c t D i s p l a y A d S a l e s IDC believes that the continuing pressure to improve profitability for all participants in the value chain will force publishers to introduce RTB-based trading of directly sold inventory. The continuing threat of a new recession will only increase that pressure. Demands by ad agencies to introduce RTB and increasing competition from Google (Google Display Network) and Facebook both of which already transact most of 2011 IDC #

14 their display sales on an automatic basis will also add to that pressure. There is a reason why Google's revenue per employee is more than twice that of Yahoo!'s and why Yahoo!'s profitability is significantly lower: Yahoo!'s huge direct sales force. The same holds true for AOL and MSN. That is why all portals will first transfer their lowest revenue-per-salesperson accounts onto automatic platforms. RTB-based direct sales will grow very slowly at first. But since these small percentages apply to a big chunk of the market (e.g., 65% of U.S. display ad spending goes through direct sales), even these small shares will grow to a significant contributor of total RTB sales very quickly (see Table 5). By 2015, IDC expects RTBbased direct sales to contribute 15% of total RTB sales in the United States, 7% in the United Kingdom, 14% in Germany, and 13% in France. T A B L E 5 R T B - B a s e d I n d i r e c t V e r s u s D i r e c t D i s p l a y A d S a l e s, ( $ M ) Country Segment United States Indirect , , , , ,326.5 Direct Total , , , , ,076.1 United Kingdom Indirect Direct Total Germany Indirect Direct Total France Indirect Direct Total # IDC

15 C H A L L E N G E S / O P P O R T U N I T I E S RTB helps in integrating and automating the display ad value chain, which up to now has largely been manual. This makes it easier, less labor intensive, less error prone, and faster to set up and run a campaign for both agencies and publishers and reduces costs, thereby improving profitability. RTB faces a number of challenges, which IDC believes it will be able to overcome: The primary key to the future of RTB is publisher adoption. If publishers don't make sufficient amounts of inventory available, RTB growth could be stunted. Publishers' major concerns are yield, data leakage, and cannibalization: Yield, or the amount of revenue realized against a certain amount of inventory, must be better when using RTB than when using traditional channels. This, however, seems to be an issue few publishers are facing. Most of the companies interviewed reported increased ad prices when using RTB. Data leakage is the potential theft of valuable publisher audience data through the dropping of data-collecting cookies. Cannibalization is the concern that if publishers made massive amounts of inventory available through ad exchanges and RTB, possibly with too little price control and resulting lower sales prices, it would start to compete with publishers' directly sold inventory, jeopardizing their core revenue source. However, we do not believe this will be a factor limiting RTB growth as long as ad exchanges and SSPs offer publishers a reasonable amount of price control. Some publishers are also concerned that a proliferation of platforms would in fact fragment the market, reducing volume and the number of bidders, thereby decreasing demand and lowering revenue yield. However, we feel this matter is being addressed effectively by SSPs and DSPs. Brand safety is a concern for both publishers and agencies. Publishers want to control which advertisers and advertisements are being featured on their services so as to not dilute their brand with low-quality or inappropriate advertisements. Conversely, agencies want content safety to make sure their clients' ads are not run against inappropriate or unfitting content or are not run below the fold or among multiple ads on one page. This, however, should satisfactorily be addressed by ad exchanges, DSPs, and SSPs by allowing block lists for both certain advertisements and certain types of content. Since data on users is critical to the effectiveness of RTB advertising, the safety of valuable audience data is paramount. Even more so than in the United States, privacy protection is of particular concern in the European markets, where regulations and legislation are more severe than in the United States (particularly in Germany and France). For instance, there are some proposed regulations on the use of cookies that might curtail the usefulness of RTB. However, industry executives assess the risk of any severe impact of such regulations at below 10% IDC #

16 European industry executives also see technological challenges. Running backend solutions that are able to scale with the demands of a real-time auction, targeting, and ad serving environment are key. The integration of RTB platforms into the workflow is not trivial. Slow public infrastructure and latency are also concerns. IDC feels that as long as the financial incentive is strong enough, technological hurdles will be overcome. Finally, some companies interviewed bemoaned the lack of standards. This problem will be addressed as technological integration increases and industry organizations such as the OpenRTB begin to issue guidelines. C O N C L U S I O N RTB has the potential to revolutionize the way display advertising is being traded and served by automating, integrating, and optimizing it. Both publishers and advertisers/ad agencies can reap its benefits and must do so to remain competitive. C o p y r i g h t N o t i c e External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2011 IDC. Reproduction without written permission is completely forbidden. 16 # IDC