This post is by Leon Gurevich, Commercial Director, EMEA at OpenX.

Programmatic is both the present and future of digital advertising, and the next phase of its development is set to transform the online advertising landscape once again. It is the biggest and newest innovation in advertising, helping to fuel the web economy, and connects consumers with compelling products and services.

More than a quarter (28%) of the UK online display market was managed programmatically in 2013; this looks set to increase to 47% by the end of 2014. The benefits of programmatic – including ever more precise audience targeting and measurably effective ROI – support the prediction that the vast majority of ad spend will ultimately be traded through sophisticated technology rather than by traditional and time-consuming manual processes.

So how did an industry grow from zero to $5 billion dollars in less than five years and what does the future hold for programmatic?

The creation of a dynamic new marketplace

Programmatic is a market-based system that enables buyers and sellers to automatically and instantly trade their digital advertising inventory. The model is similar to a stock exchange, where impressions – rather than stocks – are traded to deliver optimal value for buyers and sellers. Before programmatic, digital advertising was sold in bulk and was executed via traditional manual methods; a time-consuming and inefficient process. Programmatic now offers a plethora of benefits for advertisers and brands, who are able to acquire the exact audiences they want to target at scale across multiple publishers and sites, reducing waste and increasing efficiencies. Publishers or sellers are able to place inventory into an exchange and sell at a reserve price to drive higher bids, and are therefore able to better monetise their site – all in real time. This is a vastly improved economically efficient mechanism that reduces the guesswork from the system of buying and selling inventory, and is now utilised by the majority of world's publishers and advertisers.

Developing programmatic sophistication

Programmatic has grown at a phenomenal rate, but the model remains relatively simple. Its success has also fuelled a desire from sellers and buyers to deliver the power of programmatic across a broader, more diverse set of opportunities, eliminating unproductive layers of operational execution to allocate time for strategic thinking, economic insight, and creativity. And rather than programmatic being about machines and automation, it has enabled humans to step away from their spreadsheets to focus on the unique, high value, custom experiences that require discussion, discourse and problem-solving.

The homogenous nature of programmatic has now become heterogeneous, and has developed and diversified into three different dimensions of sophistication: formats, screens, and channels.

Diversification of ad formats

Increased programmatic sophistication empowers buyers and sellers to apply programmatic to a broader, more diverse set of opportunities – including a new range of ad formats – and can be used throughout the conversion path to add enhanced value for brands. A case in point is IAB Rising Stars, which until recently was only available to buy via an insertion order but can now be executed programmatically. These high quality rich media ad units – including features such as filmstrips, sliders, and sidekicks – are seen as top of the funnel, engaging branding tactics that would not previously have been associated with programmatic.

Programmatic is also transforming the video ad industry by making it more transparent, measurable and automated. Video is an expensive advertising medium and historically there was a lack of quality video inventory, so brands were keen to maintain control of the buying process. However, as programmatic has matured it provides the inventory and analytics to make automated video advertising an attractive proposition. As a result, spend on programmatic video increased by an impressive 65% in the first quarter of 2014 compared with the same period the previous year, and TV advertisers in particular are looking to close the gap between digital and TV by adopting programmatic to extend TV campaigns across digital screens.

Native is another ad format now being executed programmatically. Native programmatic may seem like an oxymoron as one approach uses bespoke content, which is the result of collaboration between publisher and advertiser, while the other uses automation to distribute ads at scale. However, both methods work towards the same goal – to reach receptive audiences with relevant advertising – and native programmatic delivers the best of both worlds with the power and efficiency of programmatic applied to the contextual relevance of native.

Applying programmatic to these more sophisticated ad formats allows marketers to adopt a single platform approach to media buying and provides standardisation across marketing campaigns, improving the quality of programmatic ad creative. While the importance of impactful creative in successful advertising campaigns is well understood, programmatic creative has so far taken a back seat to factors including audience targeting and inventory quality. As more ad formats are executed programmatically, improvements in messaging, format, and aesthetics will be applied to rich media, video, and native advertising – providing better brand experiences for the consumer.

Cross-screen programmatic sophistication

With consumers rapidly shifting their content consumption to smartphones and tablets, moving seamlessly between channels, mobile programmatic is enjoying significant growth rates. Native and video ad formats are particularly effective on mobile, which has resulted in increased programmatic adoption in these areas. Standardised mobile ad units for native and video programmatic are being developed, and marketers are continuously looking to simplify and automate mobile ad buying with more than half (57%) of advertisers already buying mobile ads programmatically.

Ad buyers were previously reluctant to invest in mobile advertising due to difficulties in tracking conversions and retargeting consumers, but mobile programmatic now offers a solution to these concerns. Traditional tracking relied on cookies, but this is an ineffective technology on mobile as cookie functionality varies by device and may not work across mobile platforms. With programmatic sophistication on the increase, device recognition technology fills the gaps where cookies perform ineffectively, allowing tracking across all digitally connected screens.

With the escalation of mobile, increasing numbers of marketers have concluded that programmatic is the most effective approach to keep pace with consumers as they adopt new devices and technologies. Programmatic has already extended to include smartphones and tablets, enabling brands to reach consumers on their screen of choice. Soon it will encompass connected TVs, as well as the countless screens that will stem from the emerging Internet of Things ecosystem.

A new era of channels

Programmatic has entered a new phase in its maturation cycle and has reached a new level of sophistication that emphasises increased flexibility and allows for a more diverse array of applications across channel. Programmatic now encompasses a huge range of complex rich-media, video, and native ads, traded through sophisticated business models. Buyers and sellers have seen the power and scale of programmatic – now they are poised to apply it to a far greater and more heterogeneous set of marketing opportunities moving forward. These changes have led to new channels being developed, including private marketplaces and programmatic direct, which allow marketers to be more selective about where their ads appear.

Increased fraud detection

In light of these developments, it's important to note the improvement in traffic quality that programmatic can achieve. Traffic fraud is a significant concern in digital advertising, with bot codes used to generate false ad views, simulate consumer activity, and hijack user control to create false clicks. This can result in a loss of revenue for buyers when ads are served to invisible consumers, while data contamination prevents an effective analysis of marketing campaigns. Fortunately traffic quality is a high priority in the programmatic marketplace, with filtering systems and fraud detection measures designed to combat false traffic and ensure brand safety. In addition, programmatic encourages marketers to optimise metrics such as actual ROI, which are more accurate forms of measurement than click through and completion rates.

The programmatic buyers wish list

The efficiency and effectiveness of programmatic technology ensures it will play a critical role across every single advertising category. And there is also no reason why programmatic technology should be limited to advertising, as it can also be applied to other real-time, programmatic response prediction technologies – including unpaid content – designed to achieve optimal value at scale for participants.

Media buyers looking to integrate programmatic into their marketing mix should look for an exchange that offers benefits that include:

  • Access to a wide range of inventory with preferred access to premium inventory
  • The ability to combine a variety of ad formats in marketing campaigns such as rich media, native, video, and display ads
  • The potential to serve ads and track performance across all screens including smartphones, tablets, and desktops
  • A quality assurance program that implements fraud detection measures and makes traffic quality a high priority

Buying and selling digital media through programmatic channels is the future of advertising, providing new opportunities for marketers and publishers across an increasing range of formats, screens, and business models. Over the next decade we may see programmatic become bigger than paid search as brands enjoy the benefits of its scale and efficiency. The potential of programmatic is truly enormous and this new era of sophistication will shape the industry for years to come.

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