When Facebook released its quarterly earnings on May 1, most of the media attention was focused on the growth of Facebook’s mobile advertising revenue. And with good reason. Mobile is, without question, central to Facebook’s future success. But lost amidst the mobile news was another critical development for Facebook: the growth and expansion of its real-time bidding platform, Facebook Exchange, or FBX.
Real-time bidding (RTB) refers to the way display advertisements (banner ads) are purchased across the Internet. Before RTB, Internet advertising worked in much the same way as print advertising. A marketer who wanted to reach the readers of nytimes.com, for example, had to buy up inventory on the nytimes.com website, in essence, paying the New York Times based on demographic profiles of its audience.
The emergence of RTB was critical because, for the first time, it allowed display marketers to target individuals rather than a website’s audience. The real-time bidding takes place via ad exchanges that cater to thousands of websites with display inventory and thousands of marketers looking to place display ads. The marketers, at least the smart ones, come to the door with mountains of data on individual Internet users. The data is gathered via small bits of code, known as cookies, that websites drop onto a user’s web browser.
Cookies first emerged to allow websites to remember users so that they would not have to re-enter the same information on forms each time they visited a site. But for marketers, cookies, though technically quite simple, became a breakthrough innovation. Cookies made it possible for an advertising network with thousands of participating sites to track a user from one site to another. And that meant that when users looked at a product on one site, they might very well see adisplay ad for that product on another site. In other words, a massive new trove of data was suddenly available to marketers.
Recommended for YouWebcast: Zero to Millions: The Secrets Behind Building a Business and Growing a Digital Audience
Zappos.com, for example, could now go to an ad exchange and bid to show Zappos display ads to individuals who have previously visited the Zappos.com site, a practice known as “Site Retargeting.” These individuals might be encounter Zappos ads on thousands of different sites. The site itself isn’t the priority for Zappos. It’s the individual that matters. The buying process is referred to as real-time bidding because the ad exchange is processing all of the buyer and seller algorithms in that split second before a webpage loads and an advertisements appears. In short, RTB took online advertising from the world of data into the world of big data.
Site Retargeting is only one of the ways that marketers now use RTB. Another increasingly popular technique, known as Search Retargeting, allows marketers to serve display impressions based on searches they’ve performed on Google and other sites. This is significant in that marketers can now acquire new customers by targeting display ads in the same way that Google targets its search ads. And these ads tend to be effective for the same reason Google’s search ads are effective, that is, they’re targeting the intent that people reveal when they conduct an online search.
How significant has RTB been in the online advertising display industry? According to eMarketer’s latest forecast of the US online ad market, advertisers will spend more than $3.36 billion for display ads through RTB, amounting to 73% growth for the year. By 2017, RTB is expected to account for 29% of all digital display spending. These numbers are further supported by a recent survey of online marketers and agencies conducted by Chango, a programmatic marketing company. According to Chango’s Retargeting Barometer, more than half of marketers and agencies will spend more on retargeting in the next six months.
These numbers help explain why Facebook decided to launch its own RTB exchange last September and why it has taken off so quickly. (By January of 2013, FBX was already serving a billion impressions and 1,300 advertisers per day.) Make no mistake about it: Facebook’s embrace of RTB was a monumental moment in online advertising, one that would have been unthinkable only a few years earlier. Before turning to RTB, Facebook was only targeting ads based on its own data. And why not? With hundreds of millions of users telling Facebook what they “like,” Facebook appeared to have the little need for the data of others. There was only one problem: targeting display ads to users based on their profile information and the things they “like” didn’t turn out to be as effective as RTB targeting.
Why would RTB targeting be more effective than targeting via Facebook’s own data? Ultimately, for the same reason that targeting search terms is so effective. RTB targets ads according to online behavior (the sites someone visits and how they interact with those sites) that reveals true intent. Facebook, by contrast, has traditionally been reliant on what we might call “public intent.” Put another way, clicking to indicate that one likes a site is not as strong a signal as visiting a site over and over or spending a long time browsing many different pages. It’s the difference between targeting what one says about oneself and what one actually does. And, as every social psychologist will tell you, those are two very different things.
So, as Facebook releases new earnings reports each quarter, expect to hear much more talk about FBX and RTB. Facebook has already begun showing RTB ads in its Newsfeeds, and there are hints that RTB will be coming to Facebook’s mobile offerings soon. Facebook advertising always had the most data but it wasn’t always powered by the right data. Now, thanks to RTB, Facebook is well positioned to become the immensely profitable company so many investors always assumed it would.