Investigation: Google, "The Rise Of DSPs," And What's Really Fueling Its Display Ad Growth

Google is blowing the doors off with its display advertising business, which is doing so well that the company bragged about that it is on a $2.5 billion annualized revenue run-rate just in display. A big part of that growth is coming from YouTube and Google’s own sites. But another big driver of display advertising growth both for Google and across the industry is coming from a less well-understood source: the big advertising agencies themselves and their so-called trading desks and demand side platforms (DSPs).

By one estimate, these DSPs already account for 10 percent of online ad spending, and could grow to as much as 50 percent over the next few years.

One advertising agency in particular, Publicis, is pushing a ton of advertising dollars through Google in return for what two industry insiders independently refer to as “kickbacks” or “rebates.” Kurt Unkel, an SVP at Vivaki (the digital arm of Publicis) flatly denies there are any payments of this kind. “There isn’t a rebate in play. We have a strategic partnership,” says Unkel. Any suggestion that Publicis is accepting payments from Google in return for driving online ad spending through Google is “an utter crock of shit,” he says.

He adds, “That is illegal in the U.S.”

Google is a bit more circumspect. “There are incentives,” admits a Google spokesperson. “I don’t know that there is a wad of cash,” he adds, “payments are predicated on a bunch of things.” Those things are more along the lines of investing in the trading platform, co-marketing, and training if Publicis and Vivaki hit certain milestones. “There is no commission being paid,” says the Google spokesperson. So there are payments, but they are framed as technology incentives to help Vivaki test and prove out its exchange.

Direct rebates would be a big no-no and could raise antitrust concerns. It would mean that Google is essentially buying market share in display advertising. If its rising share in display is based on better performance then that is fine. But if there were some sort of financial incentive for Publicis (or any other ad agency) to throw display ad spending its way, that would raises all sorts of concerns. The question would be whether Google could pay such rebates because it is making a higher profit from its display ads than competitors, or whether it is using its profits from search advertising to fund the growth in display in this manner. If it were the latter (and, again, to be clear, there is no evidence other than anonymous hearsay that this is happening), that could have antitrust implications, especially if this rebate practice extended to other ad agency DSPs.

Again, Google and Publicis are adamant that there are no kickbacks and that there are not even any obligations to drive a certain amount of spending through Google. But one thing that is certain is that the DSPs are driving growth for Google. One source, who is an employee of Publicis and requested anonymity to protect his job, estimates that in 2010 Publicis will run $1 billion in advertising through Google, a figure Unkel does not dispute. Most of that is still search advertising, but about $200 million is display, according to the employee, and that portion is growing quickly. Soon the employee estimates that half of all online display advertising bought on behalf of Publicis clients will be going through Google. What’s more, he argues that “Google’s growth in display and agencies profits are tied together.”

Digital is certainly driving growth at Publicis, a huge ad agency holding company that controls $60 billion in advertising spending. In the third quarter, the digital business accounted for 29 percent of Publicis’ total revenues of 1.3 billion Euros and 44 percent of its North America revenues of 666 million Euros. North American revenues grew 36.5 percent, faster than any other region, and digital revenues grew 28.1 percent, which is quite a bit faster than the industry average of 17 percent growth for U.S. Internet advertising in the third quarter.

The Google spokesperson agrees that ad agency DSPs account for “a significant part of the growth in display, not just at Google but in the industry as a whole.” Moreover, he notes that the number of transactions on the DoubleClick Ad Exchange has tripled over the past year. But according to Google’s own analysis, publishers are getting higher prices for their ad inventory, on average 130 percent higher than on competing ad networks.

To understand what is going one here, we need to do a deep dive into the netherworld of the advertising industry. Big advertising agencies like Publicis, Omnicom, WPP, and Interpublic are setting up their own quasi-ad networks in-house to protect their relationships with their clients. These are called “trading desks” and “demand-side platforms.” They are supposed to be ad-network agnostic, and utilize the best technologies to place and target ads on behalf of their clients across the Web. But the ad agencies don’t have their own technology. They have to license it from Google and others, although most of their clients may not be aware of this fact.

Publicis, for instance, runs its digital business through a subsidiary called Vivaki. Google recently strengthened its partnership with Vivaki, and also has a deal with Omnicom. In fact, all six major ad agency trading desks purchase ads through the DoubleClick Ad Exchange.

Vivaki’s DSP technology is called Audience On Demand, but it is really based on technology Google acquired when it bought Invite Media last summer. Invite Media is a realtime bidding platform for online display advertising and buys ads through the DoubleClick Ad Exchange, among others. DoubelClick, of course, is also owned by Google. Says the Publicis employee of his counterparts at Vivaki: “They are like Gods internally, they are bringing in the profits now.” At the very least, it is obvious that these DSPs are creating tension both within ad agencies and between agencies and ad technology companies who fear that the rise of the DSPs will cut them out of the spoils.

On the surface, the Vivaki DSP is supposed to operate at an arms-length relationship with the other parts of Publicis. Media planning teams assigned to each client are supposed to look out for the best interest of the client and allocate advertising dollars where they make the most sense. But it doesn’t always work that way in practice, claims the employee. Media planners are often 26-year-olds who are easily cowed by other executives at the ad agency. Increasingly “client buys” for online ads are funneled through Vivaki’s Audience On Demand platform.

Unkel says this is not true and that Audience On Demand has to perform well or lose the business, just like an outside ad network. “We used to have a reliance on intermediaries,” he explains, “who gave the appearance of adding value. They were able to take on risk and remove complexity. I now can create that inhouse, and don’t have to pay as much.”

As a result, independent ad networks are beginning to feel the heat. One executive at one of the largest competing ad networks confirms, “We are losing deals to Vivaki.” Even though Vivaki’s DSP is supposed to be evaluated based on its merits, it is becoming increasingly difficult to win those deals for outside ad networks. The executive explains it this way: “If you are a guy hiring for your department and bring in candidates for a job. One is a great candidate, one is your son. You are going to hire your son.”

In this case, however, it might actually be more profitable to hire the son. Since Google controls a lot of the inventory through AdSense, it can make money at different points along the chain, from publishers as well as advertisers. And therefore it can “pay” for a bigger share of ad agency’s display budgets in different ways. “Only somebody who aggregates those pieces together can get the price to an attractive point,” argues Unkel. “The aggregation is my best chance to get it super cheap.” But another way to look at it is that the more intermediaries there are, the more they parties take their cuts along the way before the money is spent on an actual ad. It is all a black box to clients, many of whom have no idea their ad spending is running through Google. “If it is so above board, the clients should know about it and the dynamics behind it,” argues the Publicis employee. “Our clients are so clueless it is a joke.” What they see is a list of Websites where their ads are placed. The Google relationship is obscured through Vivaki’s white-labeling of Google’s technology.

Vivaki still buys through other ad exchanges, including Yahoo’s Right Media, especially for ads on Yahoo sites. But the growth is definitely going to Google, which is the “primary” partner. This pursuit of short-term profits may turn out to be short-term thinking. “They think this is what is saving the agency model,” warns my source at Publicis. “I think this is what will kill it. They think Google will be a partner forever. But the client will be gone, and Google will say you can buy directly from me.” The executive at the competing ad network agrees that longterm, “The battleground is the client.”

Photo credit: Flickr/ Noah Wesley