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Supply-Path Optimization: Unraveling the Complexity of Programmatic Ad Buying

The lack of transparency and complexity in the programmatic ad buying ecosystem has left advertisers scratching their heads, unsure who they’re buying from and how much of their ad spend is being eaten up. Enter supply-path optimization (SPO), the industry’s answer to untangling this web of confusion.

At its core, SPO is about buyers making deliberate choices to identify the most efficient connections and transact with sellers. The goal is to eliminate inefficient and expensive paths to supply, ensuring that advertisers get the most value for their investment. However, the term “SPO” has been thrown around by nearly every constituent in the supply chain, creating unnecessary complexity and confusion. It’s time to cut through the noise and focus on the core opportunity at hand.

The SPO battle is heating up, with industry giants like The Trade Desk, Magnite, and Pubmatic launching competing solutions such as OpenPath, Clearline, and Activate, respectively.

But why are we breaking the programmatic supply chain in the first place? 

The answer is simple: margin and control. The growth of online video and connected TV (CTV) has attracted significant investment, leading to a land grab for both supply and demand.

 Traditional demand-side platforms (DSPs) and supply-side platforms (SSPs) are no longer necessary intermediaries in this landscape. Most online video and CTV deals can be executed directly through integration into the publisher’s ad server, eliminating the need for additional platforms.

There is much debate surrounding the benefits of supply path optimization (SPO), a technique used by advertisers to gain more transparency and control over the programmatic advertising supply chain. While some view SPO as a valuable tool for improving ad performance and increasing ROI, others remain skeptical of its true value. One such skeptic is industry expert Matt Barash, who argues that SPO can be used for creative accounting and margin manipulation, and that it often masks the core issues at play in the competitive landscape.

Barash’s concerns about SPO stem from a belief that the technique can be easily used to manipulate data and metrics in order to make supply chain partners appear more effective or efficient than they actually are. By doing so, advertisers can create a false sense of competition among partners, leading to higher costs and less transparency overall.

Additionally, Barash argues that SPO can be a distraction from the real issues at play in the advertising industry, such as ad fraud and viewability concerns.

Despite these criticisms, many advertisers are still eager to embrace SPO as a way to optimize their programmatic advertising efforts. By gaining greater visibility and control over the supply chain, advertisers hope to reduce costs and improve performance across their campaigns. However, it remains to be seen whether SPO will live up to its promises, or if it will prove to be a wolf in sheep’s clothing, masking deeper issues in the industry.

So, how does SPO actually work?

 Each DSP has developed its own strategy for supply-path optimization. Some use it to identify the most relevant bids with the highest chance of winning, while others use it to turn off SSPs that don’t implement second-price auctions. The key reasons for DSPs to embrace SPO are bid duplication and the various auction mechanisms used by SSPs.

Header bidding, in particular, has put a strain on DSPs, processing a higher volume of impressions per second. Additionally, the industry needs more transparency in pricing and auction dynamics to ensure fair and efficient transactions.

But wait, aren’t all auctions conducted using the second-price model? Unfortunately, that’s not the case. Each SSP has its own logic for how it submits bids into a publisher’s ad server, including second-price, first-price, or other auction formats. This mix of auction models, exacerbated by the proliferation of header bidding, creates a significant challenge for DSPs and highlights the need for SPO.

Companies like Xandr and Iponweb have developed their supply-path optimization algorithms to address these challenges. Xandr analyzes a publisher’s SSP partners, traffic, and win patterns to automatically turn off SSPs using “aggressive auction tactics.” On the other hand, Iponweb offers SPO as a third-party service to DSPs, leveraging technologies like artificial intelligence (AI) and machine learning (ML) to optimize supply paths.

However, the journey to effective SPO is not without its hurdles. In the vast sea of supply chain jargon, the terms “choice” and “optimization” are often misused, leading to confusion and a lack of consensus on the definition and benefits of SPO. While buyers seek SPO insights to negotiate better terms and reduce bid duplication, sellers view it as a way to understand how DSPs bid and increase their chances of making a sale.

The challenge lies in finding the right mechanism for eliminating duplication while considering the impact on advertiser results.

Deduplication may seem like a straightforward solution, but it’s not that simple. Perfectly duplicating exchanges and choosing one over the other does not guarantee optimal results, as various factors come into play, such as fees, transparency, take rates, and auction models.

 Real-time deduplication is technically infeasible due to the speed and scale of RTB auctions. Instead, SPO systems employ static, per-placement, per-region mappings of duplicate paths to supply, making intelligent decisions about which auctions to bid on. However, unless the exchanges are identical in every aspect, there will always be variations in value, resulting in suboptimal outcomes.

While the buy side has largely embraced SPO, the sell side remains skeptical. Publishers are financially incentivized to work with as many partners as possible, leading to a proliferation of supply paths. 

However, changes are underway as DSPs, SSPs, and agencies strike SPO deals and create curated marketplaces that exclude publishers with inefficient supply paths. The ultimate goal is to eliminate structural inefficiencies in the market, driving economies of scale and superior unit economics.

As the industry navigates the intricate web of programmatic ad buying, supply-path optimization stands as a potential solution to streamline and optimize transactions. However, it is crucial to cut through the jargon and focus on the core opportunities presented by SPO.

 By understanding the complexities, challenges, and potential benefits, advertisers can make informed decisions about their programmatic ad spend, ensuring efficiency and transparency in an ever-evolving landscape.

Pesach Lattin
Pesach Lattin
Pesach "Pace" Lattin is one of the top experts in interactive advertising, affiliate marketing. Pesach Lattin is known for his dedication to ethics in marketing, and focus on compliance and fraud in the industry, and has written numerous articles for publications from MediaPost, ClickZ, ADOTAS and his own blogs.

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