Andrew Walmsley on digital: Google auctions require fresh skill set

There was a time when, if you wanted to buy space in a particular national newspaper, you did it after lunch. You needed to know the sales director, or he wouldn't take your calls, and your rates depended on the strength of the relationship - a factor not unconnected with your golf handicap.

Golf is a little less important these days, but what has really changed is the buying environment, which has become more professional and lost some of its trader culture.

Better research, international competition and increased shareholder and client scrutiny have forced the media to pull its socks up, but despite this, it is still a business that runs on relationships.

It is not surprising then, that people are struggling with the bare logic of the Google auction. Google challenged the industry because it requires a fundamentally different approach - a real-time process that needs continuous input rather than the 'set it and forget it' approach of traditional media. Pricing is governed not by leveraging scale, but by skill at managing the auction and the quality of technical input through search engine optimisation. And the outcome is measured in terms of sales, not discounts.

But, if some investors are right, these skills are not going to remain the province of search - they are coming to media itself, as media auctions start to gain traction.

Google's acquisition of DoubleClick last year was driven partly by the belief that it could implement its auction model in display advertising, a belief that lay behind its earlier deals to buy radio trading platform dMarc, and to sell newspaper advertising.

It is not alone. Last year, Yahoo! took control of RightMedia, paying $680m for a business that is expanding across Europe.

But buying media at auction is not for the faint-hearted. Predicting volume is unreliable, and there are no guarantees. The web interfaces of some auction businesses are fiercely complex, revealing the level of sophistication in targeting, but providing a training and skills challenge for customers.

For auctions of online media, every impression is sold separately, meaning that publishers can set rules within their own adservers to prioritise customers based on yield - the system will serve a high yielding direct-sold ad if one is available, followed by a lower-yield run of site ad, a network ad and finally an ad from the auction if none of the above is available or the auction yields a better return for that ad impression.

Adding behavioural targeting to the mix makes auctions more effective still for online media, improving yields for publishers and performance for advertisers.

The auction is an efficient way of trading remaindered inventory - sellers get what the market will bear for their surplus ads, buyers get cheap media with no guarantees, and market liquidity improves for both.

The system is attractive, but it won't take over the world.

Auctions work best when it is difficult to establish the value of a commodity, and while this is true of remaindered inventory, the majority of value will continue to be traded where planners want to specify the location, timing and delivery of ads.

Far from reducing transaction costs, auctions are likely to increase agency overheads, as greater monitoring, complexity and additional skills are required. These were the very factors that held many agencies back from investing in online media in the first place, and are significant obstacles for success here too.

To thrive, advertisers and agencies will need to fuse competencies from search (auction markets), data (behavioural targeting and predictive modelling) and financial markets (real-time dealing). Auctions are going to make media more complex but could be a revitalising force for the sector.

- Andrew Walmsley is co-founder of i-level

30 SECONDS ON ... GOOGLE'S ACQUISITIONS

- In March 2007, Google acquired leading online display advertising company DoubleClick for $3.1bn (£1.6bn). US anti-trust regulators approved the deal after a year-long investigation into concerns that it may marginalise competition.

- When the search company acquired radio advertising firm dMarc for $102m (£51m) in January last year, it announced plans to introduce its own radio ad distribution channel by incorporating dMarc's automatic ad scheduling system into its AdWords service.

- Google bought YouTube for $1.65bn (£758m) in stock in October 2006. The terms of the deal, which preserved YouTube's distinct identity and independent operations, included plans to use ads to generate revenue from clips.

- Rumours abound that Google is poised to acquire Skype, following the internet phone service's disappointing performance for owner eBay.

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