ThinkEquity, the New York-based research company, recently published a report on Non-Premium Display Advertising,. It provides an excellent overview of the display market and the growing influence of ad exchanges.

The report makes a number of interesting observations on the non-premium market:

1. On the growth of the non-premium market, ThinkEquity believes it will rise from this year’s expected figure of $4.1 billion to $11.4 billion in 2013:

We continue to expect non-premium display advertising to be the highest-growth segment of the online advertising market in coming years, based on superior fundamentals including inventory and pricing growth. However, our checks with industry participants indicate that non-premium display has not proven immune to macroeconomic shocks. We estimate that non-premium display advertising totaled $4.1 billion in 2008, up 32% versus 2007... By the end of our forecast period in 2013, we expect non-premium display advertising to account for $11.4 billion in total revenue, representing 34% of total display ad revenue. For the 2008-2013 period, we expect non-premium display to grow at a 22% CAGR.

2. ThinkEquity sees ad technology and process innovation becoming more focused on the non-premium display market:

While innovation across the online media industry continues apace, we believe that the majority of technology and process innovation in the online advertising market is aimed primarily at the non-premium display market, and that the non-premium display market stands to benefit most from these new technologies and process innovations.

Among these innovations, we believe the most noteworthy include advances in behavioural targeting, contextual targeting, “brand response” advertising solutions, data exchanges, spot media exchanges, forward/futures media exchanges and salesforce automation platforms, specialist exchange media buyers, creative versioning/targeting/optimization technology, and inventory/yield/channel management.

3. Rise in the number of agencies in Europe and US using ad exchanges – and the different approaches of the agencies:

We believe that media agencies within each of the major North American and European holding companies are either actively using or testing multiple online advertising exchange platforms... Fundamental strategy with respect to advertising exchanges seems split roughly along geographic lines: European holding companies appear to view advertising exchanges as potential opportunities for media arbitrage, whereas North American holding companies appear to view advertising exchanges as a new arena in which to build best-of-breed capabilities to drive client wins/retention.

4. The increasing competition between agencies and networks – and the growing trend of ad agencies building trading platforms on top of the existing exchanges:

Ad agencies are becoming increasingly competitive with ad networks, through the creation of “private” ad networks, integration with major ad exchange platforms, or the development of wholly new ad technology platforms built atop the DoubleClick and Right Media ad servers, etc. Examples of major agency initiatives include WPP’s B3, Publicis’ Vivaki, and Havas’ Adnetik. Increasingly, ad agencies appear interested in creating the ability to aggregate premium and non-premium display inventory in order to perform inventory allocation decisions in real time on the buy side. As ad exchanges commoditize the inventory aggregation function of ad networks, networks increasingly appear positioned as specialist media buyers or meta ad networks, either in cooperation or competition with ad agencies.

5. Ad exchanges influential role in aggregating non-premium inventory:

We view non-premium/spot display advertising exchanges (e.g., Right Media Exchange, DoubleClick Advertising Exchange, OpenX Market, etc.) and quasi/secondary-premium forward/futures advertising exchanges (Yahoo! APT, ContextWeb, Traffiq, AdBidCentral, and potentially the DoubleClick Advertising Exchange in future iterations) primarily as innovations with respect to inventory aggregation.

Historically, the inventory aggregation function in the non-premium display market was performed by sales intermediaries. However, fragmentation in the online ad network market has resulted in an increasingly complex yield management challenge for online publishers. Traditional non-premium display yield management approaches may be inefficient, labour intensive and sub-optimal from the perspective of yield maximization; they also have the effect of reinforcing the competitive status quo in the ad network market and retarding innovation. We believe that spot display advertising exchanges eliminate these inefficiencies while also democratizing access to non-premium inventory, catalyzing the growth of new market participants, increasing competition for inventory, and allowing marketers or agencies to participate directly in the market.

The report is essential reading, and a copy be obtained by emailing ThinkEquity’s Robert Coolbirth – rcoolbrith [at] thinkequity [dot] com.