Programmatic Is Eating the (Advertising) World

In 2011, renowned entrepreneur and investor Marc Andreessen famously wrote, “Software is eating the world.” Now, in 2014, I would argue that “programmatic” is eating the world. The world of advertising, that is.

For readers unfamiliar with the concept, programmatic — or programmatic advertising — generally refers to an automated, technology-driven method of selling and buying digital advertising that is used to automate either the transaction itself (for example, real-time bidding), the workflow behind this process, or a combination of the two.

It was only about a year ago that Forbes published an article titled “What Is Programmatic Advertising and Is It the Future?” Now, programmatic is definitely the present, with eMarketer predicting that programmatic advertising will grow from less than $5 billion worldwide in 2011 to more than $32 billion by 2017.

You may balk at such a forecast, but if you think that the reach of digital advertising is limited to devices like cellphones, computers and televisions, you need only look out the window of PubMatic’s New York City office onto Times Square to be reminded that this is not necessarily the case. Each time I visit, it seems as though more of the billboard ads have been converted to digital displays — and digital almost always opens the door for programmatic.

With more and more traditional media making the leap to digital, the opportunities for programmatic will only continue to grow. Case in point: Programmatic radio advertising. As music consumption increasingly goes digital, from radio broadcasts over the Internet to digital services like iTunes Radio, Spotify and ClearChannel’s iHeartRadio, all of the audio and visual ad spots that are created are being bought and sold programmatically.

Mistakenly, many people confuse programmatic advertising — the automation of the advertising transaction and/or workflow — with the ability to get rid of direct salesforces. That’s wrong, and understanding why unlocks the key to why programmatic is eating the advertising world.

The case for workflow automation is quite easy to understand. Automation creates efficiency, which lowers costs and improves outcomes. No longer do we have to key in orders manually, email advertising creatives back and forth, compare impressions and discrepancy calculations using spreadsheets, or try to figure out after the fact who served the risqué ad. All of this will have workflow around it and increasing levels of automation, as rules, decisions and escalations are encoded into software programs.

The case for automation of the transaction is quite evident, but actually not well understood. Many people believe that programmatic and real-time bidding are expanding because they allow advertisers to pay less for ads: They’re getting something for $2 that used to cost $10.

Actually, the opposite is true. Programmatic is expanding because it allows advertisers to pay more for ads, and to be happy about the fact that they’re doing it. We are in the midst of a multiyear transition in which it feels like ads are cheaper, but ultimately the cost of advertising is going up. The secret is that the ad being bought is more targeted, more precise and more effective, and that’s why the advertiser is happy to pay more. It’s much easier to figure out which ads are not being delivered effectively (wrong audience, wrong creative, wrong context, etc.) and to stop it; and then to look at the ads that are being delivered effectively, and to do more of that.

If we look at it from the perspective of economics and technology, the key shift in programmatic advertising is that the advertiser now has a voice in determining when to place an ad before a user. In the legacy world of traditional ad selling, the advertiser bought almost purely on context (give me 10 million impressions on the homepage of website X, for example). Each user is treated the same.

Of course, people are different with respect to their preferences, budgets, desires, needs, etc. In the new world of programmatic advertising, the publisher can simply send a well-qualified advertiser every single homepage impression, and let the advertiser send back a signal every time they see a combination of context and user that they want. This causes the value of the product being sold — the ad impression — to increase exponentially. But suddenly it’s much richer (context plus available audience) than it used to be (context alone).

The pace at which programmatic is eating the advertising world is quickening. And we’re seeing a shift in the industry where the companies that don’t have programmatic in their DNA are either having to make challenging transitions or face running out of runway. You can spot them all around you – here are just a few examples:

If you’re an advertiser, publisher, consumer or investor, it’s pretty clear which side of the divide you want to be on.

Rajeev Goel co-founded PubMatic in 2006 to give premium publishers a real-time selling platform for managing their revenue and brand strategy. As CEO, he is responsible for all aspects of the company’s vision, strategy and execution. Reach him @PubMatic.

This article originally appeared on Recode.net.