© 2014 Merkle. All Rights Reserved. Confidential The Economics of Digital Advertising March 19, 2015 Jeff Gottlieb

© 2014 Merkle. All Rights Reserved. Confidential Agenda »General Survey »Basics of Display Advertising ‣ How Real Time Bidding Works ‣ Ways to Buy Display Advertising Online (How the Market Works) ‣ Challenges to the Digital Display Ad Industry »Basics of Facebook Advertising ‣ How does Paid Social differ from Display? ‣ Challenges of Advertising on Facebook

© 2014 Merkle. All Rights Reserved. Confidential General Survey Besides print and TV, where are you seeing ads? What forms do they take?

© 2014 Merkle. All Rights Reserved. Confidential Basics of Display Advertising How Does Real-Time Bidding Actually Work?

© 2014 Merkle. All Rights Reserved. Confidential How the Digital Display Market Works »Buyers (Advertisers, Agencies, Trade Desks) ‣ Goal: Maximize ROI/ROAS (or minimize Key Performance Indicator, or KPI) ‣ To do this, buyers try to purchase inventory (ad space) on websites at the lowest possible price ‣ Use DSPs and the DSPs’ proprietary algorithms to optimize towards a certain KPI, such as Cost Per Sale (CPS) or Cost Per Order (CPO) »Sellers (Websites, Publishers) ‣ Goal: Maximize Revenue from selling ad space ‣ To do this, sellers try to sell their inventory at the highest possible price ‣ Use SSPs to find exchanges where they are able to auction off their ad space at the highest price possible

© 2014 Merkle. All Rights Reserved. Confidential Different Ways in Which Display Advertising is Bought and Sold »Traditional Direct Buys ‣ Advertiser and Publisher make deal offline, advertiser sends creative assets to Publisher, Publisher serves the ads ‣ Only one buyer, only one publisher ‣ Usually very high prices due to premium inventory »Automated Guaranteed Buys (Direct Deals) ‣ Exactly the same as traditional direct buys, except negotiation and agreements happen online through special platforms (i.e. iSocket) ‣ Prices still high due to premium inventory ‣ Only one buyer, only one publisher

© 2014 Merkle. All Rights Reserved. Confidential Different Ways in Which Display Advertising is Bought and Sold, Continued »Private Marketplaces (PMP) ‣ Publisher makes packaged deals of inventory (may not be best quality inventory) with a price floor ‣ Advertisers make agreement with Publishers to run on these packages (a few advertisers to one publisher) ‣ SSP creates Deal ID on behalf of Publisher and sends this deal ID to Advertisers ‣ Advertisers input Deal ID to target inventory in their DSPs ‣ Auction occurs for this inventory across these advertisers (like RTB, but instead of a lot of bidders, there are only a few) »RTB ‣ No deals are negotiated ‣ Publishers sell inventory through SSPs and ad exchanges ‣ Advertisers bid on inventory through DSPs

© 2014 Merkle. All Rights Reserved. Confidential Main Challenges Facing Digital Display Advertising Industry 1)Ad Fraud 2)Viewability

© 2014 Merkle. All Rights Reserved. Confidential Ad Fraud »Ad Fraud is the fraudulent selling of online ad space, where most of the time ads are not seen by humans »In other words, advertisers are buying impressions that are not actually real

© 2014 Merkle. All Rights Reserved. Confidential Ad Fraud, Continued »How is this being done? ‣ Program-based: Malware & Bot Traffic ⁃ Fraudulent activity driven by code that impersonates real web site visitors ‣ Pixel stuffing ⁃ Placing an ad’s code into 1x1 pixel in an ad-supported portion of a website, making the ad unviewable. Most times, two ads are “served” in one location ‣ Ad Stacking ⁃ Placing more than one ad on top of an ad-supported portion of a website, thus only allowing the top ad to appear ‣ Companies Selling of Fake Traffic and Publishers using them to boost traffic on their site(s) ‣ Setting up fake websites and content, and using proxies to fool platforms

© 2014 Merkle. All Rights Reserved. Confidential Why Ad Fraud Is Bad News for the Industry »How rampant do you think ad fraud is? »How much media spend from advertisers was lost due to ad fraud in 2013? »In 2013, what percentage of ads on desktop computers were fraudulent? Mobile ads? »Is the situation getting better or worse? »What steps are being taken in the right direction? ‣ Ad Verification Tools and Pre-Bid Technologies in DSPs

© 2014 Merkle. All Rights Reserved. Confidential Viewability »According to the IAB (Interactive Advertising Bureau), an ad is considered to be in view if the following requirements are met: ‣ Standard ads: 50% of the ad is in view for more than 1 second ‣ Video ads: 50% of the ad is in view for more than 2 seconds

© 2014 Merkle. All Rights Reserved. Confidential Why is Viewability an Issue? »In the end, if a person does not seen your ad, you are throwing ad spend away »Consider an ad “above the fold” and an ad “below the fold” that are both served on an ESPN webpage ‣ An “above the fold” ad loads immediately on to the page without the user need to scroll the page ‣ A “below the fold” ad will also load immediately on to the page, but the user has to scroll down in order to see the ad ‣ The user finds a link to an article he/she wants to read that is located “above the fold,” and he/she clicks the link and leaves the page ‣ The money used to buy that “below the fold” inventory is wasted because the user never scrolled down to see it

© 2014 Merkle. All Rights Reserved. Confidential Steps Taken to Solve Viewability and More Challenges »Pre-bid technologies to target inventory that is viewable ‣ Advertisers can target inventory in their DSPs that has been declared or deemed to be viewable »More and more publishers are declaring what inventory is above or below the fold out of necessity »However… ‣ Viewability measurement is currently limited to only desktop devices (desktop computers and laptops) ‣ Mobile devices (smartphones and tablets) have no metrics to report out on the viewability of ads ‣ Big issue here: people are gradually moving away from desktop devices and using mobile devices much more

© 2014 Merkle. All Rights Reserved. Confidential Let’s Pivot A Bit and Talk About… Advertising on Facebook!

© 2014 Merkle. All Rights Reserved. Confidential How Does Buying Ad Space on Social Networks Differ from Display? »How auctions are won are much more “black box” ‣ In regular display, quite simply, if you set your bids high enough, you will win the auction ‣ In Paid Social Platforms, like Facebook, not only is your bid amount considered, but so is the actual quality of your ad! ‣ Thus, the “equation” for a final Facebook bid is the following: Final Facebook Bid = Bid Amount x “Ad Quality Score” ‣ This “equation” is very similar to how a paid search ad on Google works ‣ Many factors go into the “Ad Quality Score,” such as relevancy to a target audience and quality of the image used, to name a couple

© 2014 Merkle. All Rights Reserved. Confidential How Does Buying Ad Space on Social Networks Differ from Display? »No measurement for fraud nor viewability! ‣ Social Networks do not allow third party companies to track these ads, for fear personal identifiable information (PII) will be stolen ‣ Because human action is needed to create social network profiles, paid social networks assume that when they serve an ad to a profile, they assume a human is logged in ‣ Ads live in the feeds, and live there forever!

© 2014 Merkle. All Rights Reserved. Confidential Main Challenge: Battling the Black Box »Unfortunately, a lot of the factors that go into “ad quality score” on social networks are out of the advertisers control, and advertisers are mostly at the mercy of the black box »There is, however, one thing an advertiser has complete control over…

© 2014 Merkle. All Rights Reserved. Confidential Images and Cutting Through the Clutter of the Newsfeed »Advertisers are in complete control of what images go with their advertising »Thus, the emphasis for advertisers is to use compelling images in their ads that will catch users’ attention and make them engage with the ads. »This is done through likes, shares, comments, and clicks through to advertiser websites.

© 2014 Merkle. All Rights Reserved. Confidential Native Advertising (aka The Balancing Act) »Native ads fit into the website but need to stand out from the clutter to increase engagement »This is where photography plays the key role ‣ Stunning image that stands out on the website but looks naturally part of the interface ‣ Increased emotional engagement translates into likes, shares, favorites, retweets, etc. 20

© 2014 Merkle. All Rights Reserved. Confidential The Future of Digital Advertising – Enormous Growth in Mobile 21 Source: ComScore

© 2014 Merkle. All Rights Reserved. Confidential Mobile, Social, and Native Ads »30% of display ads now delivered on mobile devices »Integration of social media and mobile has been a huge factor in driving native ad innovation »Scroll instead of search ‣ Social content is a stream (i.e. Facebook Newsfeed), with all user attention on the stream ‣ In-line content better than browsing 22

© 2014 Merkle. All Rights Reserved. Confidential The Future of Digital Advertising – Where Are We Headed »While desktop still plays a major role in the industry, mobile and paid social platforms offer a lot more opportunity of growth in the digital ad space ‣ For example, ad space in mobile apps is growing exponentially ‣ More social networks, such as Pinterest and Instagram, are just dipping toes into advertising »Thus, finding solutions for ad fraud and viewability on mobile devices and social networks/apps are becoming more and more important in the digital landscape