What Is an Ad Exchange and How Does It Work?

by Isabel Greenfield

7 Min Read

The tech world, specifically the ad tech world, can feel like an excess of new words and tools that seem to pop up overnight. As you begin to explore the various terms of programmatic advertising, an ad exchange is something you’ll see mentioned often as an important part of the programmatic ad buying and selling process.

Keep reading to learn more about what is an ad exchange, how they work, who uses them, and the various types of exchanges.

What Is an Ad Exchange?

An ad exchange is the central part of the purchase process for programmatic advertising. An ad exchange acts as a marketplace that sits in between publishers looking to sell their inventory and advertisers looking to buy it.

How Does an Ad Exchange Work?

Publishers use another piece of advertising technology called a supply-side platform (SSP) to share the inventory they have available and the minimum price at which they would be willing to sell their inventory. The SSP essentially plugs into an advertising exchange or more often, multiple ad exchanges so that their inventory can be easily accessed.

To access this inventory, advertisers use a demand-side platform (DSP) to input their campaign needs from targeting parameters to bid price. The DSP also plugs into the ad exchange, like a focused shopper at a market, looking only for the products that fit exactly what they are looking for.

Most ad exchanges sell inventory through real-time bidding, which means that an ad impression is bid on by multiple advertisers, with the spot going to the highest bidder. While this happens in real-time, it feels instantaneous to the viewer.

Programmatic ad exchanges allow publishers to make their inventory available to anyone who is looking for them and allow advertisers to buy from a range of publishers. They eliminate the need for direct deals which can be laborious and rely on human negotiation which is time-consuming and imprecise.

Learn More: DSP, SSP, and Ad Exchange: What’s the Difference?

Why Are Ad Exchanges Important?

For marketers and advertisers, leveraging ad exchanges brings several tangible benefits that enhance campaign performance, increase ad reach, and provide insightful data analytics.

Expanded Reach: Ad exchanges provide marketers access to a wide range of publishers, increasing the potential audience and ensuring a more extensive reach of their advertisements.
Real-Time Bidding: Ad exchanges operate on real-time bidding (RTB) systems, allowing advertisers to bid on impressions as they become available, ensuring cost-effectiveness and immediate ad placement.
Precise Targeting: Using ad exchanges, marketers can utilize detailed targeting capabilities like demographic, behavioral, and geographical data, making their campaigns more relevant to the user.
Transparency: Ad exchanges provide transparency about where the ads are being placed, giving marketers control over their brand safety and improving the effectiveness of their campaigns.
Performance Metrics: With ad exchanges, advertisers get real-time performance metrics, helping them to understand their audience better, optimize their campaigns, and measure their return on investment.

Types of Ad Exchanges

There are various types of ad exchanges including:

Open Ad Exchange

An open ad exchange is perhaps what most refer to when discussing an ad exchange. An open ad exchange is exactly what it sounds like–an ad exchange that is open to anyone to access. Any advertiser, agency, or ad network has access to the inventory on the open exchange.

Private Ad Exchange

A private ad exchange is also just what it sounds like–an exchange that can only be accessed by specific advertisers. A publisher may want to limit who can access their inventory (and therefore, what advertisers show up within their content) so rather than post their inventory to an open ad exchange for anyone to access, they use a private ad exchange. A private ad exchange also prevents an ad network from reselling a publisher’s inventory.

Preferred Deal

A preferred deal is negotiated between a publisher and an advertiser. A fixed price, usually at a premium, is agreed upon so that an advertiser can get a first look at the inventory a publisher has available. If the advertiser does not want the inventory, it then moves to a real-time auction. This is also often called programmatic non-guaranteed because the inventory isn’t reserved for the buyer and they don’t need to buy the inventory once they see it.

Who Uses Ad Exchanges?

So who exactly buys from advertising exchanges?

An ad exchange is meant to make advertising available to anyone who is looking to advertise. Most commonly, advertisers will buy directly from an ad exchange or an agency will buy from the exchange on behalf of their clients. While less common, an ad network may also buy directly from an ad exchange.

Ad Exchange vs. Ad Network

What’s the difference between ad exchanges and ad networks? Don’t worry, we’re not just throwing another term–ad network–into the mix without defining the differences. The difference between the two is most simply thought of as a marketplace (ad exchange) versus a curated shop (ad network).

In a marketplace, anyone with something to sell can set up a table and make a sale. In a store, however, the owner has specifications as to what they are looking for and they control what type of products they are selling within the store. It’s much the same with ad exchanges and ad networks.

Unlike an ad exchange, an ad network buys impressions in bulk and then makes them available for purchase by the advertiser. They will sort through the impressions rather than requiring an advertiser to do the sifting, and offering curation, but within a private setting.

Ad networks become an additional player within the purchasing process, often marking up inventory prices before reselling to advertisers.

Thus the appeal of an ad exchange is that it offers transparency, without another third-party benefiting from inserting themselves into the process.

Related: Streaming TV Advertising: The Definitive Guide for Marketers

What Are Examples of Ad Exchanges?

Now that you know what an ad exchange is conceptually, what about some real-life examples?

Some popular ad exchanges are:

Google Ad Exchange
OpenX
AppNexus
Rubicon Project
Verizon Media

Is Google Ads an Ad Exchange?

This is a great question because the naming here doesn’t make this one easy. There are two different Google entities you may be hearing about: Google Ads and Google Ad Exchange.

Google Ads is a paid search platform–not an ad exchange.

This service sells paid ads at the top of search results or within the Google Maps function. Advertisers can buy keywords that are relevant to their business and these ads appear when a user searches for those terms.

Google Ad Exchange, which is often referred to as Google AdX, is an ad exchange and one of the most popular.

How Do Ad Exchanges Make Money?

Programmatic ad exchanges make their money in a few ways.

First, they often require a setup fee to be paid at the outset of using the exchange.

Second, and perhaps the most common way an ad exchange makes money, is off a commission. A publisher pays a percentage of the money that they make from an advertiser back to the ad exchange since the exchange was what helped make the connection and ultimately the sale. The cost doesn’t always fall to the publisher. Advertisers may be the ones responsible for the commission, depending on the ad exchange and the negotiated deal.

How Does Performance TV Stack Up?

How does Performance TV compare to an ad exchange? Well, Performance TV, a form of OTT advertising, plays a different role in the ad ecosystem and actually works with ad exchanges along the programmatic process.

That said, unlike an ad exchange, Connected TV platforms like MNTN offer both quality impressions and transparent reporting.

Quality: Performance TV offers Living Room Quality inventory. This means that your CTV ads will only show up within premium networks, such as ESPN or Discovery+, and not any longtail channels, like The Belly Dancing channel. All impressions are also non-skippable. Ad exchanges are often open markets so the quality of the impression is not guaranteed.
Transparency: Not only does Premium TV offer guaranteed quality impressions, but you’ll know exactly where those impressions ran with the TV Network Report. With programmatic ad buys, they may utilize multiple ad exchanges which means multiple reports and it’s not always clear exactly where your ad impressions are running.

Ad Exchanges: Final Thoughts

An ad exchange is a connection between the publisher looking to sell impressions and an advertiser looking to buy impressions. While advertising exchanges were originally created to make it easier and more mutually beneficial to exchange ad impressions, there are safer and more transparent options for CTV/OTT advertisers to explore.