The Rubicon Project: Taking A Closer Look At Its Demand Manager Initiative
Summary
- The Rubicon Project is an independent global exchange for advertising headquartered in Los Angeles.
- The introduction of header bidding increased exchange transparency which had a negative impact on Rubicon’s revenues.
- In May 2019, Rubicon announced the private beta release of Demand Manager, a prebid as a service offering.
- This article takes a look at the impact header bidding has had on Rubicon and its recent Demand Manager initiative.
The Rubicon Project (RUBI) has come a long way over the last few years under the leadership of its CEO Michael Barrett who was appointed in March 2017. In this article, I am going to focus on one of Rubicon’s newer initiatives which it announced on May 9, 2019, Demand Manager for publishers. Given the muted market response to the announcement, this seems to be a development that has yet to gain traction. But based on the publisher need it is designed to fill and % fee based pricing (that is yet to be fully disclosed) this effort could help Rubicon to monetize a greater share of successful ad auctions. This is an example of a company who is willing to invest into adjacencies presented by its two sided exchange network, in this case to meet a need on the supply side e.g. the publishers.
The initial upside of header bidding for publishers and downside for Rubicon
Header bidding is a relatively recent development coming onto the scene around 2015/2016. It is a way of monetizing advertising inventory by conducting a unified auction, rather than using a waterfall methodology, where all interested buyers are able to bid simultaneously. To do this publishers exposed inventory to multiple auction houses/exchanges like Rubicon. Publishers initially benefited from this as they were able to get better bid density, pricing and higher revenues generated for each additional exchange they added to the auction. Header bidding also enabled demand-side platforms (DSPs), like those from The Trade Desk (TTD), Alphabet (GOOG), Amazon (AMZN) and MediaMath, to pressure supply-side platforms (SSPs) to improve inventory quality and stop gaming the second-price auction. DSPs could now reroute buys to other exchanges because no single exchange had exclusive access to valued publishers like ESPN or The New York Times. This added transparency to the marketplace and the DSPs could analyze each exchange’s fees and auction dynamics for the same impression enabling them to avoid or even shutout the worst players. Finally header bidding gave the programmatic market the chance to avoid exchanges with fraudulent inventories (e.g. exchange does not have a contract with publisher).
The header bidding empowerment of publishers and DSPs was one of the reasons Rubicon eventually eliminated buy-side fees in November 2017 in an effort to normalize its pricing and to achieve a higher level of transparency. The dynamic nature of buy-side fees (raising and cutting them as needed) also annoyed buyers and even led to legal action against Rubicon. Rubicon would continue to charge publisher-side fees that were based on long-term contracts and were more transparent and fixed. Rubicon also experienced strong pricing pressure from independent competitors like AppNexus (acquired by AT&T (T) in June 2018), Index Exchange and OpenX with CEO Barrett estimating exchange take rates would fall to between 10% to 15% to be competitive from around 25% in 2016 when Rubicon generated peak revenues of USD278 million that saw its share price briefly reach USD20 per share. In short, Rubicon took a hit to its revenues as buy-side fees represented as much as 50% of its take rates. As shown in the chart above Rubicon’s share price followed revenues lower and recovered as revenues stabilised and recently turned higher again.
The downside of header bidding for publishers and potential upside for Rubicon
Source: Rubicon company presentation
The positive header bidding trends for publishers started to come to an end in Q3/Q4 2018 with CPMs (cost-per-thousand or cost-per-mille) and pricing declines. Basically, the header bidding benefits were largely played out and all the added complexity of dealing with multiple players, as shown in the graphic above, was starting to show. Publishers had to manage connections with over 20 exchanges and implementing even simple rules (e.g. price floors, bidding increments, blocked advertising content) involved interacting with multiple user interfaces and software codes. Even using an open source code like “Prebid,” of which Rubicon is a founding member alongside AppNexus, still involved a lot of investment and heavy lifting on each publisher’s part.
Source: Rubicon company presentation
So this created a need that Rubicon believes it can meet through its Demand Manager initiative which it announced on May 9, 2019. Demand Manager enables large publishers to deploy, configure and optimize their own Prebid-based header bidding solutions. As shown in the graphic above, Demand Manager is built on “prebid” the technology standard for open source header bidding. Demand Manager provides enhanced tools for configuration management, user interface and performance analytics. It allows publishers to manage all of their exchange connections in one simple universe. Rather than being controlled by Rubicon, it is turned over to each publisher to tailor to their own needs and enables them to maintain ownership of their own code and processes. However, Rubicon offers consultative support and is working towards an installation timeline of less than one month.
Rubicon has a clear fee generating model for Demand Manager. On auctions Rubicon does not win but others win, a standard % fee will be charged for using Demand Manager. On auctions Rubicon wins it will charge its standard take rate of around 13.5% on average at present plus the Demand Manager % Fee. This fee structure enables Rubicon to capture a larger share of the overall auction economics. As Demand Manager remains in a closed beta launch the % fee has not been disclosed yet. Demand Manager does not just improve Rubicon’s economics it can also enhance ad revenues for the publishers as outlined by the following beta test user in the quote below (emphasis mine):
“Implementing Demand Manager immediately increased our revenue by double digits,” said Matt Burgess, Business Development & Programmatic Partnerships, Publishers Clearing House. “The solution enables us to lower page latencies and improve our user experience, but the biggest change is how simple and easy it is to transact with all of our partners.” (May 9, 2019 press release)
Key takeaways
As essentially a platform business that captures a share of the transaction value between buyers and sellers, Rubicon Project has the potential to enjoy superior economics. Granted there is an 800 pound gorilla in the room in the shape of Alphabet (GOOG), in particular in the case of Rubicon its DoubleClick Ad Exchange. But having a dominant player also incentivizes publishers to seek and support independent alternatives which became more limited when AppNexus, one of the largest and most price competitive independent exchanges, was acquired by AT&T. In addition to its core exchange business, Rubicon’s Desk Manager initiative has the potential to meet a genuine market need and enhance Rubicon’s overall value proposition.
Additional disclosure: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice.
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Analyst’s Disclosure: I am/we are long RUBI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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