The walled gardens of ad tech, explained

walled garden

Almost no industry report or analysis in the ad tech industry is complete without a generous sprinkling of the term “walled gardens”. What is a walled garden in advertising? In a broader sense, any closed platform or closed ecosystem where the technology provider has significant control over the hardware, applications, or content can be called a walled garden.

In consumer technology, Apple’s decision to drop the ubiquitous 3.5mm headphone jack in favor of its proprietary lightning connector is perhaps the most recognizable example of a company making changes that lock users further within its… you guessed it—walled garden.

In ad tech, there are a handful of companies that claim a disproportionate amount of global ad spend and have more user data than anyone else. In this explainer, we’ll look at the origins of the term walled gardens, review the walled gardens of ad tech, and how they affect publishers.

Origin of walled gardens

Despite the incessant chatter about walled gardens in mainstream publications that cover ad tech these days, the term was first coined in a different context by John Malone, the founder of Telecommunications Inc., which was later acquired by AT&T.

US telecom companies serve as early examples of walled gardens. Mobile telecom operators have been known to exercise tight control over the services and applications that are available to users on mobile devices connected via their network. In a more extreme example of walled gardens in telecom, in the 1970s, Bell owned all the hardware (including phones) and had indirect control over the information sent through their infrastructure.

Around that time, a company called Hush-A-Phone had been marketing a small, cup-like device that mounted on the speaking party’s microphone and reduced the risk of the conversation being overheard. Bell sued Hush-A-Phone on the grounds that anything attached to the phone could damage their network. The court ultimately ruled in favour of Hush-A-Phone, and this landmark case is widely considered to be a watershed moment that led to the development of a secondary market for third-party accessories and the breakup of the Bell System.

Thankfully, things have changed a lot since those days—at least in telecom.

What is a walled garden on the Internet?

Let’s take a look at the walled garden ecosystem. In 2019, Facebook generated $69.66 billion in advertising revenue, while Google earned almost twice that at $134.81 billion. The ad revenue generated by both companies surpasses the ad revenue generated by all other ad tech companies combined, hence their moniker ‘Duopoly’.

Statistic: Selected online companies ranked by total digital advertising revenue from 2012 to 2020 (in billion U.S. dollars) | Statista
Find more statistics at Statista

Here are a few ways in which Google and Facebook strengthen their position:

  • Both companies have a vast amount of first-party user data, which has become even more valuable now with the impending deprecation of third-party cookies. Google has over 1.5 billion monthly Gmail users and Facebook has 2.8 billion monthly users.
  • Many of these users are persistently logged into their Google and Facebook accounts across multiple devices they own, giving the Duopoly access to the deterministic data needed to target users across devices with a high level of attribution accuracy.
  • Google, in specific, also builds and distributes browsers (Chrome) and operating systems (Android), which gives the company even more control over the ecosystem.

Now, another company is set to join the ranks of Google and Facebook, and turn the Duopoly into a Triopoly. According to an eMarketer report, Amazon’s share of the US digital ad market surpassed 10% for the first time in 2020, growing 52.5% YoY. Despite being a relatively late entrant to the digital advertising landscape, Amazon’s fast growth has already secured it the third spot as the largest ad tech platform by revenue generated.

“For advertisers with goods to sell in the marketplace, Amazon ads were a key performance lever throughout 2020, especially with the cheap ad opportunities available in Q2, when many sellers suffered out-of-stocks and dropped out of the auctions,” said Nicole Perrin, eMarketer principal analyst at Insider Intelligence. “Amazon advertising has long been a must for marketplace participants, and that hasn’t really changed—though more brands and retailers are considering Amazon from an ecommerce perspective due to the pandemic.”

A key reason for this growth is that Amazon has something that Google and Facebook don’t—purchase intent data. While Google and Facebook know what users are searching for and clicking on, Amazon knows what users are buying, from whom, and how often, all of which are extremely valuable to certain buyers, such as e-commerce brands and retailers.

Independent ad tech vs. walled gardens

Google, Facebook, and Amazon may together take more than half of all revenue generated from digital advertising, but they’re not the only game in town. Companies outside the walled garden are known as independent ad tech companies, and include entities like:

  • Supply-side platforms (SSPs)
  • Demand-side platforms (DSPs)
  • Ad networks
  • Ad exchanges
  • Ad servers
  • Consent management platforms (CMPs)
  • Data management platforms (DMPs)
  • Identity resolution vendors
  • Ad quality vendors

Some examples of independent ad tech companies include OpenX, Index Exchange, LiveRamp, Pubmatic, Rubicon, MediaMath, The Trade Desk, and even Blockthrough! While independent ad tech companies don’t have the data or scale of the Triopoly, they provide a number of advantages to the brands, advertisers, agencies, and publishers they work with:

  • Transparency: Independent ad tech companies provide access to measurement, attribution, and reporting data more freely than walled gardens, which tend to operate like black boxes. In many cases, they also allow third-party companies to integrate, measure, and verify advertising campaigns and revenue performance.
  • Better support: Independent ad tech companies are highly focused on growth and retention, and therefore typically provide direct access to help and technical support, often assigning dedicated account managers to most customers. It’s hard to get that kind of direct, one-on-one support from Google or Facebook, unless you’re a huge client.
  • Data ownership: Most independent ad tech vendors allow their clients to upload their own first-party data set for targeting, and in the case of header bidding, they give publishers access to log-level data. The walled gardens, on the other hand, are more restrictive in terms of the data that can be ingested into or gleaned from their platforms.
  • Customization: It is much more easy to work with independent ad tech vendors on custom solution development or to build your own solution using their open application programming interfaces (APIs). With walled gardens, everyone, regardless of size, gets the same solution with very little scope of customization.

How do walled gardens impact publishers?

Strong competition on the demand-side directly benefits publishers in terms of generating better yield for every available impression. In fact, this is the reason header bidding gained widespread adoption, which also serves as a good example of how walled gardens affect publishers.

Before header bidding, Google gave its ad exchange (AdX) a “last-look” advantage. With that, before an impression was served, AdX could review all competing bids and then had the opportunity to outbid them. However, the other exchanges did not get a chance to do so.

Header bidding leveled the playing field by allowing all exchanges to simultaneously bid on every single impression, resulting in better yield for publishers. Eventually, Google revoked the “last-look” advantage that AdX enjoyed, but only after header bidding was already mainstream.

Large publishers with sizable first-party datasets end up building walled gardens of their own, giving some users ad-supported content, while offering subscriptions to others. Small and mid-sized publishers are forming login alliances and collaboratives such as The Ozone Project to fight walled gardens and reach advertisers directly with robust audience data.

For publishers, the best antidote against walled gardens is to gain a better understanding of their own audience. Bring in demand-agnostic ad tech partners into their monetization mix. And find ways to package their inventory in ways that are attractive to advertisers.

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