What’s looming in an ad’s future?
“The world’s most derivative industry needs derivatives.” That opening or versions a lot like it have been swirling around my head for weeks. I kept putting it off until a wise man, Danny Weisman, gave me the caffeinated jolt of 37,500 pounds of Arabica coffee neatly packaged in a simple contract to be settled in July.
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Derivatives have been around forever. Pretend you live in ancient Greece and grow olives. You bring your olives to market and sell a bunch for a goat and two sheep. Next week, for the same amount of olives, you only get a goat and one sheep. Hmmm. You got less. That’s not great. The week after that, you get two goats and two sheep. The changing market price is hard on growers and equally annoying for buyers. It’s probably not great for the goats and sheep either.
After a while, fed up with the vagaries of live market pricing, a smart buyer and seller decided to fix a price today for olives in the future. Knowing tomorrow’s price today was good for everyone.
There was still one problem. Every deal was unique. A unique buyer. A unique seller. A unique contract. For a unique good. At a unique future time. The transfer of future commodities needed to be commoditized.
The Cotton Exchange figured this out 150 years ago. There, you could buy or sell futures on all sorts of commodities. That stabilized the prices of inputs to stabilize the prices we pay for things we use every day. But no one can mansplain it like Randolph Duke, “Coffee. Wheat. Which is used to make bread. Pork bellies which is [sic] used to make bacon. Which you might find in bacon and lettuce and tomato sandwich.”
Without MBA-trained marketing people to create a catchy tagline for this future price thing, they settled on, “Future.” The market took off anyway. Proving once again that product-market-fit always matters.
Since day one futures focused on physical goods and their delivery. If you owned a frozen concentrated orange juice future you took delivery of actual frozen concentrated orange juice of a certain quality at a certain place at a certain time. Which is great if you make Tropicana. But what if I just wanted to lock in a price or speculate and didn’t want the actual stuff?
By 1981, math types liked everything about futures except the stuff. They loved using data to run highfalutin calculations to make more money with less risk. So, they created futures for intangible things. Money. Financial futures gave geeks a new future. Wall Street lavished big pay and glamour jobs that brought geeks out of the chalk-filled hallways of technical colleges and into the backseat of stretched limo paid for by brokers.
Money futures didn’t require you to deliver palettes of cash to warehouses. You didn’t show up with the interest rates differentials on settlement day.
That’s about the time I showed up.
Before I got into ads. Before I was a VC. Before I analyzed LBOs. Before I was an investment banker, butcher, baker, or a candlestick maker, and after I did some robotic stuff, I was a trader.
Mostly, I traded derivatives. Which mostly meant yelling, “Mine!” or “Yours!” into an old-style phone handset tethered to a desk covered by monitors that displayed flickering prices for a variety of markets and gave us a way to DM traders around the world before DM was a ubiquitous verb.
In quiet moments, we’d use words like, “Delta” to describe the convexity of the basis risk that governed the difference between our synthetic position and the actual product we engineered to have it mimic. And, I swear, at the time, I think I knew what that meant.
Those chats were interrupted by senior people who would call me by the wrong name to dispatch me to buy coffee for the group. But they’d pay. So, no harm; no foul. Charles. Chand. What’s the difference? It was a simpler time.
The stuff I traded worked like this. I could buy (or sell) a futures contact on an interest rate at, say, 48. Don’t worry. None of that matters. Here’s all you need to know. Each point was worth $25. If I paid 48 it went to 49, I made… $25 dollars. If it went down one, I lost $25. That’s it. I bought and sold thousands of futures every day.
So why do it? Well, for one thing, it’s fun. Plus, doing it paid well. Plus, telling people you were a trader in the early 90s was great for ego. Maybe for id too.
There are futures for all sorts of virtual things. Weather. Every line on every game for every sport is a kind of future. But nothing for ads.
Media is the most derivative business I know. Everyone dupes everyone. Content is copied. Ideas are aped. Original thinking is rarely rewarded. A one-trillion-dollar ad market sits on top of it. For all the sophisticated ad tech and data display dashboardary, ads lack the simple financial trappings of pork bellies. Until there’s a derivative market, ads have no future. At least not one we can model with the kind of precision we apply to frozen concentrated orange juice.
People assume we don’t need an ad futures market. Proof? We don’t have one and no one talks about it. People also assume that a futures market must deliver ads. Not necessarily. Ad futures would work like financial futures. You don’t buy futures on TV ads to take delivery of a TV ad. They don’t settle. They just trade.
People who buy and sell ads worry about future ad prices. Meta might worry that ad prices might go down. Brand and agencies lose sleep about ad price escalation. This is just like olive traders in ancient Greece.
Let’s say you’re Danny. Let’s say he has a client who sells looms. As we all know, the Fall is traditionally looming season. People weaving cloth for sweaters they’ll wear in the winter and such. He knows he’s going to buy one million dollars of ads in September. He doesn’t want to worry about the election cycle driving up the price of ads. So, he buys a September ad future. He buys it today. He pays 48 for a million dollars of future contracts. Danny makes $25 every time the price goes up. Which means he has $25 more dollars to spend on ads in September. If the price of ads go up, Danny’s futures offset the extra cost.
OK. But you’re thinking who would sell Danny September futures? Good question. Let’s say you’re a small independent website publisher that just got demolished by Google’s unhelpful content update. You have no idea what your ads may be worth in a few months. That publisher would sell the future price of ads.
Now, to be really clear, Danny isn’t buying ads on the independent site. He’s just trading a future contract to hedge his ad buying risk. Likewise the website owner doesn’t deliver ad space. Selling future ad prices just fixes a price.
There’s more than one interest rate future. There’s one for T-bills another for bonds and all sorts of things in between. The same would hold for ads. One for video ads on premium sites. One for video ads on FAST services. One for social ads on Facebook. One for TikTok ads. Could you imagine a futures market for TikTok ads given what’s going on about there? One for programmatic. It gives the Trade Desk all sorts of new meaning.
An ad futures market vastly expands the ad market. Think of all the new jobs it would create for people to trade, price, speculate, and other analyze the future price of ads.
Next step — and this one is EZPZ — who wants to build a marketplace app for ad futures with me? I have the domain AdLoomer.com, the dev team, and the tagline VCs will love — the Uber for the future of ads.
In a nutshell it’s an incredibly simple idea that ad types have made incredibly complex to price tomorrow’s ads today. Nothing unoriginal there.