Ever since the early 1990s, the primary method toward monetization on the Internet has been online advertising. Online publishers (i.e., everything from news sites and blogs to special interest websites) used advertising networks that helped advertisers place their ads on sites that were relevant to the products and services they were trying to promote. Ad networks then paid those publishers a share of their ad revenue, primarily based on the reach, or impressions, that publishers would generate for each advertiser.

While ad networks are still prominent in online advertising, the wide variety available to advertisers has made it more challenging for them to manage these networks and ensure that they are getting broad (but also targeted) exposure. Furthermore, both publishers and ad networks faced an abundance of unsold inventory, meaning lost opportunity for advertisers and lost dollars for networks and publishers. Enter: ad exchanges.

Ad exchanges started in the mid 2000s with the goal of optimizing the buying of open or unused ad inventory across networks and publishers from a single platform where advertisers can bid on targeted ads in real-time. Ad exchanges operate in a similar way to stock exchanges (hence their name), where ad inventory is priced at whatever the market considers to be a fair price. For instance, some inventory can be priced at pennies per impression, while other inventory is considered premium, where each impression might be in the tens of dollars. This model is similar to how paid search bidding for keywords developed.

There are multiple ways that advertisers can leverage ad exchanges that include the likes of AdBrite, AppNexus, and DoubleClick Ad Exchange. Most exchanges offer self-service tools where ads can be bought and campaigns can be managed, all tied back to analytics, which advertisers could directly tap into. Agencies can get access to these tools on behalf of their clients to buy advertising. Some advertisers opt to use demand-side platforms, which lets them tap into multiple exchanges, enabling them to further optimize their ad buys.

While exchanges have been around for a few years, they are about to get a whole lot more interesting. Recently, Facebook announced that it is building its own advertising exchange, called Facebook Exchange, or FBX, that will let advertisers and agencies buy ads that utilize Facebook user characteristics on sites outside of Facebook. Currently, Facebook is having challenges with ad effectiveness on its own network despite the capability to granularly target ads based on users' personal information. By opening up Facebook users' characteristics beyond the social network itself through its exchange, it could open up untapped potential that existing exchanges have already done for online display advertising in general.

Technology continues to play an increasingly important role to maximize effectiveness for advertisers; ad exchanges are a natural evolution in how agencies, advertisers, and publishers are optimizing their practices to drive results.