Second-price auctions have been the unquestioned auction model in online advertising since the rise of Google paid search. However, as recent reports have demonstrated, they have rapidly been giving way to first-price auctions in many programmatic ad exchanges.
This shouldn’t be a surprise. With the rise of header bidding, fragmented supply and demand, and multiple auctions occurring before an ad is served, first-price auctions present a seemingly simpler alternative for maximizing publisher yield. Likewise, for brands, first-price auctions seem to be a fairer, more transparent alternative to what were historically rarely true second-price auctions. Artificial price floors, “ghost” bids, and other forms of market manipulation have been the norm for second-price programmatic ad exchanges for years. This meant brands, and the DSP’s which represent them, have actually been playing a game to which they never really knew the rules. First-price auctions seem to offer a fairer alternative.
Unfortunately, putting first-price auctions into practice has only exacerbated the problems of today’s complex and opaque programmatic supply chain, for both publishers and brands alike– especially in supply-constrained markets like premium video. Instead, rather than more first-price auctions, a new approach to ad serving should be considered which both maintains true second-price auction mechanics and provides true consolidation of demand.
WHY IS THAT THE CASE?
Regrettably, for publishers, first-price auctions aren’t likely to increase the value of their inventory and will only inhibit a publisher’s ability to gain knowledge of the true value of their inventory. While submitting higher prices to the ad server may seem like a good thing for publishers and acceptable to many buyers, basic auction theory tells us that, perhaps, this won’t likely translate into what publishers want most over the long-term: higher CPMs and greater revenues.
In fact, smart bidders will actually bid lower than they would in a second-price auction (often at continuously lower levels) in order to find the bare minimum price needed to bid to win the impression, actually resulting in lower CPMs for publishers and obfuscating the true value pricing knowledge present in second-price auctions. This is especially true in supply-constrained, high-value markets like premium online video, where competitive pressure between buyers is the best way to drive higher prices.
Likewise, first-price auctions don’t solve for brands’ concerns around programmatic supply chain complexity and lack of transparency—and, in fact, they may exacerbate these issues. Driven by publishers’ desire to maximize demand, complex, header bidding supply chains remain intact, with even more auctions (exchange, header bidding wrapper, and ad server) and multiple vendors each taking a slice of the ad dollar. As is the case with most complex matters, additional complexity is not often the best path to resolution. And in the case of programmatic auctions, the less complex solution to opaque, manipulated, and multi-layered second-price auctions is not first-price auctions, but instead true, transparent second-price auctions across direct and programmatic sales channels – a true unified decision which provides a level playing field for brands and publishers alike.
A BETTER WAY FORWARD
Despite the fact that the market may be turning to them, first-price auctions aren’t the best answer to solving for better marketplace transparency and inventory valuations. Maximizing yield for publishers and transparency for buyers doesn’t require altering fundamental second-price auction mechanics, but it does require simplifying today’s fragmented header bidding model. So what does a better path forward look like?
- Fully transparent auction mechanics, grounded in second-price principles that advertisers and publishers understand. First-price auctions distort pricing for buyers and sellers alike, but so do other forms of second-price market manipulation like artificial floors. True, un-manipulated second-price auctions remain the best way for advertisers to win the impressions they want the most and for publishers to understand the full value of their inventory.
- An alternative to header bidding which provides true unified ad decisioning. Header bidding has been a good first step in helping publishers better manage direct sold and programmatic demand, particularly in display, but the debate over auction mechanics only highlights the flaws of the header bidding model – a complex, multi-stage auction with limited control for both publishers and advertisers. Moving ad decisioning back into the publisher’s ad server where all programmatic demand can compete against direct-sold demand and a single second-price is determined against prices of directly sold campaigns, is the only sustainable path to delivering optimal yield and transparency for publishers while giving advertisers the best chance to win the impressions they value most.
- A simpler supply chain, with no conflicts of interest and more direct advertiser to publisher relationships. While programmatic transactions will always require technology intermediaries, the programmatic ecosystem needs fewer technologies between publishers and advertisers, not more. However, restoring trust in programmatic will require more than just a reduction in numbers; technologies also need to stop playing both sides of the field and choose to focus on representing the interest of advertisers or publishers exclusively.
First-price auctions may be increasingly common, but they aren’t the panacea some publishers or brands perceive them to be. As publishers and brands seek an alternative to historical programmatic norms, it’s time that they give fully transparent second-price auctions a real chance in a platform that can deliver on this promise.