Three ways the first-price auction will expand programmatic transparency, and revenue

Predictions 2018: First Price Auction

Header bidding has changed digital ad trading forever. Now it’s even putting pressure on a foundation stone of the industry itself – the second-price auction. That’s good news, since the option of first price will not only bring a more transparent auction, but a more transparent industry. Its addition will challenge remnant-era practices, allowing trust to re-enter the ecosystem, expand budgets to programmatic and allow programmatic to finally expand its revenue potential.

What’s causing the change?

The main problem with the programmatic auction, as it’s run today, is that it doesn’t allow advertisers to achieve the win rates they need to reach audiences at scale. This has always been a problem, but it’s being aggravated by header bidding which effectively creates a two-tiered auction system.

On the buy-side, buyers can’t select an optimal bidding strategy, so advertisers can’t achieve the win rates they need. On the sell-side, running multiple siloed auctions means that content providers are flying blind in terms of how much their inventory is worth. That’s undercutting the effectiveness of the entire marketplace.

Add to this the industry-old problem that the second-price auction leaves room for vendors to charge hidden fees, and anyone can see that the option of a first-price auction model will address many issues.

However, it’ll also create a domino effect with far-reaching repercussions for the industry in the long-term. As an option, it will return trust to the advertising ecosystem in three significant ways:

Nowhere to hide

When the highest bid is the clearing price, any fees charged on top of that will have to be open and transparent. Ad exchanges and ad tech vendors will no longer be able to bury service fees before presenting buyers the final bill and before paying out content providers. This will bring to light vendors with business models based on remnant-era practices with take rates as high as 30%. The result will be a more honest value chain where budgets are easier to track. This will give more confidence to both buy and sell-side as they can be sure that more value is flowing through the entire ecosystem, not just to a few shadowy middlemen.

True value for content providers and advertisers

There’s a lot of debate right now on how a first-price model will affect pricing, with some predicting decreases, while others increase. In a first-price auction scenario, advertisers will have more confidence in the exchange, but content providers will also have clearer insight into what their inventory is worth. They can better value their audience, create a more effective monetization strategy, and ultimately negotiate better deals with the buyers that need to connect with a particular audience.

Programmatic reach more potential: a predictive, stable marketplace for big budgets

Lastly, allowing the option of a first-price auction will open up advertising budgets to embrace more programmatic trading. Now, the programmatic industry undercuts itself because it doesn’t allow advertisers to reach audiences at scale. A second-price auction can be effective at returning low prices. However, what large advertisers are looking for, through the help of their media planning partners, is oftentimes winning a large number of impressions at predictable cost. That means the certainty of achieving the win rates, and subsequently the audience reach, predicted in their media plans. Rather than giving a lower price at unpredictable reach, a first-price auction scenario can potentially give advertisers more confidence in a programmatic ecosystem in which the price is relatively high and stable. That’s something that the “you get what you pay for” first-price auction model can provide: a predictive, more reliable and stable marketplace.

Once that’s in place, advertisers will have the confidence to move large digital IO budgets to a programmatic buying environment, use data to automate trading and extract more value from the campaign. This will allow programmatic to finally expand its revenue potential.

More transparency equals more revenue

Some players such as ourselves have already started facilitating both auction models and eventually both auctions will exist concurrently. In the short-term what’s crucial is clearly communicating to buyers the auction type they are participating in; a practice that should become standardized across the industry. In the long-term, the option of the first-price auction will help the industry to overcome non-transparent practices allowing more revenue to flow through the entire ecosystem for buy and sell-side alike.

Sebastiaan Moesman, CEO, Improve Digital.

Join Improve Digital at The Drum's Predictions Breakfast on Thursday 25 January.

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