For as long as there's been programmatic advertising, the second-price auction has been a crucial component of the efficient marketplace we've all been working to build.
The value in the second price auction is that it encourages buyers to bid the true value of what the impression is worth to them -- without having to worry that a lower bid would have saved them money. As a result, bidders can be confident that each impression will be awarded to the buyer who values it most. Or at least that's how it used to work.
Over the past 18 months, a glut of header bidding partners have flooded the marketplace, creating a muddled digital landscape that has threatened conventional auction dynamics. Whereas buyers could once count on a standardized second-price auction for every bid, agencies and DSPs must now grapple with a suite of SSPs that use different mechanisms to determine the winning bid. This has created uneven results for buyers across their SSP partners, even in instances in which the SSPs are offering the same exact impression.
To ensure a fair, stable marketplace, the digital media industry must acknowledge and adjust to the changing auction mechanics. Ultimately, it's up to buyers, sellers and vendors to decide the fate of the second-price auction for real-time transactions.
If you want to understand why the second-price auction is under attack, it's important to first consider how header bidding has changed the way SSPs compete with one another.
Prior to header bidding, publishers often chose to work with one SSP over another, making an either/or decision on which vendor to use. They could work with Rubicon Project, OpenX or PubMatic, but not all at the same time. Publishers had to choose the technology partner that offered the best combination of product features and customer service, and could only layer in a select group of other partners behind the primary (i.e. the waterfall approach) to keep latency to a minimum.
All of this changed with the introduction and expansion of header bidding, which allows publishers to offer each impression to numerous SSPs simultaneously. Partner selection became an “and/and/and” situation, with publishers choosing to work with potentially dozens of partners. Rather than competing on feature sets for a long-term partnership, SSPs are now fighting one another to offer publishers more money for every impression. As a result, vendors have been heavily incentivized to alter their auction logic in such a way that they can pass higher bids along to the publisher.
Here's what this looks like in practice:
In header bidding, the programmatic auction is essentially split into a two-step process. First, the SSPs collect bids from their demand partners, choosing a winner via the auction logic of their choice.
After each SSP has made its decision, the winning bids are then passed into a larger header bidding auction, which uses a first-price mechanism to determine the winning SSP and the final price the publisher receives.
Due to the added pressures of header bidding, SSPs are now migrating closer and closer to a first-price mechanism in the initial auction. As a result, publishers are now getting almost the entirety of a DSP's $10 bid, which otherwise might have been chopped down to $5 under the old second-price model.
All of this is to say that the growth of header bidding is having a profound effect on how SSPs run their auctions. In the months and years to come, these changes are causing everyone involved to carefully consider how they approach the market.
While the long-term future of programmatic auction logic remains murky, the near-term future is already unfolding. Above all else, the new mechanics of header bidding are causing buyers to pay more money to publishers. In recent months, winning bidders who were used to paying out at a second price are beginning to see their clearing prices rise under first-price auctions. Meanwhile, publishers are enjoying significant (but temporary and unsustainable) boosts in the amount of money they're clearing for each impression.
Buyers are already reducing bid prices as a result of this trend as they cannot simply pay more for impressions that haven’t increased in value. The problem is that bid prices are being lowered across the board, as buyers don’t have any insights into the auction mechanics for a specific impression opportunity, or even for a specific SSP. If this continues, and buyers lose faith in how their bids are treated by exchanges, publishers risk declining programmatic revenue. It will also push buyers to invest in new algorithms to bid the lowest price possible to win an impression rather than what the impression is worth to their advertisers.
To maintain healthy bidding practices exchanges need to provide buyers with clear insights into how closing prices will be determined. In fact, the time has come for some exchanges to run first price auctions which provide the buyer with the ultimate clarity on how auction mechanics work. First price auctions make sense in a world where the result of that auction is passed to the publisher to compete with other channels of advertising demand. As long as the buyers understand auction mechanics they can bid appropriately to preserve advertiser performance while still bidding aggressively to drive reach and frequency.
Since header bidding is not, and will not be, pervasive, second price auctions will still have a place in programmatic advertising. Anywhere there is a single auction which determines to whom an impression is sold, the second price auction is ideal. But the mechanics of those second price auctions need to be made clear to buyers. As we have learned, black box auction mechanics don’t allow the algorithms behind programmatic buying to maximize value for advertisers, and it is that maximization of advertiser value that ultimately makes programmatic an optimal technology for publisher monetization.
The best path forward
While it's unclear exactly what the future of programmatic auctions looks like, a healthy evolution of the ad-tech marketplace requires three elements: transparency, standardization, and an extended and steady transition period.
Transparency is needed so buyers can bid efficiently, and so publishers benefit from a healthy marketplace. Standardization is needed in how that transparency is communicated to buyers so the integration work required to understand these new signals is minimized across exchanges. And, a transition period is needed so DSP’s data science teams can adjust bidding algorithms to buy efficiently through different auction types.
Buyers have a right to know the kind of mechanism they’re bidding into for the sake of creating effective bidding strategies and the only way to ensure this is by facilitating the move to a standardized, industry-wide auction setup. These elements empower buyers and publishers to do business with the confidence that they can generate similar results across every auction taking place. Programmatic is a complicated space, and any major shift will have to give vendors, buyers and publishers adequate time to prepare. OpenX is the only company that recognized this with the launch of a first price auction functionality that puts the best interests of all partners first.
Ian Davidson, VP of platform demand, OpenX.