There are no losers when it comes to first-price auctions
In this article, Ivan Ivanov, COO at PubGalaxy discusses the benefits of moving to the first price auction model, and the impact it will have on the digital publishing industry.
Gone are the days when waterfalling was the main method publishers had to sell their inventory. Header bidding is now the hottest tool in ad tech, boosting publisher revenues with returns of up to 70%.
But while header bidding has been a positive development for publishers it has complicated the programmatic process and necessitated technological evolution, not least in auction mechanics. Most recently header bidding is driving an ongoing shift from the traditional second-price model to a simpler first-price setup.
So, why is this shift in auction models necessary and what impact will it have on the wider digital advertising industry?
Problems posed by second-price auctions
Second-price auctions – in which the final price is determined by the second-highest bidder – are the model on which programmatic was originally built. They allow market price discovery, encouraging buyers to bid the maximum they are willing to pay in the knowledge the impression will clear just above the second highest bid.
Header bidding, however, has muddied the waters of the second-price model. Since most implementations compete the winning bid against other demand in the publisher's ad server, most commonly Google AdX, the second price paid by the top header bidder might not be high enough for them to win on the final auction, even if their initial bid was the highest. It also prevents publishers understanding the true value of their inventory, making the model unworkable in a header-bidding world.
The second-price model also brings additional challenges. By naturally keeping prices to a minimum it restricts publisher revenues, encouraging the implementation of floor pricing to prevent impressions being sold too cheaply, especially when supply exceeds demand and there is only one bidder.
Finally, the model lacks transparency, opening the door for vendors to boost their profits with hidden fees. They may tell the buyer a first-price model is in place when it is in fact a second-price model, pocketing the difference between the clearing price and the maximum bid, or may be dishonest about the results of a second-price auction, charging advertisers an amount somewhere between the true price and their bid. As well as limiting value for buyers this is bad news for publishers, as shady auction tactics can have a negative impact on their own reputation, resulting in loss of revenue.
The challenge of moving to first-price
Most publishers support a move to first-price auctions and the transparency this will bring. But while many exchanges and supply-side platforms are already offering some first-price auctions, the switch from second-price isn’t going to happen overnight and, with Google’s DoubleClick Ad Exchange still using second-price, the two models are likely to co-exist in some form for the foreseeable future.
The main challenge in shifting to first-price is for buyers. With second-price auctions buyers could overbid, safe in the knowledge their bid would be reduced to market value, but with first price they need far greater understanding of the worth of the impressions they are bidding on to avoid paying over the odds. In the short term, exchanges and supply-side platforms using first-price will need to offer some sort of estimated market rate service for buyers and moving forwards demand-side platforms will need to play a greater role in determining market value on the bidder’s behalf.
It is possible for both first and second-price auctions to be used within the programmatic process, but full transparency is essential to ensure buyers understand which model is being used so they can set bidding strategies accordingly.
Is first-price really a better option?
Opinion is mixed regarding the impact a change to first-price auctions might have on pricing. Initially prices are expected to rise, increasing publisher revenues, but this will be relatively short term as buyers get used to the new model. Some fear prices may then drop as buyers exercise a more conservative bidding strategy but again this will only be temporary until the market stabilises.
The important aspect of first-price auctions is increased transparency as there is nowhere for vendors to hide service fees. A move to first-price will highlight sell-side parties that use the opaque nature of second-price auctions to increase margins, putting a stop to this process and encouraging vendors to move to more open and sustainable business models. All in all, this system has the potential to create a more honest and transparent value chain, increasing confidence in the process from both the buy and sell sides. Not only will advertisers feel more confident they are getting impressions at a fair price, but publishers will be better able to evaluate their inventory’s true worth.
The evolution of programmatic auctions from second-price to first-price may be slow but it is necessary in an ecosystem where header bidding is the norm and transparency is increasingly highly valued. With benefits for both the buy and sell sides, there are no losers in the shift to first-price auctions.