As more media investment moves to Programmatic, buyers and sellers are demanding greater transparency. Buyers have historically had a blind spot when it came to what is happening on the sell side, but we are finally learning more about what has been happening in the shadows.
Programmatic auctions have traditionally been understood as second-price. Due to the perceived holistic adoption of the second-price auction, virtually all programmatic traders account for this in their bidding strategy. Buyers bid high for their most valuable segments, to ensure we win users, but still clear at a much lower CPM. To date, this method has worked because the players in the auction know the rules of the road, and can adjust their strategies accordingly. A first-price auction, on the other hand, is where a buyer would receive the good/product/impression for exactly what they bid for it.
Changing the Rules
For a while, buyers have had some inclination that non-second-price auction dynamics may be at play in the programmatic marketplace, but we haven’t been able to identify where this is happening or how prevalent it is. That creates a huge issue, as it means that we are ‘bidding blindly’, without knowing how our bids are going to be treated by the SSPs.
There are two ways SSPs can do this:
1. First-Price Auction: The SSPs set the auction rules to clear at the highest bid price
2. Shadow First-Price Auction: SSPs create second-price auctions that behave like first-price auctions where the floor is set at a percentage of the highest bid (typically 95% or higher)
What makes this style of auction duplicitous is that it is employed without warning, seemingly to take advantage of the majority of programmatic buys that are planned to second-price. Due to the fact that it occurs somewhat randomly, it is next to impossible to strategize for.
What does this mean for buyers?
There are both pros and cons for buyers participating in first-price auctions. The downside of participating in a first-price auction is, of course, the risk of bidding so high that the advertisers’ CPMs skyrocket.
The positive aspect of participating in first-price auctions is that the advertiser will typically have a higher win rate. Since most publishers have adopted header bidding (or a tool on their site to evaluate many SSPs’ bids simultaneously), advertisers essentially have to win 2 auctions—the SSP auction and the header auction. If the SSP auction is won at a very efficient price, it stands the chance to lose in the header.
The only way to truly solve for this is to give buyers transparency into what type of auction they are participating in before they bid. In the past few weeks, a few key SSPs have moved to address this lack of transparency, in hopes of appeasing both the buy and sell side.
These solutions, adopted by companies such as OpenX, utilize pre-existing protocols within OpenRTB that pass values that indicate the auction type and where the final decision of the auction is taking place (direct served or header). This protocol has always been there, it has just been optional, and therefore ignored, by SSPs.
Rubicon announced they will begin offering first-price auctions alongside second-price and will provide transparency around the auction type that one is entering. Within the AppNexus platform any auction marked as second-price will no longer contain soft floors and all header bidding inventory will automatically be entered as first-price.
How are we responding?
Now that buyers will have transparency into the auction types, we will adjust our strategies to better fit the type of auction we are buying into. But it isn’t that easy—DSPs need to build this capability into their algorithms to adapt to multiple different auction types.
Beyond that, we are working with our clients to evaluate the supply sources we are buying through. This way, we can choose to buy only through the SSPs that are transparent with us, and not the ‘bad actors’ who manipulate the auctions. We will determine the most efficient routes to buy inventory from certain publishers, and buy only through those SSPs. We predict there will be a wave of consolidation happening among SSPs, and it will lead to ‘survival of the most transparent’.
This is a developing topic and it will take some time to see where the industry nets out. What is clear is that the buy side is demanding transparency, and SSPs and publishers are making steps towards that goal.