Programmatic is undergoing a sizeable and fast-moving power shift, with traditional second-price auctions making way for first-price transactions.
As most digital advertisers will know, the second-price model has dominated as the automated trading method of choice for years. Ever since Google Paid search ads took off, its eBay-style auction mechanics — where the price winners pay is just above the second highest bid, instead of their maximum bid — have become standard. But first-price is increasingly changing this.
The more fixed and seemingly simplistic model, which sees auction winners pay their highest bid in full, is gaining popularity. In fact, it’s estimated that just under half (43 per cent) of impressions dealt via multiple major US ad platforms are already sold through first-price auctions. And with programmatic taking a growing portion of ad spend across Asia Pacific — expected to reach $452 million by 2019 — it is highly likely regional trading will flow in a similar direction.
This does, however, raise one crucial question: what’s driving the sudden surge in adoption of first-price auctions, and is it a positive development for the industry?
First past the post
There are two central factors that have fuelled the ascension of first-price to favour. To start with, both publishers and advertisers have become increasingly frustrated by the complexity of the ad buying process. Of particular concern is the continued division of demand between many platforms, and the confusion caused by running several auctions before the ad server awards impressions to the ultimate winner. Then there is the closely related irritation with a perceived lack of transparency in programmatic, especially when buying and selling using second-price.
As a result, advertisers and publishers have begun to lean towards first-price, which comes with the promise of transparency for advertisers — what they bid is what they pay, with no hidden fees — and maximum value for publishers, as the system is not geared to sell at the lowest price. This is in addition to it being a more straightforward means of buying and selling impressions.
Yet appearances can be deceiving, and first-price auctions are no exception.
First-price: a road to greater complexity
The main problem with first-price auctions is that they are more likely to increase complexity and confusion, not diminish it. For example, the division of funds during programmatic trading is often more convoluted, as a greater variety of vendors and auctions (such as header bidding wrappers, ad servers and exchanges) all take a portion of advertising spend. And that’s not to mention the fact that multi-stage header bidding auctions are baffling from the buy and sell side, offer little control, and are vulnerable to manipulation.
Finally, first-price doesn’t necessarily guarantee optimal value for buyers or sellers. Knowing that their full top price must be paid if they win, many advertisers frequently and consistently bid lower than during second-price auctions as part of an effort to gain desired inventory at minimal cost. This is bad news from the publisher side, as it drives lower cost-per thousand impressions (CPM) and prevents true understanding of how much inventory is worth: an especially acute issue in the premium video ad market, where supply is finite and competition is vital to keep yield high. For advertisers, there is also a risk that, in an attempt to secure the impression, they may end up overpaying and therefore experience poorer ROI.
A simpler solution
So if first-price isn’t the ultimate programmatic solution, which model should advertisers be deploying? In short, the best option is restoring second-price, with some improvements.
It’s impossible to deny that some forms of second-price auctions, such as artificial price floors, can be as problematic as first-price. But these issues can be overcome if the industry embraces entirely transparent auctions where decision-making powers are consolidated and auction mechanics are based on a second-price model that is clear to all.
By adopting second-price auctions that are free from manipulation, and placing decision-making back in the hands of ad servers, advertisers and publishers can unify the entire buying process and help iron out many of the intricacies that have caused discord. For example, swapping multi-layered header bidding for a trading process that allows all demand — including programmatic and direct sold — to compete for inventory in one second-price auction will enhance simplicity. It will also give publishers a better opportunity to achieve maximum yield and advertisers a clear view of what they are buying, and how much for.
Furthermore, by assuming a more defined, uncomplicated system, publishers and advertisers will also regain trading control – an element that many feel is lacking in the current first and second-price auction formats. Last but not least, reducing the actors and stages involved in buying will also help streamline the supply chain, thereby increasing clarity, reducing windows for manipulation, strengthening relationships between advertisers and publishers, and reinforcing faith in programmatic.
Globally, almost a quarter of advertisers state that fully understanding the dynamics of first and second-price auctions is a priority for 2018 – a significant increase from just 7% in 2017. This indicates that the potential is there for the enduring benefits of second-price auctions and its mechanics to be recognised and appreciated. Now, it is up to advertisers and their publisher partners to convert this knowledge into meaningful actions and make the changes needed to ensure this old but faithful model provides the optimum solution for the future.