The Trade Desk GM AUNZ Mitch Waters talks first-price auctions and how it’s changing the programmatic landscape.
There’s a great deal of debate on auction dynamics and the shift to first price auctions (1PA) right now. Market sentiment has been resounding in the fact that media buyers are opposed to it, supply side platforms (SSPs) are pushing for it and publishers are trying to stay out of the debate.
Taking a step back, 1PAs have evolved out of the world of header bidding. As auctions have moved into publishers’ ad servers, SSPs have had the opportunity to compete not only against other SSPs, but also direct activity for every single impression.
As a result, win rates have plummeted while SSP infrastructural costs have increased. Traditionally, in a second price (2PA) world, SSPs would go into the auction with a discounted bid that had to compete with this increased competition. In order to have the best opportunity to win the auction, SSPs started to bring the highest bid (1PA) to the auction.
As each SSP implemented the new auction type, they started passing that information in the bid stream for Demand Side Platforms (DSPs) to read.
The challenge was that they all had started passing different values, which made standardisation of reporting and targeting operationally difficult.
It also meant that it was difficult for DSPs and buyers to know when they were participating in 1PA. In an industry that is striving for greater transparency, this is obviously not ideal and a step backwards.
Buyers were getting caught out using strategies that had previously worked in a 2PA world, resulting in significant economic cost.
An example could look like this: a buyer bids $100CPM in a retargeting campaign because they know it had historically cleared at $25CPM in a 2PA; however, because the SSP is hosting 1PA, the auction clears at the $100CPM, which is 4x higher than budgeted.
At this point it would be easy to paint SSPs as villains in this new world order, which is not my intention and not true. Putting aside standardisation of auction type in the bid stream, which will be resolved in time, I believe 1PA will lead to greater transparency in the supply chain and create sustainable business models for SSPs who face rising infrastructure costs (header bidding).
Current Challenges
For years programmatic has been stigmatised as remnant because the market has only ever had access to the bottom of the waterfall.
With header bidding the market is playing at the top with equal access to inventory and has a chance to show the true power of programmatic. The participants do, however, need the tools to compete.
There is no denying that there will be short term operational pain. That said, with a focus on transparency of auction dynamics and the right technology, I believe that the outcomes of 1PA will lead to far more positives than negatives for the buy side of the programmatic advertising industry in the long run.
The buy side’s response to 1PAs has been to introduce bid shading. This is the process of automatically reducing the bid CPM relative to historical market clearing rates for a particular piece of inventory.
This means that a buyer’s submitted bid will be closer to the market value, maximising win rates while keeping the buyer’s eCPM in check.
While effective in principle there are some important considerations for buyers:
- What is the lookback on evaluating historical market clearing rates? Are these clearing rates already impacted by 1PA dynamics and therefore inflated? It is crucial that buyers adjust their bid CPMs to the value of the inventory they are buying to speed up the shift back to true market value.
- Do you always want your bid shaded? Header bidding has opened access to the most valuable users and inventory, and 1PA allows you to submit a high value bid to the publisher’s ad server. Buyers need control over which strategies shading is applied to.
- As always, transparency is critical to efficiency. How much is your bid being shaded? Is the right decision making happening on your behalf?
I encourage you to probe your technology partner on their bid shading tools to ensure you are getting transparency into the process.
A short-term implication is that 1PA introduces an operational burden in changing bid strategies on thousands of line items. For certain buyers this could be weeks’ worth of manual work, not to mention the work analysing what the new bid prices should be.
All this considered, I still believe this will be positive for the buy side.
Advantages to Buyers
At the Trade Desk, we have done some analysis and here are the advantages for advertisers:
- Our trading team applied mathematical modelling (Revenue Equivalence Theorem) to determine the impact of both 1PA and 2PA on clearing CPMs and the findings were interesting. The theory suggests, in both 2PA and 1PA, if buyers are submitting their true value as a bid, then as the volume of bidders increases, CPMs will be equal between 2PA and 1PA. As more publishers adopt header bidding, the market will see a natural increase in bidders.
- 1PA dynamics means that we are now more reliant on technology to decipher the true value of a bid request. Combining traders and machine learning is a powerful method for driving efficiencies and will likely lead to lower market rates in the long term. Transparency is critical to achieving this efficiency.
- Being involved in the header auction and competing against direct deals means the buy side gets greater access to better inventory. In theory, the days of programmatic campaigns under delivering due to direct sold campaigns stealing all impressions should be gone. This has been a huge barrier for shifting traditional mediums into programmatic. As a buyer, if I know I have access to 1PA and can bid accordingly, I can win premium inventory against direct sold inventory.
- Finally, it will incentivise buying platforms to focus on improving price optimisation tools, so that we are better at adjusting for CPMs. I would argue that most platforms have focused very little on building tools for CPM/bid optimisation. This is now non-negotiable.
The change to 1PA with the right technology and auction dynamics will be a win-win for all, including the buy side, and will be the right move in the right direction.