Last week Google released the news that it will be making a major change to the trading protocol on its Adx exchange: doing away with second price auctions and introducing first price, or unified auctions in its place. In order the understand the considerable implications of these changes for publishers and advertisers alike, it’s first important to understand the distinction between first and second price auctions

 

First-price bidding

Let’s tackle the first-price auction initially. In this example, we have three bidders in competition for the same inventory.

Bidder A = £4
Bidder B = £4.20
Bidder C = £4.50

The result:
Bidder C wins and pays £4.50 for the impression. In this type of auction, the winner pays exactly what they bid.

This scenario would appear to favour the publishers: delivering them the highest yield for their inventory, whilst potentially forcing buyers into paying falsely high prices, as buyers must essentially guess how much the competition are prepared to pay.

 

Second-price bidding

Now let’s consider how a second-price auction would work in the same scenario. With this auction, the winning bid a buyer pays is the price offered by the second highest bid, plus £0.01.

Bidder A = £4
Bidder B 
= £4.20
Bidder C 
= £4.50

The result:
Bidder C wins and gets the impression for the clearing price of £4.21 (second-highest price + £0.01). The reduction in this example is the £0.29 the winning bidder “saved” on the impression.

This approach was previously very widely adopted and was considered the fairest model, accommodating both the publishers’ need to drive revenue from their inventory and the advertisers’ desire to achieve value for money.

 

Unfair playing field

The shortcomings of the second-price auction are made apparent when Adx has to compete for business with exchanges using first-price bidding. Almost all other demand sources have moved to a first-price model over recent years, resulting in an unfair playing field for those on Google’s AdX exchange. Let’s look at this example to understand why:

 

A publisher sits across two different inventory exchanges: Google AdX and Index Exchange.

Google had a higher bidder, but because it defaults to £2.31 on the second-price auction model, they lose out to a £4 bid.

This means that Google was losing out on potential revenue as the auction favoured the Index Exchange bid. The publisher also misses out on an additional £1 in revenue.

 

Will it cost me more to advertise?

For advertisers, of course, the most important question: does this mean that it’s going to cost me more to buy programmatic inventory from now on?

Not exactly. A new technology called bid shading has emerged which mitigates the potential for higher rates that first-price auctions would cause. Bid shading was developed to deliver a compromise between first and second-price auctions, whereby the advertiser will pay a price somewhere between the first and second price value. A piece of technology owned by the demand-side platform will analyse millions of previous bids on similar inventory, such as what bids will typically win on a certain website, to calculate a bid that is likely to win in this instance. It ensures that advertisers don’t miss out on impressions they want to win, but also makes sure they don’t pay over the odds.

Bid shading has already been widely adopted: Google is one of the last to drop first-price auctions and make use of this tech. So why is their announcement such big news? Well, because it’s Google, and because AdX is by far the most dominant player in the market. This move makes first-price auctions now the standard for programmatic trading.

 

Don’t panic!

Clearly, there’s a benefit for publishers here. However, I would argue that this is actually a positive change for both publishers and buyers. Sure, buyers may have to pay a little bit more for inventory, but by setting an industry standard this change is creating a more level playing field, with more clearly defined rules of engagement and far better transparency. This can only be a good thing.

If you’d like to learn more about how Space & Time can help your business in the programmatic arena, please get in touch with our specialist team.

 

Dan Hughes, Head of Programmatic