First price is a terrible move for the programmatic industry

Sarah Melrose, programmatic director at Ikon Communications makes her bid for why second price needs to stay, while simultaneously helping to get your head around what second price actually is.

What’s happening?

Unless you’ve been living under a rock, you’ll know that the programmatic industry is moving to first price auction model, over the previously used second price model.

For those not in the know, I’ll quickly explain. Second price is what the industry as it currently stands is built on, and it’s determined by the market rate.

Second price decides what inventory is worth in market by taking into account what someone else is willing to pay when it comes to bidding.

Take the example below. Bidder B wins this auction, but not with the amount they actually bid ($4.50), instead they win with $4.21 – 1c more than the second highest bid. This is second price.

In the first price model, the highest bid is accepted at face value and second price is ignored, meaning Bidder B still wins, as they did in second price auction, but pays a higher price in first price auction, as seen in the example below.

There are many reasons to argue for first price, but there are also many against. A key reason is that there is greater risk for buyers to ‘overpay’ what they need to in order to win.

What tends to happen across many demand side platforms (DSPs) and trading desks is a high max bid is set and a low minimum, giving a large bidding range for flexibility.

As buyers, we know that we’ll never pay the highest bid amount set, and often end up somewhere in the middle – thanks to second price.

With first price, that entire strategy has to change, and quickly, as buyers will now pay the highest bid accepted.

Why is first price a great move for the programmatic industry?

From a publisher point of view, first price could mean increased revenue. If buyers set bids too high, some buyers could overpay by bidding more than they need to, to win the auction.

Then there’s transparency – that old word. In the current second price world, floors and clearing prices are sometimes not declared thoroughly.

Therefore what is declared at $5.01 winning bid as seen in the second price model, could actually be told to publishers that $4 was the winning bid, and SSPs pocket the difference – leading to a lack of the T word.

A first price model would help clear this up.

Why is first price not a great move for the programmatic industry?

Transparency again I’m afraid. Or lack of it. Although first price may increase transparency for publishers, it removes it for buyers.

Using first price, buyers are currently reliant on DSPs to ‘bid-shade’ for them. Bid shading involves reducing the bid sent to auction, based on many factors such as average clearing price, desired win rate and other weighted factors, whilst aiming to win the auction.

At present, buyers can’t see this information in DSPs. We’re running blind to how these factors are decided on our behalf – that’s a transparency problem right there.

Secondly, even if we could, there is a very real possibility that DSPs could adopt the same model as SSPs have had in the past, and retain those extra dollars between the winning bid and what is declared to the SSP.

Buyers wouldn’t know this. What if the DSP tells me, as a buyer, the lowest I can pay is $10 to win, but reality the bid accepted by the SSP is $8 and the DSP takes the extra $2? It’s not solving transparency across the board – it’s shifting the problem.

DSPs also aren’t ready. There has been a nearly instant switchover on the SSP and publisher side, yet DSPs have not changed with the same speed intensity, leaving buyers in a vulnerable position. Some DSPs aren’t set up as of today to read first price and second price, and therefore can not reduce bids where first price is in place.

As buyers, in some cases we’ve been given 48 hours’ notice that all deals will go first price – it’s unfair and puts a lot of pressure on the buy side to adapt in time.

Even in cases where DSPs can distinguish between the two, buyers can not currently see whether an auction is first price or second price in any UI of any DSP – that I know of so far. (I’d love to be proved wrong!) This creates a big black box, and takes us five steps backwards, not forwards.

In addition, I don’t believe header bidding will exist as it does today in 18 months time. The core benefit of being competitive with direct booked activity won’t be necessary, as more and more inventory gets traded via programmatic, and less direct IOs are traded.

This sounds terrible, what can we do?

Call on the IAB to help DSPs and buyers navigate through this. Right now, each SSP sends in their declaration of first and second price in a different fashion in the bid stream – some say 1 and 2, some say A and B – that makes the job for DSPs much harder to pull this information out and send to buyers. Standardisation is key. How about the following:

1 – First price

2 – Second price

3 – Fixed price

That seems simple enough, if we can all agree.

As buyers, ensure your DSP can bid shade – and understand what its algorithm is. Monitor bids closely. Are you paying more than you were on second price? If you feel it’s too high, or too unmanageable ask your SSP for a fixed price deal.

You could also turn off entire exchanges that are first price. As of today, these are Appnexus, Index, Pubmatic and Rubicon. Unique inventory is not a competitive factor any longer for most exchanges.

As publishers, please help buyers by providing suggested bids based on historical data. Some of you have done this and I do thank you!

Yet still, moving to first price flips the issue of transparency to DSP side, it does not restore transparency in the chain. If the only aim here is to remove the shady practices of ‘dynamic’ floors then it does that, but now puts the emphasis on ‘dynamic winning bids’ instead.

Stay on second price. Please!

Sarah Melrose is programmatic director at Ikon Communications. A version of this article first appeared on LinkedIn.


Get the latest media and marketing industry news (and views) direct to your inbox.

Sign up to the free Mumbrella newsletter now.



Sign up to our free daily update to get the latest in media and marketing.