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.
Great article Sarah it’s a relatively unique approach the industry has to auctions for programmatic. Many other auction environments have varying combinations of mechanics and transparency.
First price would definitely help publishers get a more accurate value of their inventory.
Obviously there is a need for DSP/SSP technologies to make money and profit but feels like there is a massive opportunity for a revision of the business models that uphold them/
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The publisher who originally said yes to second price should be shot. End of.
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The irony here is not lost. An agency complaining about lack of transparency in pricing.
This is how your clients feel!!
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It is hilarious that an agency is bemoaning transparency and also that this may in fact help publishers get paid the correct price for their product.
Publishers typically have to a) cover your technology costs b) make good when you balls up your planning/buying/booking c) bend to lowering rates when agreeing to deals that you never hit d) buy you lunch for the privilege of a, b and c.
God forbid that you actually have to think about the trading you are paid to do rather than lazy trading and copying previous “strategies”. Stop over-relying on others to do your job for you and put a bit more effort into delivering for your clients.
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All you have described sounds like a game to pay less than you should.
And now you lament that you may have to pay closer to what you should.
Sounds like all publishers should switch to first price ASAP.
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Thanks for taking a stance Sarah. As you correctly point out, we should all work more closely together on this one – and the IAB locally are keen work on this collaboratively through an appropriate working group. This issue also came up on a related panel at the programmatic event in Sydney on Thursday last week.
We have already formed a group to help review and support the requirements of the new openRTB protocols. Alongside supporting specific solutions such as ads.cert, openRTB 3.0 is all about greater transparency in RTB – and providing better clarity for buyers on the related auction mechanics (1st v 2nd) is a critical outcome. As you mention, buyers currently being uncertain of what auction type they are participating in is clearly unacceptable. Thereafter buyers keen to mitigate the risk of ‘winners curse’ in any 1st price auctions will be obliged to do the hard yards and properly value the media they are bidding on.
I love your call to action on collaboration Sarah and us all trying to establish a more level playing field in what has been evolving very quickly. We’re all in this together and we’re keen to have you involved. We’ll need to broaden the related working group to ensure that we can competently review these requirements and provide guidelines and some standardisation to genuinely improve what we are all working with. Feel free to hold me personally accountable on this one.
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This article misses the mark on a number of points.
None of the exchanges mentioned are exclusively first price – with varying auction dynamics dependent on the integration type (header vs waterfall for example), buyer preference (e.g. buyer directed first price) and by publisher preference.
This article also totally ignores the difficulties in header bidding where one partner uses first price and others do not – which can result in the highest bidding buyer NOT winning that impression – potentially driving negative outcomes for both the advertiser (who, assuming they have bid correctly – potentially ends up losing the impression that they were willing to pay as certain amount for) and the publisher (who undersells their impression via a first priced exchange when another buyer via a second priced exchange was willing to pay more, but their bid was reduced to the second price).
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Maybe if you sat on this a little bit longer you would realise that Sarah is raising awareness on behalf of her client’s interests. You would also realise that it is in the publisher’s interests to support Sarah’s position since it would ensure more media spend is going to publishers and not vendors in the middle.
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great shout. spot on.
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a good explanation of why the shift in the first place. https://www.linkedin.com/pulse/why-move-1st-price-auctions-mark-evans/?trackingId=jfshrh8yHkuxiGR%2Bjn%2FWWA%3D%3D
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Did the bidding model originate with Google search and then programmatic adopted it?
The article makes a great point that we need to hear more from the IAB on the subject.
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Ha!
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All I want is clean auction process. Anything that improves a fair value exchange is important to both the buy and sell sides of this equation. It increases competition which fosters innovation. Shifting transparency to the buy side gives both parties motivation to solve the problems inherent in programmatic.
Auction models are well understood. In programmatic we’ve built our own though! Part due to latency (understandable) and part due to commercial considerations (wild west). Revenue equivalence of auction theory (https://en.wikipedia.org/wiki/Revenue_equivalence) states that the outcome, irrespective of the auction type, should be the same. The winning bidder should be the winning bidder in all auction types. It’s a great theory.
That theory is predicated on the bidders offering what the item for sale is worth to them and that a single auction mechanism is used, not a combination. Risk aversion (not knowing the value of the item) breaks the theory. We’re all suffering from that challenge.
Can you imagine a real estate agent not disclosing what the winning bid was, and paying the seller substantively less than the amount paid by the buyer? That wouldn’t be a transparency issue – it’s theft -for both parties.
I hope that these changes will encourage more direct business. Look now. Find out where your budget is being spent. Identify the top partners. Talk. If your partners can’t or won’t tell you this take the nuclear option.
That, to me, is the key to transparency and both sides holding the supply chain to account on what is being skimmed. It’s very easy to sit down post campaign, discuss what was spent, what was earned, and what went missing. Both parties can work on the please explain requests to understand what has happened. Programmatic isn’t going away so we had better fix it.
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Hi anonymous – who are you and what do you know about FPA and general auction dynamics? Maybe don’t jump the shark? The points made in this op-ed are salient and we should respect the perspective. We’re all in it together which is to help our shared client base hit their targets.
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