Megan Sullivan-Jenks, Director of Marketing, Choozle: Before we dig too deep into what’s happening, can you start by explaining the difference between first-price auctions and second-price auctions?
Julie Pifer, Product Manager, Choozle: The core difference between first-price auctions and second-price auctions is in the way the auctions are finalized, which affects what rate is ultimately charged to the advertiser.
In the first-price auction model, the advertiser pays the exact amount based on their winning bid. Because of this, advertisers try to bid close to what the impression is actually worth to them. In the second-price auction model, the advertiser pays $0.01 more than the second-highest bid made in the auction. It’s in the advertiser’s interest to bid the highest possible value that they can to maximize their chances of winning the bid.
MSJ: Why are these auction models important to understand?
JP: It’s important to understand these two auctions models as it changes the power dynamic throughout the supply chain between the advertiser and publisher. Within a first-price auction model, both the advertiser and publisher have a power dynamic. Advertisers get access to quality inventory at a price that’s worth it, while publishers get paid adequately.
The second-price auction model creates room for unfair practices as it gives more power to advertisers willing to pay higher prices for inventory.
MSJ: Now that we have an understanding of the auction types, in your own words, what’s happening in the industry?
JP: As the industry continues to grow, there’s a push to evolve. We’ve seen this evolution in everything from best practices around privacy to, as of lately, auction models. Google is making a big move to move to first-price auctions for Google Ad Manager, its publisher exchange and ad server. At that time, it will also run a single, unified auction. This is huge for the industry as a whole as Google Ad Manager will be the last major exchange to switch to first-price auctions. Other exchanges tested or rolled out first-price auctions starting in 2017.
MSJ: How will auctions change after the shift to first-price auctions?
JP: As one of the largest ad exchanges, there are a lot of things that need to happen before making the switch. They’ll require all partners to share and receive bid data which will be the core information needed to execute a first-price auction. This move will help increase transparency that has prevailed in the ad tech industry. Moving to a first-price auction removes layers of ambiguity and unknown prices within an auction.
From there, Google will have a unified first-price auction that provides a level playing field for everybody, including buyers, publishers, networks, exchanges, demand-side platforms, and supply-side platforms.
MSJ: Unified auction is another new term here. Can you elaborate on what that means?
JP: As part of the transition to a first-price auction, Google will be moving from a series of auctions for each impression to a single, unified auction. Previously, private marketplace auctions would occur, then an open exchange auction, and then if the impression still hadn’t been sold Google’s supply-side platform would get the final chance to buy the inventory, often for next to nothing. Now, open exchange auctions and private marketplace auctions will be occurring simultaneously and the highest bid will win.
This means the buying model across all inventory auction types, like open exchange or private marketplace, will all be making the change in the Google Ad Exchange.
Advertisers should be aware of this shift as it could impact your buying and bidding strategy. It may be challenging, at first, to find the right CPM prices that will provide you the best results. But keep testing and trying different prices, and consider separating out inventory such as mobile that ultimately is less expensive to buy.
MSJ: Ultimately, why should we care?
JP: Google’s adoption of the first-price auction model is a huge step towards making programmatic advertising auctions transparent for both buyers and sellers. As the dominant supply vendor, it means evolving the industry standard and best practices which will lead to greater transparency, operational simplicity, and fairer buying methods.