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September 5, 2017, Article

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Big Changes Coming To Auctions, As Exchanges Roll The Dice On First-Price

The second-price auction is crumbling.

All the major exchanges/SSPs – with the exception of Google AdX – are rolling out or are deep in experiments with first-price header bidding auctions.

The tests vary in aggressiveness and scope from exchange to exchange, with AppNexus, Index Exchange and OpenX leading the charge, and with visions of much of their inventory moving to first-price auctions. Rubicon Project and PubMatic also run limited first-price auctions on some of their inventory.

All of these exchanges confirmed to AdExchanger that they run some first-price auctions.

For example, instead of collecting bids of $8, $5, and $3 and sending a $5.01 bid to the ad server, the exchange would send the $8 bid through, while making it clear to the buyer it was running a first-price auction.

By sending through the highest bid, the exchange has the best chance of winning against direct buys and Google AdX. But there are multiple flavors of first-price auctions in play right now, and some offer buyers and sellers more transparency than others.

Industry insiders say this trend is a prelude of things to come.

“In the next five years, the majority of auctions will move to transparent first price,” said Criteo’s EVP of global supply, Marc Grabowski.

Switching auction dynamics will unleash dramatic changes in the $32.5 billion programmatic market for buyers, ad tech companies and sellers.

Why change?

Buyers, publishers and ad tech companies who advocate a switch to first-price auctions say it’s because fair second-price auctions don’t exist anymore. SSPs have polluted them with hidden fees and manipulative auction dynamics.

Exchanges fiddle with clearing prices such that second-price auctions often close near the first price anyway. A $30 CPM bid might close at $29.99 or $28.50.

“Every exchange has some game they let you play with the auction dynamic that approximates a first-price auction,” said Eric Berry, CEO of TripleLift. “There are easy ways to plot first price vs. second price and see what shenanigans are happening.”

The tactics are widespread.

“We are seeing 25% to 30% on a daily basis closing on the first price,” said Lewis Rothkopf, GM of supply at MediaMath. “Philosophically, we are totally OK with it, as long as we know about it going in. But we see close to zero SSPs sending a first-price flag in the open auction environment.”

Many see switching to a first-price auction as the only way to start over and make programmatic auctions transparent to buyers and sellers.

A transparent first-price auction will squeeze the margins of ad tech players in the middle, and deliver more working media to the publisher. Buyers will finally know the rules of the game.

But the switch comes at a cost: It will force DSPs and buyers to change their buying strategies and build tech for a first-price auction. And with many first-price auctions still nascent and tests conducted in secret, the market is in a state of disarray and confusion, allowing opportunists to realize short-term gains at others’ expense.

Read the rest of the article on AdExchanger.

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