A little bit of context
Google announced a few weeks ago their move from a second-price to a unified first-price auction.
First, Google will shift to first-price auctions for display and video inventory sold through Google Ad Manager, its publisher exchange and ad server, by the end of 2019. This does not impact auctions for Search, YouTube, AdSense, Search or other Google property inventory. Display & Video 360 (previously known as DBM) advertisers won’t need to make any changes.
Google will also run a single, unified auction and remove their last look.
6 Key points you should know about this move
1- What does First Price auction mean?
As a reminder, in a first price auction, buyers pay the price they bid. Whereas in a second price auction, the winner pays the price bid by the second highest bid + one cent. So in a second-price auction, if two buyers bid $10 and $15, respectively, the buyer who bid $15 will win but will only pay $10.01.
2- How exactly this will impact the ecosystem?
Many SSPs already moved to first price auction and all DSPs are able to bid at a 1st price, even though not all have specific algorithms for this. If the DSP is 1st price ready, it will adapt really quickly. If the DSP is not 1st price ready, it will have to test and learn progressively, bid after bid.
Everyone seems to agree that first-price auctions will lead to an increase in CPM, temporarily, until all DSPs adapt their bidding strategy and bring the CPMs back down.
Programmatic Guaranteed will also benefit from Google’s move to 1st price. Publishers will have to develop closer relationships with brands and agencies if they don’t want to risk overpaying in first-price environments. Programmatic guaranteed offers a win-win alternative for advertisers who need efficiency.
3- How will buyers adapt
When the market moves from 2nd to 1st price, buyers have to adapt to maintain their margin.
When buyers bid in a second price auction, they try to evaluate the true value for each auction. Why? Because in this case, they will pay the price of the second best bid + one cent.
When buyers bid in a first price auction, they won’t bid the true value. Why? Because they will pay the price they bid — and in this case, if they bid the true value they will make no profit. In a first price auction, buyers have to bid below the true value of the impression. This means buyers will have to test and learn to be able to find the right mix between their win rate and their margin. In other words, they’ll have to practice “bid shading”.
4- But what is bid shading?
Following this move from 2nd to 1st price auctions, DSPs have begun a practice called bid shading to get the lowest winning bid price.
With bid shading, DSPs reduce their bid as much as possible to maximize their margin without impacting their win rate. To prevent them from this new practice and a CPM that’s too low, advertisers have started to set floor rates.
This feature is now available in many DSPs and will become more popular due to the move from 2nd price to 1st price auctions.
How does it work? The DSP will analyze all the historical information logged on bids. It will then calculate the bid so that it sits between what the first and second bids would be.
These bid shading algorithms also take site, ad size, exchange, and competitive dynamics into consideration when determining where to set the bid. If win rates decrease, they’ll raise the price they pay.
It’s important to note that bid shading has some drawbacks, and some advertisers consider it a temporary “dirty” fix to use while they improve their knowledge about the best way to bid in a 1st price auction environment.
5- But does bid shading offer real transparency?
Important questions remain around the transparency of first-price auctions and bid shading. Google claims that first-price and unified auction will bring better transparency.
However, bid shading uses black box algorithms to lower bids. And even for buyers, these tools are not really transparent. DSPs don’t disclose how much they might be benefiting from the margin they take from bid shading.
And as mentioned above, some advertisers might consider this a “dirty” fix, or temporary solution to use while they accelerate their learning curves on the subject.
6- Will Google’s unified, first-price auction kill header bidding?
The underlying question is now that Google will allow all buyers to compete in a unified auction, what happens to header bidding?
In our opinion, header bidding will continue despite Google’s unified first-price auction.
Header bidding allows a publisher to take back control over their inventory by managing both their revenues from Google and the fees in their wrappers.
Some publishers might be concerned that Google’s unified first price auction mechanism will still provide an advantage to Google, and Google has yet to provide enough proof points to establish their transparency. And advertisers might think they won’t have enough control. Lack of transparency will remain a big concern regarding Google’s dynamic allocation and they will still continue to use header bidding.
In addition, it seems as though EBDA and header bidding are acting in a complementary fashion. (In some cases, if both mechanisms are plugged into the same placement, EBDA will fill an impression rather than header bidding.) Moreover, the CPMs are different, and some publishers have even seen revenue uplifts of +10%, so certain SSPs might recommend maintaining Client-side Header Bidding even if the inventory is available through Google Exchange.
All publishers agree that competition and bid density have a positive effect on eCPM, and this remains true even in a 1st price environment.
Higher Cookie sync matching rates is another strong argument to support client-side header bidding.
With this move to 1st price, the strategy should differ from that used in second price auctions. Publishers will have to make careful adjustments to their flooring strategies. At Smart, we help publishers protect themselves from bid shading and advise them to set a minimum floor price to guarantee to maintain a minimum value of their inventory.