Google Announces Shift to First-Price Auctions
Google Ad Manager (formerly DFP) has announced a move to a unified first-price auction for programmatic display media buys. All bids will now happen in unison (in one auction) and the highest price will be paid regardless of bidder.
It’s important to note that several other commonly used ad exchanges including Rubicon Project, OpenX and Index Exchange already use first-price auction mechanics.
Impact of Google’s Move to a First-Price Auction Format
Google will be shifting to first-price auctions for Google Ad Manager (formerly DART for Publishers), an Ad Server/SSP that publishers use to manage and optimize their yield. This also affects display and video auctions on Google AdX, Google’s ad exchange where publishers can make their inventory available for purchase on the open exchange for exchange buyers. The change will have no impact on auctions for ads on Google Search, AdSense for Search and YouTube.
Timing and Transition Schedule
Google initially announced plans to transition to unified first-price auctions for Google Ad Manager in March of this year. In a blog post published on September 5, Jason Bigler, Director of Product Management at Google, officially announced the full roll-out of first-price auctions to all partners using Google Ad Manager, with the expectation to complete the transition by the end of September 2019.
First-Price Auctions for Google Ad Manager: Under the Hood
To understand how this change will impact current media, let’s review the details of the current programmatic ecosystem.
Publishers work with one or more SSPs (Supply Side Platform) partners to make their inventory available. On the other side, advertisers buy inventory through an ad network (i.e. Google Ads) and/or a DSP (Demand Side Platform) like DV360, The Trade Desk, Verizon Ads/ Oath/BrightRoll, Amazon, Dataxu, etc.
Publishers may hold multiple auctions where an ad can pass through a mix of auctions with different rules. Currently, Google Ad Manager runs both first and second price ad auctions where a bid can go through both a second price auction, followed by a first price auction.
What Are Second-Price Auctions?
A second-price auction is where the winning bid pays 1 cent more than the second-highest bid. For example, if advertiser A bids $10, advertiser B bids $4, and advertiser C bids $5, advertiser A will win the bid and pay $5.01.
What Are First-Price Auctions?
The winner of the initial second-priced auction may also enter into a first-priced auction, which may include other campaigns (like a publisher’s guaranteed and non-guaranteed advertising campaigns). This first-price auction functions like a real-world auction where the highest price bid is the final sale price. So, if the second price auction winning bid enters at $5.01 and the other bidders enter with $7 and $9 bids, the $9 bid would win. Even though the original $10 bid from Google Ads in the second-price auction won there, it’s adjusted down after outbidding the second-highest bidder by one cent.
All bids will now happen in unison (in one auction) and the highest price will be paid regardless of bidder. Using the example from the graphic above:
- Google Ads bid at $10, DSP bid at $5, non-guaranteed advertiser deals at $7 and $9 bids.
- Since all are running in unison, the highest bid is $10, so the Google Ads bid would now be $10.
The Search Agency’s Utilization of CPM Bidding
The Search Agency’s Display team is rarely bidding on flat CPM rates on any of our buying platforms – rather, we choose to adopt machine learning and algorithmically-informed dynamic bidding where we select a CPC, CPA, ROAS-based bidding strategy. When bidding on a CPM basis – for example, a $5 CPM, we’d generally aim for a blended CPM, so the bidder might sometimes bid $20 CPM and other times bid $0.50 CPM with the target of achieving a $5 CPM over the course of the campaign (unless we were using a completely fixed CPM model).
With the change, our bidding technology needs to recognize first-price versus second-price auctions and incorporate that into the CPC/CPA/ROAS bid strategy to bid in an appropriate manner based on the predicted outcome of that impression purchase.
What Google’s Move to a Unified First-Price Auction Means for the Industry
While Auction Dynamics may become a more prominent factor in the programmatic media buying ecosystem going forward, it’s only one factor among many. Aside from that, here are some highlights and changes we’ll need to make as an industry:
- Publishers will need to be transparent with auction model being used. Publishers must indicate which auction type they are using. Note that this does not just apply to Google’s Ad Exchange, but each Ad Exchange adopts different auction dynamics with many shifting to first-price.
- Algorithms/bidding strategies will need to accommodate the auction changes. Once the auction type is exposed, it allows our technology partners to know whether to use first-price or second-price bidding logic (do you bid $10 so you pay $5.01 or do you bid $5.01 to win?). Otherwise, we run the risk of severely over or under-bidding. Many DSPs utilize bid shading to help reduce and optimally price bids so advertiser don’t overpay in the first-price auctions.
- Greater transparency around bids for advertisers. With the changes, winning bid information will be shared back to buyers to inform future valuation of the inventory.
- Better inventory valuation for Publishers. A more simplified auction allows publishers to simplify their yield optimization configurations, ensures they will always be paid the highest price bid, and allows them to focus more time on improving and optimizing the quality of their inventory.