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What is Supply-Path Optimization?

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Header bidding was supposed to solve the problem of complexity in ad operations. As the adoption picked up pace however, SSPs (short for supply-side platforms, software used by publishers to sell ads) began altering their algorithms and employing aggressive auction tactics to increase yield. This works out well for the SSPs and even publishers, at least in the short term. But in the long run, everyone loses.

Gaming the Auctions

Most larger publishers now use multiple SSPs to manage their ad inventory, and as with middlemen in most other businesses, SSPs will try to prioritise their own personal gains over anyone else’s—including other SSPs, advertisers, even publishers.

How are they gaming the system?

Second-price auction has long been the default standard for RTB auctions, in it, every bidder is asked to submit the maximum amount of money that they’re willing to pay for an impression, the winner then pays the second-highest bid that was collected plus a minimum increment. What are the advantages? First, speed, unlike a real world auction, there’s no time for bidders to outbid each other while the user waits for the ad to load, so the auction is set up for speed by design. Second, fairness, in terms of finding the optimal outcome for both the buyer and the seller.

What a few SSPs have been doing is switching their auction logic to first-price, thereby snatching the bid from competing SSPs, albeit at a higher price.

You might think that all SSPs are running second-price auctions, but you would be incorrect. The second-price auction is a well-understood auction model that lets buyers bid the true value. In reality, every SSP has its own logic — second-price, first-price or other formats — for how it submits bids into a publisher’s ad server. As Jason Fairchild, chief revenue officer for ad exchange OpenX, described, a mix of multiple auction models is a problem and the root cause is header-bidding proliferation.

Via AdExchanger

This works for publishers because they get the maximum value for their impression and for the SSP because they get a cut for every impression; it’s the advertiser that initially bears the brunt, noticing that their spend on one domain is much higher than the others for the same number of impressions.

In one sense, even with header bidding, we’re back to square one. Obviously, this can’t last.

How the Industry is Fighting Back

Sooner or later, a human or an algorithm on the demand-side will notice the discrepancy and either cut off the publisher or at least significantly reduce their spend on them.

That’s when things get difficult for the publishers, and in most cases, they don’t even know why it’s happening to them—the SSP never told them about the underhanded tactics being employed.

Brian O’Kelley, CEO of AppNexus, first explored this problem in detail last year and suggested a few things that both publishers and advertisers could do in order to fix it, coining the term “supply-path optimization” in the process.

Over the past couple of months, the Advertiser Technology Group (ATG) team at AppNexus has experimented with penalizing SSPs that operate non-second-price auctions, which we call “Supply Path Optimization”. Note that AppNexus has a separate Publisher Technology Group, responsible for our SSP and full-stack ad serving solutions, and we apply the same logic to our own SSP.

He also provides important recommendations for publishers and advertisers:

Publishers

  • Just because an SSP spends the most money doesn’t mean they’re doing the best job representing your interests.
  • Keep your header bidding wrapper separate from the header bidders. Use an open source solution like prebid.js or the Index Wrapper that doesn’t play games with auction dynamics.

Advertisers

  • Be aggressive about finding the best path to supply. This is challenging, and likely requires using a DSP with built-in supply path optimization
  • Treat SSPs as pipes, not as media companies. If an SSP sends salespeople to your office, be very concerned.

AppNexus is not the only one that’s been working on solving this problem though. UK-based ad tech company Iponweb has created a product called BidSwitch that monitors activity between buyers and sellers to ensure trading efficiency, they’re just starting to run tests for supply-path optimization.

More recently, as stakeholders become more aware about the problem and its implications, DSPs have threatened to cut off SSPs who don’t clean up their act, which is the appropriate response, as both advertisers and publishers will regain their trust in each other, while bad players get penalised.

Demand-side platforms (DSPs) are putting pressure on supply-side platforms (SSPs) to improve inventory quality and cut out the games that pad the second-price auction.

DSPs are being more aggressive in blocking supply sources until they clean up.

The pressure could force the ecosystem to grow up. While DSPs aren’t coordinating their actions, exchanges cut off from multiple buyers will suffer. Players with bad inventory and high fees will see buyer demand evaporate, creating a cleaner, more transparent marketplace.

Converging factors are prompting the cleanup: marketer pressure, header bidding and rising costs.

via AdExchanger

If you’re rolling your eyes at supply-path optimization being yet another buzzword, consider this: Sure, ad tech is complex. Why? My favourite explanation comes from Michael Driscoll, CEO of Metamarkets:

The world of ad tech processes about 400 billion transaction-like events per day, while the New York Stock Exchange processes a puny six billion trades; and programmatic ad trades use up to 100 data fields each, while a stock trade only has ten (you know, bid price, ticker symbol, etc.).

As the tech backbone supporting an almost $200 billion digital ad industry, ad tech has its own jargon much like Wall Street and some really smart people working for it: This makes it similarly vulnerable to insiders trying to peg the game in their favour.

Supply-path optimization is just another attempt to create additional checks and balances between the buy and sell sides to promote greater transparency for everybody involved.