Second-price auctions have long been the industry norm in programmatic advertising. Now in a big move, Google has announced that its Ad Manager suite of products will be transitioning to the first-price auction model by the end of this year. Google’s decision comes amid growing voices in the ad tech industry calling for simplicity and transparency.
A number of ad exchanges, including OpenX and Rubicon Project have started offering more straightforward auction practices, now Google’s jump into the foray indicates a tipping point.
For the uninitiated, second-price auctions mimic how selling works on eBay, meaning that the winning bidder pays one cent more than the bid made by the second-highest bidder. In contrast, in first-price auctions, the winning bidder pays the exact bid they made. You can learn more about the difference between first- and second-price auctions here.
For brands and marketers, second-price auctions work out to be a better deal because the blow from having to paying the highest bid is cushioned. On the publisher side, it typically leads to the ad inventory being undervalued. For both buy- and sell-side though, the second-price auction adds layers of complexity, as SSPs and DSPs compete to create bidding algorithms and techniques to optimize the buying and selling process.
Reducing complexity is one of the things Google hopes to achieve by moving to the first-price auction model. “In order to help simplify programmatic for our partners, in the coming months we’ll start to transition publisher inventory to a unified first price auction for Google Ad Manager,” says Sam Cox, Group Product Manager at Google in a blog post. “We expect the transition to be complete by the end of this year. By switching to a single first price auction, we can help reduce complexity and create a fair and transparent market for everyone.”
Publishers are initially expected to see a jump in ad revenue. Once buyers adjust their bids according to the value of impressions under the new auction model, that revenue jump is expected to return to the baseline. “With this change, every offer from programmatic buyers will compete in the same unified auction, alongside inventory which is directly negotiated with advertisers. An advertising buyer’s bid will not be shared with another buyer before the auction or be able to set the price for another buyer. The buyer that wins the auction pays the price they bid. By simplifying our auction in Ad Manager, we can help make it easier for publishers and app developers to manage and get fair value for their inventory,” Cox added.
So, apart from helping reduce complexity in ad tech, what’s in it for Google? “The shift to first-price auctions will improve an already dominant position for Google as their win rates rise,” Shubham Grover, Product Specialist at AdPushup says. “This will also make header bidding less effective and generate good PR for Google. Publishers can expect increased yield initially, followed by DSP’s optimizing their algorithms for bid shading.”
The shift towards first-price auctions has led to practices such as bid shading, which is a compromise between SSPs and DSPs in case the winning bid is too high. For instance, let’s say the winning bid is $10 and the second highest bid is $4—someone is clearly losing money. Practices like bid shading indicate that DSPs are not yet ready for first-price auctions.
This is why Google will introduce the update gradually so all affected parties have the time to adjust to the move. “Since the change from second to first price will require both buyers and sellers to make changes in their programmatic strategies, we’ll give everyone time to prepare over the next few months before we start testing,” the blog post about the update stated.
It’s also important to note that Google’s move to a single unified first price auction only impacts display and video inventory sold via Ad Manager. This change will have no impact on auctions for ads on Google Search, AdSense for Search, YouTube, and other Google properties, and advertisers using Google Ads or Display & Video 360 do not need to take any action.