Google Ad Manager Moving to First-Price Auction
A few weeks ago, advertisers around the world were disappointed to hear that Google is moving its publisher exchange, Google Ad Manager, from a second-price auction to a first-price auction. Google Ad Manager, formerly AdX and DoubleClick For Publishers, is Google’s advertising exchange, where real-time bidding for impressions takes place.
This move will cause huge repercussions across the programmatic buying landscape as it will inevitably affect traders, advertisers, and rival exchanges. The move from second-price to first-price has been a developing trend plaguing the programmatic industry over the last year, with Google being the most significant player to remain completely second-price, until now.
The difference between the two types of auctions is quite significant. In a second-price auction, the winning advertiser only pays $0.01 more than the second-highest bidder. If an advertiser bids a $10 CPM for an impression, and the next-highest bidder only bids a $3.50 CPM for that impression, the first advertiser would clear at a $3.51 CPM. This type of auction is beneficial for advertisers because it involves less price strategizing, and allows traders to bid high but doesn’t cause CPMs to skyrocket. However, publishers naturally prefer first-price auctions, which is where you pay what you bid which results in higher profits for the publisher. In the previous scenario, the first advertiser would pay a $10 CPM for that impression, regardless of what the second-highest bidder bid.
As more exchanges shifted to first-price, CPMs across verticals rose steadily; first starting in early 2018. eMarketer reported a 37.5% increase in the percent of impressions sold on first-price auctions from December 2017 to March 2018, and the trend continued through the remainder of 2018. The shift has led to more price strategizing for bidding in the programmatic space, or bidding differently between the two exchange types, but only if that information is known to the trader. However, the majority of exchanges are not transparent in how much of its business is conducted in first-price auctions, thus the rising CPMs across the board.
Traders and advertisers typically turn to their DSP to provide transparency in auction dynamics from advertising exchanges when faced with a lack thereof from the exchanges themselves. Of course, this is complicated even further when Google’s lack of transparency is factored in. Other PMG DSP partners have provided readouts of impressions served on first-price vs. second-price auctions and the costs associated, but Google’s Display & Video 360 DSP has generally remained a black box in this area.
With the shifting of auction dynamics, the lack of transparency will become an even bigger issue. Many DSPs have rolled out technology called bid shading, where the DSP will see whether the auction is first- or second-price in the bid request then dynamically lower the bid if it is a first-price auction. With Google being the last major second-price player, there will not be as big of a use for this technology as bid shading will be less of a differentiator in DSPs.
Another aspect of this development that is causing massive reverberations across the industry is that the Google Ad Manager shift to first-price will happen at the end of 2019. This means that Google’s switch from second-price to first-price will take place during Q4 which is already a time when advertisers see rising CPMs, and will certainly cause the holiday season to be even more competitive and costly.
Some good news that has come from this is that Google’s power of “last look” will be sunset, as that feature is not compatible with first-price auctions. Currently, in any auction that takes place on Google Ad Manager, Google has the power to take a “last look” at the winning bid and pay a penny more, allowing more favorable rates for advertisers who use the Display & Video 360 or Google Display Ads DSPs. With the transition to a first-price auction, this power will cease and the playing field will even out.
Google’s decision to move to a first-price auction is also impacting several rival advertising exchanges. Programmatic Supervisor Steve So hypothesizes that Google Ad Manager’s announcement to join the other major exchanges in a first-price auction model by the end of 2019 “could mean the end for header bidding as price support and last look no longer matter.”
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Advertising exchanges will rely heavily upon Google’s own container solution (exchange bidding) to maintain market share, but with the first-price auction now balancing the scales, we should start to see Google’s share further increase. While the announcement is new and the industry is still figuring out what exactly the effects of this shift will be, the consensus is clear: this is the final nail in the coffin for second-price auctions, and certainly solidifies that first-price auctions are here to stay.
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