The second-price auction played a starring role in making programmatic a $48 billion industry, but Google’s first-price switch means the model could be facing its final curtain call. After years of issues caused by header bidding and sequential auctions, Google has moved away from second-price auctions to increase transparency.
Here is what publishers need to know about Google’s switch to first-price auctions and how it impacts their business.
From Second to First: Google Sets a New Tone
Although second price — which sees winners pay the price of the second highest bid, plus one cent — has long powered programmatic, its utility has steadily declined. In the early days, it helped ensure impressions achieved their true value; buyers competed in one auction, placed bids according to their actual threshold, and paid a fair price. When the rise of header bidding popularized sequential auctions, however, things changed.
For publishers, it provided opportunities to drive yield by offering impressions to multiple supply-side platforms (SSPs), ranked by preference, as well as control over partners. But this meant advertisers could lose impressions in later auctions, even if they won the first round, and fueled underhand tactics among some SSPs. The most infamous being mislabeling auctions so buyers who thought they were bidding second price would end up paying the full first price — a trend that led buyers to limit risk by lowering bids.
All this drove the initial first-price conversion that has culminated in Google’s transition. By embracing a model where impressions go to the highest bidder — who pays the full bidding price — Google has joined the wider movement towards better transparency. But the effects of its decision on the industry as a whole will be a tangled mix of positive and negative.
Industry Impact: The Good
The greatest benefit of the first-price switchover is certainty. On the buy side, advertisers will know exactly what kind of auction they are in and the price they will pay. Plus, there will be reduced scope for auction deception.
On the publisher side, there will be a chance to realize the original second-price vision: advertisers bidding what they feel impressions are worth, not the lowest price they think can win. Additionally, starting off from a higher bid price means cost per thousand impressions (CPM) rates and competition will grow, as will publisher ad revenue. That’s not to mention the fact Google will also give up its last look advantage and therefore its ultimate pick of ads and power to capitalize on undervalued impressions.
And The Bad?
Google is a business, so it follows that operational changes have a business advantage. As first price sends Ad Manager CPMs higher, the exchange will increase in worth for publishers while the value of other platforms and trading mechanisms stays static. For example, a hike in Google’s auction prices will narrow the difference between its CPMs and those driven by header bidding, meaning there is less to be gained by selling inventory with multiple header auctions.
From Google’s perspective, this is wholly positive; it will win more auctions and expand its already vast market share. For publishers, the consequences are more complex. On one hand, it will negate the need for convoluted yield optimization. But on the other, it will mean significantly diminished choice and control over partner selection.
Then we come to price. Because demand side platforms (DSPs) were created in a second-price world, algorithms and strategies are tuned for one way of trading: bidding higher to win, safe in the knowledge they are unlikely to reach their maximum price. So publishers will likely see yield soar. Yet as advertisers and agencies adjust, they will likely change tack through underbidding, direct deals with set rates, or bid shading — where a compromise on price is reached with sellers after auctions if a buyer has overpaid. In short, there might be an initial spike in revenue, but publishers shouldn’t expect it to last.
The Future Is First-Priced – But Is It First Class?
It goes without saying that Google carries serious weight in ad land. So, while it isn’t the first programmatic player to embrace first-price, the reconfiguration of its auction processes will play a huge part in altering how ads are bought and sold, and potentially pulling that final curtain on second-price. That said, the industry isn’t headed for an overnight revolution.
Google has announced the transfer will be staggered, initially applying to display and video only – not YouTube, AdSense, or search. And publishers can choose how they adapt. After the first-price transformation, success will depend on two key factors. Primarily, advertisers will be more focused on achieving optimal value for their ad spend, so survival will mean offering the best quality inventory. Secondarily, publishers can decide to limit Google dependence by continuing to sell through a varied group of premium programmatic partners.
In recent years, the intricacy of programmatic has made it difficult to ensure impressions are fairly priced and traded. By making a transparent model the norm, Google might just be showing the way toward better understanding and value for all.