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Mike Solomon

Mike SolomonBy Michael Solomon

EVP, Chief Media Operations Officer

 

Advertisers are realizing that the conceptual simplicity and elegance of programmatic advertising belies a supply chain and infrastructure that are in no way simple or transparent.  Much has already been made this year about issues with brand safety, hidden tech taxes, and fraudulent activity such as “domain spoofing”.  However, several factors have conspired to call the viability of the programmatic auction itself (the engine behind the transactional component of automated ad buying) into question.  Specifically:

  1. A cash grab mentality coupled with an opaque ecosystem have rendered the second price auction (the original hallmark of the programmatic media sale) all but dead. In second price auctions, the winner (highest bidder) pays one cent more than the second-place bid.
  2. As such, many individual players (Supply Side Platforms, or SSPs) within the larger supply chain are moving to first price auctions, where the winning bid is the assessed price. However, not all of them are doing so at the same pace or to the same degree. Which is confusing.  Especially since …
  3. … The type of auction and the nuanced auction dynamics of a given SSP are not consistently made clear to buyers (and in some cases are outright misrepresented). This really limits the buyer’s ability to develop and execute bid strategies, and to just generally not get screwed.

Why do marketers need to understand something as inane and complex as the programmatic media auction?  Because the programmatic supply chain has demonstrated repeatedly that its complexity and opacity make it susceptible to exploitation.  Advertisers who spend in programmatic need to understand how their media budgets are being invested.

Second Price Programmatic Auctions Were Awesome, And Now They Suck

The automated buying and selling of display advertising impressions, was built around the second price auction.  Programmatic auctions are managed electronically by software representing the buy and sell sides, such that individual impressions are auctioned off in real time.

In theory, the “rules” of the auction are straightforward.  In a situation where a bidder wins a second price auction with a $5.00 CPM bid against a second-place bid of $4.00, the $5.00 bidder will win the auction and will pay $4.01.  This is a supremely fair.  The winning bidder doesn’t get milked by the seller for bidding considerably more than the next-highest bidder.  Buyers can build strategy around that kind of a paradigm.  They worry a little bit less about over-bidding, because their focus is bidding enough to win the auction while knowing that they won’t necessarily have to pay their entire bid.

© Jasperodus | Dreamstime

 

Which is great.  Awesome.  Except that the industry has killed the goose.  Poisoned the well.  Stepped in it.  You get the idea.  Second price auctions work great in theory.  But when the entities running the auctions start playing games, and all play different games, and the buyers don’t know which game they are playing or what the rules are for said game … then second price auctions start to suck.

What kind of games, you ask?  Often, SSPs institute “dynamic floors” on second price auctions, which essentially mean that the winning bid must pay at least the floor amount if it is greater than the second price bid.  This is supposed to protect publishers, but it also benefits the SSPs running the auctions.  Because there is limited visibility into individual auctions and because these floors are “dynamic” (meaning they can change at any time to whatever suits the SSP and are unknown to the buyer), there really is no way for individual bidders to know how badly they are being taken at any given time.  Which may be why second price auctions keep getting compared in the trade media to the proverbial “black box”.

But wait!  That’s not all.  In addition to charging publishers a disclosed fee for participation in auctions, SSPs often make money from the buy side, as well.  Publishers don’t know the actual price paid by the Demand Side Platform (DSP) which represents the buy side.  An SSP might underreport the clearing price of an impression to the publisher, pocketing the difference as a “fee” from the DSP.  Likewise, buyers often don’t have any idea how much is being passed on to the publisher.  DSPs also have no visibility into competing bids for an auction, and buyers have long wondered whether SSPs ever inflate winning bids by putting forth their own fake bids during the auction to drive up the second price.  In still other cases “bidding fees” or “buyer fees” have been employed, in which an undisclosed percentage set by the exchange is added to the second highest bid (essentially adding that amount to the price paid by the winning bid).  As some have observed, fair second price programmatic auctions no longer exist.

This gamesmanship really is the single biggest problem with second price auctions, particularly from the buy-side perspective.  Other disadvantages have been identified as well, however.  For example, in “header bidding”, where a seller can programmatically evaluate multiple types of potential buyers before deciding where sell, a second-price auction has the potential of masking the best buyer.  If individual exchanges bid into the auction based on each of their second price winners, there is no visibility by the seller into the other bids from each exchange, which can negatively affect their yields.  Others have pointed to the ability to “game the system” in second price auctions by executing bidding strategies to learn what competing bidders are willing to pay (although this is to some extent what the aforementioned “dynamic floors” are supposedly in place to prevent).

Mystery Mix-and-Match Auction Dynamics Suck Even More

Many in the industry have concluded that various industry players have polluted the second price auction irreparably, if indeed it ever was executed as fairly as some assumed.  The rise in header bidding has further complicated matters, as multiple exchanges (with varying auction rules) may be competing for the same inventory.  As such, most agree that the best path forward is to shift the ecosystem to first price auctions, where the highest bid wins, and pays that winning bid amount.  This would seem simple enough, and clearly appears to be the direction that things are headed.  However, in the meantime the only consistency in auction dynamics seems to be the lack of transparency and clarity inherent in the process.

© Jirikabele | Dreamstime

 

The major exchanges/SSPs are all moving towards first price auctions, but not to the same degree or on the same schedule.  Some are in various stages of experimentation.  It becomes extremely difficult for buyers to develop and execute bid strategies when programmatic auction rules are inconsistent.  The strategy for first vs. second price auctions is not going to be the same, and buyers need to know what they are dealing with.  What makes matters worse is not just the lack of consistency but the outright lack of clarity into the type of auction and the auction dynamics.

And this is not necessarily accidental.  Cases have been repeatedly documented where the various ad tech vendors between buyer and seller leverage the lack of transparency to improve margins.  One such documented practice involves a DSP communicating to the buyer that the auction is first price, then executing and winning on second price, and splitting the additional spread between itself and the various other programmatic platforms participating in the transaction.  Nice.

The Interactive Advertising Bureau has recently introduced an updated OpenRTB (real-time bidding) 3.0 framework which among other things would improve protocols for communicating the type of auction and other auction dynamics to potential buyers.  The OpenRTB 3.0 framework is the largest overhaul of the open auction protocol since its conception in 2010, and is in the public comment phase through December 15, 2017.  In theory, this should be helpful, but buyers have repeatedly noted situations where existing fields to communicate this kind of information are incomplete or outright misrepresentations of the auction type and dynamics.  In order for this communication to be effective, it has to be used consistently, and the parties have to be honest and transparent.  The framework for this communication already existed in the current version of the framework, but was rarely being used.

Unfortunately, Not Everyone Is On The Same Timetable

Clearly, what needs to happen is for the industry to move completely to transparent first price auctions, where the dynamics are clear and each player’s fees are evident.  There has appropriately been a great deal of focus on transparency on the buy side in programmatic (agencies, DSPs, etc.).  However, there must be transparency throughout the entire supply chain, including the entities executing the auctions.

Certain players in the ecosystem will not benefit – and indeed may suffer – from increased consistency and fee transparency.  Thus, as you might expect not all players are approaching this issue with the same sense of urgency.  Some entities benefit from this lack of transparency into programmatic auctions and pricing dynamics, and thus may have little motivation to change it.  The current environment is costing money to advertisers in a couple of key ways.  First off, their buyers (agency or in house) cannot bid as effectively if they don’t have transparency into auction dynamics.  And second, they are being charged fees that they can’t quantify or analyze individually for ROI.  Regardless of your KPI metric(s), if you don’t have visibility into your cost structure then you can’t analyze all of the variables.

Just a few weeks ago, a group of SSPs announced that they will provide data in the bid request (again, a variable that has been available in the IAB OpenRTB protocol for some 5 years and which has been largely ignored) to tell buyers what kind of auction they are participating in.  Very considerate of them.  Buyers were cautiously optimistic, pointing out that until DSPs integrate the new information into their systems, buyers will not be able to do anything with it.

We have seen over the past year how pressure from the buy side (think P&G) can make a real difference in moving important supply chain dynamics forward.  This is what needs to happen here, as well, which is why advertisers must be aware of this issue.  Clients need to aggressively push for as much transparency as possible into individual vendor agreements and into their own programmatic data (individual log files, etc.) so that they can gain insight into these issues.  Further, they need to apply pressure to the sell side (i.e. publishers) to push SSPs for full transparency and added consistency in programmatic auction dynamics, and an immediate and complete move to first price auctions.  Time is of the essence, because this opacity and uncertainty are costing advertisers money and negatively impacting their effectiveness, which really does suck.

 

If you liked this post, you might also enjoy “Can the Ad Industry Come Together To Fix Programmatic?

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Media Watchdog