by Jen Lee, VP Programmatic Strategy at TripleLift
First price auctions, where the highest eligible bid wins at the price of the bid (minus the supply side's fee), have grown significantly in prominence. We’ve seen major exchanges like Index Exchange, Rubicon Project, and OpenX move entirely to first price or at least experiment with a blend of first and second.
While there are many benefits of moving to a first price auction, such as pricing transparency, more revenue to publishers, and a congruence with the notion that the header is a subsequent auction, this can be problematic and confusing for programmatic buyers until every exchange is consistently on first price. Consistent, in this case, means that the exchange accurately signals a first price auction every time and this is clearly represented to the buyer so they can make an informed decision. However, currently, some exchanges offer both first and second price auctions and don’t always accurately flag this to the DSP. (TripleLift consistently and accurately discloses the auction type). While the SSP/exchange may pass the information - and the DSP may even consume it - the actual buyer in the DSP may not receive the information in an actionable manner.
To make truly informed decisions, buyers need to know if the impressions they’re bidding on are header bidding impressions, as well as whether the impression is first-, second- or some hybrid auction dynamic. If the industry is going to move entirely towards a first price world, a few things need to start happening.
First, DSPs need to start making the auction type information directly available to the buyers. This transparency is generally not readily available in the DSP UI, buyers are taking it upon themselves to inquire with each exchange partner, one by one. With this information, buyers can start to make an informed decision, either deciding to opt out of all first price auctions for the time being or setting up their campaigns with different bidding strategies depending on the exchange. This becomes an operational nightmare, in which numerous effectively-redundant line items and bid strategies are defined on an exchange basis, where buyers need to stay on top of which exchanges are actually first versus second, and where exchanges may change from time to time - even on a per-publisher basis.
Second, programmatic traders need to be re-trained and learn how to optimize in a first price world. Years ago, traders primarily monitored if average clearing CPMs went up or down 20-30 cents. There was always the safety net of price reducing and not paying $90 for an impression, regardless of the bid. In a world where at least some inventory is first price, however, traders have to be more aware of what they are willing to pay and better understand the value of each impression. Because bid prices can swing more drastically in a first price world, traders may need to change bids much more frequently – possibly multiple times a day. This increased volatility can result in over paying or risk under delivery if not monitored properly. It also means price discovery may start from low bids to see the price at which there is significant delivery, as opposed to high bids (which, in turn, means that there may be more delivery on lower-price less-premium inventory if consistent bid strategies are used).
Finally, given the more manual bid optimizations mentioned above, DSPs will have to re-visit their algorithms as many of them have built their bidder logic for a second price world. A DSP now has to be much more precise in determining the optimal value of a bid, and bid roughly that amount. Meaning there is little room for error in determining what impressions may drive a conversion that meets the buyer’s goal without overpaying. Today, DSPs each tout their own secret sauce. In a world where everything is first price, DSPs with far superior algorithms will be more readily identified, and will rise to the top.