Under a plan announced Wednesday, Google Ad Manager, previously known as Adx, will move to a first-price auction, a significant shift that will resonate across the $48 billion programmatic landscape.
"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," Google stated in a blog post.
Google previously operated on a second-price auction model, which generally speaking, is similar to winning something on eBay. For example, if the highest bidder bid $5 for an ad, and the second highest bidder bid $3 for the same ad, then the highest bidder would pay $3.01 — just a smidge more than the second highest bid. Now, however, what someone bids is what they pay. Because Google is so critical to how digital ads are bought and sold, the implications of the change will be felt across the industry.
Marketers were raised on second price auction dynamics and they have gotten used to it as digital advertising has risen to prominence. But Google's shift to the first-price approach means they'll now be at a disadvantage because demand side platforms, which are used by marketers to buy ads, were designed and optimized to operate in a second price world. So marketers will adapt their tactics, according to industry executives.
"Publishers are going to see a short-term increase with their revenue," according to one publishing executive who was briefed on the change, but asked to remain anonymous. "Once buyers realize the value of an impression, that is when [publishers] are going to see that revenue drop."
Michael Connolly, CEO of Sonobi, an ad tech platform used exclusively by publishers, says "the challenge here is the demand side is not set up to bid this way." He adds: "Demand side platforms have invested a lot of money in algorithms and machine learning to figure out bidding strategies that fit in a second price environment. To switch it to first price will require some adjustment."
Many supply side platforms had already adopted first price auction mechanics, but Google remained on the sidelines, perhaps to see how things played out.
"This is a dramatic messaging pivot by Google," one high-level ad tech executive, who asked to remain anonymous to protect industry relationships, says. "Google overall has been a staunch supporter of second price since forever. But this is validation that the rest of the market was right to make the pivot to first price as it's necessary given the dynamics of programmatic."
The move will likely be welcomed by publishers that have long desired more transparency from Google. Under its new model, Adx will no longer have the advantage of getting a last look on any given ad, which previously allowed it to cherry pick undervalued inventory and sell at a premium to marketers, for example.
Google says it will gradually introduce the update. "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 stated.
The company added: "It's important to note that our 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."
Second price auctions were set on a base of assumptions that imperfectly applied to digital media. First price, however, forces a buyer to bid what they are willing to pay — but what if they overpay?
That's where tactics such as "bid shading" come into play. In short, bid shading is a compromise between the buyer and seller that helps soften the blow when it comes to overpaying. For example: If the winning bid was $10, and the second highest bid was $4, someone clearly overpaid.
Bid shading is an agreement between the supply side platforms and demand side platforms that meet somewhere in the middle. In the example above, a reconcilliation would occur after the transaction in which the buyer would ultimately pay $7, or somewhere in the middle.
"I believe bid shading exists because the demand side platforms are not ready to go to a first price auction," Sonobi's Connolly says. "This is already happening a lot, but my guess is we're going to see a lot more of it."