Winners And Losers In First-Price Auctions

Between ad fraud, brand safety and transparency, the digital advertising industry had a tough 2017. And now that the conversation about fixing these problems and cleaning up the supply chain has hit critical mass, 2018 is sure to bring new developments and approaches to delivering greater visibility into where ad spend is going and whether or not it’s working.

One of the big complaints about programmatic is that it’s difficult to understand the true value of an impression. Historically, exchanges have been based on second-price auctions, where the buyer often pays far less than what they were willing to pay. The publisher “loses” the difference between the high bid and amount paid.

In first-price auctions, on the other hand, the winning bid is the amount paid. The publisher seems to come out on top, and one could view the end cost as the true indicator of an impression’s worth. This added bit of visibility has led some to herald first-price as the route to transparency. It is not, however, a win-win game.

At the outset, publishers look like the winners of the first-price auction game. Over time, however, the forces of auction dynamics come into play. Bidders, who get little visibility into who sets the bid direction or is in control, may dramatically reduce their bids to test price elasticity, and the publisher ultimately loses.

And there’s another potential loser in the first-price model: the ad tech vendors in the middle of the transactions. Because the fees, often referred to as the “tech tax,” are disclosed, they can find themselves in a race-to-the-bottom price war in competition for agency and brand business. So they lose, and so too may the brands and agencies that rely on these vendors, since the lower markup for vendors may lead to corner cutting on quality and expertise, which could leave more exposure to ad fraud.

If matters weren’t complex enough, advertisers don’t always have enough visibility into the process to know for sure whether they’re bidding in a first- or second-price auction. As a result, they can’t properly develop a strategy that will optimize their media spend, and again, they lose.

Now, if everything were a first-price auction, there would be more transparency and a better likelihood of achieving that sweet spot of true value. But that brings up another issue: supply and demand.

If buyers feel like they’re being scammed, paying higher-than-necessary prices in the exchange, they may give up on programmatic and shift their spend to more “walled gardens,” but that is no guarantee of lower prices. Demand in the open market is then reduced, which then makes prices drop, and ultimately pushes publishers demand and prices lower.

Inside the walled gardens, there are some interesting developments, that may be a foundation for the next evolution of bidding. Facebook’s auction mechanism is an iteration of the second-price model that brings the consumer into the equation. An advertiser only wins the placement of an ad if it actually is the most relevant. With this model, the buyer knows the cost and what the ad is worth. Google, which had previously been using the generalized, second-price auction model, has followed suit. If the industry moves in this direction as a whole, it could ultimately be a win, win with an extra win for the consumer, who gets more relevant advertising.

The issues are deep and complex. But if we can make access to transparent, comparable analytics easier and enable buyers to act and react real time, it’s a step in the right direction. In the end, we need to give buyers the opportunity to adjust their strategies to allow for relevant ads to win while publishers get a fair price, based on their ability to meet the performance goals of the client, closing the gap between winners and losers once and for all.

Originally published in The Marketing Insider

There’s More To Transparency Than Meets The Eye

Concerns over murky industry practices were simmering long before the ANA’s damning report on the lack of transparency across the advertising ecosystem, but it’s hard to overstate how much that bombshell mobilized the conversation when it was released last summer. This year, “transparency” is everywhere as an industry buzzword. Every company is implicated and, in an effort to jump on the transparency bandwagon, many will also tell you that they have a simple solution.

But simple, monolithic solutions are rarely the best ones, and the answer to opacity is not as simple as flicking the switch on a viewing ability vendor alone.

“Transparency” is not a singular checkbox to tick. To a savvy marketer, it consists of several layers of visibility and control, which necessitates adoption of a more diverse definition and approach. There are four areas all marketers should really be talking about when they think about “transparency:”

1. VIEWABILITY

Few would argue against the idea that, for an ad to be valuable, it first must have the opportunity to be seen. So “transparency” as a synonym for “visibility” often leads marketers here as their first stop.

As the Media Rating Council (MRC) and Interactive Advertising Bureau (IAB) have issued a definition for viewable inventory, there is at least a common metric for measurement. As such, this industry viewability metric has become an important starting point for any buyer’s transparency odyssey.  However, whether or not the metric is stringent enough, or able to be imposed consistently across different screens and formats, is a different story.

With many vendors’ measurements differing, therefore making it difficult to center on a single source of truth, “viewability” is but one piece of the transparency puzzle. The important thing is for buyers to not let this fact deter them from using any metric at all. Starting with industry viewability, at least, provides a baseline against which to measure.

2. FRAUD

The second piece of the transparency puzzle is ensuring that advertising both appears on legitimate sites and is engaged by an actual human. Imagine if, in the days of face-to-face ad buying, a rogue salesman could have impersonated a premium publisher by simply wearing a fake mustache. As far-fetched as that sounds, it’s exactly what’s happening in some corners of the internet today.

A central contributor to this is called domain spoofing, where falsified websites designed to look like top-tier publishers fool ad buyers into believing they are buying space on a legitimate site when they are in fact buying from a very different, dishonest imitator.  A close cousin also causing consternation for marketers are sites or articles created to lure in visitors with false headlines and content, further escalating concerns over placement quality and brand safety. Rounding out this nefarious fraud squad are designers of software meant to imitate actions of actual web browsers, simulating the viewing and clicking of ads, generating false “bot” — or non-human — traffic and clicks.

Fraud of this kind is very different from the viewability questions raised previously as technically one of these fraudulent ads could meet the industry standard of being viewable while still clearly not delivering a valuable ad interaction. What is clear is that much of this ad scourge can be eliminated by the vigilant shining of the bright lights of transparency and measurement onto performance which, when done at a granular level, provide the information and insights to help avoid these felonious players.

Development of white- and blacklists to target ad placements to known urls, and block those know to be illegitimate, is one commonly used tactic, as is close monitoring or alerts settings around unusually high traffic or clicks, which may signal false players. Additionally, buyers should consider adoption of fraud detection and prevention services, which focus solely on exposing fraudulent actors and can act as a marketer’s sentry in the field as well as demanding more granular level reporting and monitoring from their vendor partners to catch criminal actors in the act.

3. SPEND

Do you know how your money was spent last month? One of the major drivers behind transparency concerns is that marketers have precious little visibility as to how partners actually spend the dollars being handed to them.

Both managed service providers and tech platforms have questions to answer. By the time a publisher has put inventory into an exchange, that may be further aggregated into a supply-side platform (SSP) and then a demand-side platform (DSP), with each taking a share of their earnings.  It’s typical for up to 60% of actual media spend to get swallowed up by these intermediaries in what’s called a “tech tax.” Agencies and other service providers also have a variety of fees on top of that and, depending on how transparent those are, it can be difficult for a marketer to understand the true cost of the media bought on their behalf.

A further driving concern for advertisers regarding their vendor and agency fees is uncertainty around any potential conflict of interest around spend decisions which may be driven by discounts, rebates, internal fees and profits, or other incentives which may favor profitability versus performance.

To gain spending transparency from their partners, brands must demand visibility and performance, adopting contract terms that require ongoing reporting to ensure decision making meets the best interest of their business.

4. ACTIONS

Most of the available tools tend to focus on the “what” of transparency, but what about the “why”?

If an agency moved all your video spending from one vendor to another, you would want to know when that happened, as well as the reason why. Are decisions being taken in your best interest or for the agency, and what was the rationale? If you control your company’s marketing budget, you need to have knowledge and confidence around who is making these decisions and what’s driving them to do so.

That’s why marketers must seek out solutions or relations in which partners provide transparency to all campaign changes and actions, together with the motivation. That may be a data feed or software dashboard — but it could also mean writing better evidence into soft-copy reports or regular meetings.

This is not dissimilar from financial services, where fund managers are not allowed to invest large sums for clients on authority and blind trust; they must instead provide regular reporting on their investment activities, what comprises the fund and which ones are performing and which are not as evidence. Now, it’s time advertisers were able to expect the same from their ad partners.

Transparency is one of the key challenges facing the ad industry today. But it’s almost certainly not a single-point problem, and can’t be solved by a single silver bullet.

Taken together, this new lexicon for addressing the challenges of transparency offers marketers and practitioners across the ad tech supply chain a way to create confidence and visibility together to drive the best business decisions and best performance for a marketer’s ad spend.

Originally appeared in MarketingDIVE, August 8, 2017. The article can be found HERE.