Bridging the Gap to First-Price Auctions: A Buyer s Guide

Transcription

1 Bridging the Gap to First-Price Auctions: A Buyer s Guide

2 2 Introduction In an industry where rapid evolution is the norm, the changes in ad tech last year were so profound from the maturation of header bidding to the drive for radical transparency that 2018 can seem like an entirely new landscape for buyers and sellers to navigate. Nowhere is this clearer than the move from second-price to first-price auctions for inventory sold via header bidding. Rubicon Project developed this guide to help agency and brand leaders understand the implications of this shift in auction dynamics, and to empower you to conduct open and productive conversations with your partners at buying platforms and exchanges. In this document you ll learn: Why the industry is moving toward first-price auctions What Rubicon Project is doing to help buyers adjust to first-price Where we think it s all going

3 3 Understanding the Shift to First-Price In a pure second-price auction, the highest bidder wins and pays a cent more than the secondhighest bid. This auction dynamic, or variants of it, has been the standard in digital advertising since the rise of paid search which is to say forever. But at some point over the past months, most of the major ad exchanges have made the move toward the first-price model or announced their intention to do so. It s understandable why the shift away from second-price has been jarring for some buyers. In this space, no one can be blamed for asking vendors hard questions but the truth is that in 2018, first-price is more effective, provides greater transparency, and is safer than the old way of doing things. Here s why: 1. FIRST-PRICE ENABLES YOU TO WIN MORE (AND BETTER) INVENTORY For reasons we explain in detail on the next page, first-price is necessary to compete for header bidding inventory, the predominant way large publishers in the US and UK now do business. Not only has header bidding increased the amount of inventory available to buyers programmatically by a factor of 4-5x, it has opened high-quality opportunities that were previously only sold direct. 2. FIRST-PRICE GIVES YOU MORE CONTROL First-price gives buyers a direct say over what they pay, what they win, and how they value impressions. In this sense, first-price is delivering a promise of granular control that programmatic was meant to offer all along. 3. FIRST-PRICE IS TRANSPARENT In a pure first-price auction, what you bid is what you pay, period. By combining this with detailed reporting and the elimination of our buyer fees, our goal is to provide a more transparent experience than any other exchange. 4. FIRST-PRICE DOES NOT = OVERPAYING In recent years, advances in machine learning have enabled buying platforms, especially the largest ones, to bid smarter and avoid mistakes that result in overbidding. In addition, Rubicon Project offers a free first-price bidding algorithm (EMR) to platforms that haven t yet finalized their own. The second part of this paper discusses in detail how we developed EMR and how it works. In a recent survey by The Drum, 48% of buyers weren t aware of the real differences between the first and second-price auction models. However, those with an understanding of these differences thought the move to first-price was inevitable. 1 Auction dynamics are historically one of the most opaque and technical topics in ad tech, so if you re still learning you re not alone. That said, we don t expect everyone to migrate a decade of rules, systems and platforms to a new foundation overnight. It will take time for some to adjust to this new, first-priced reality.

4 4 HEADER BIDDING AND FIRST-PRICE When programmatic was still a nascent channel, publishers relegated programmatic buyers to the last place in their ad server waterfall, behind direct sales and ad networks. Header bidding enables publishers to flip that dynamic and give programmatic buyers a first look at their inventory. Unlike the waterfall scenario in which there was one programmatic exchange, and therefore one auction, header bidding exposes each impression to multiple exchanges simultaneously and requires two phases of auctions. (See diagram on next page) Here s how it works: First, each participating exchange conducts an auction as usual among its buyers, and passes the winning bid to the publisher s header. The header then conducts a second downstream auction by comparing the winning bids from the participating exchanges and awarding the impression to the highest overall bidder. To understand why header bidding affects auction dynamics: if just one of the exchanges in the above example runs a first-price auction, its winning bid will probably be higher than the bids submitted by the others (which are passing through second-price bids). This makes it far more likely that the exchange submitting the first-price bid will be the overall winner downstream. To ensure their competitiveness, the second-price exchanges must move to first-price as well. If they don t, their buyers will win less and may be less likely to fulfill their campaign objectives. In 2017, some exchanges not Rubicon Project began running first-price auctions without telling their buyers. This is why we publicly announced we would be testing firstprice and communicating the auction type to platforms in each bid request. We gave our demand and supply partners plenty of lead time and solicited feedback from them before making changes.

5 5 Header Bidding and the Downstream Auction AUCTION DYNAMICS: SINGLE EXCHANGE DSP 1 DSP 2 EXCHANGE AUCTION A DSP 3 WINS PUBLISHER PAGE DSP 3 Before header bidding, publishers used one exchange at a time to sell inventory programmatically. That exchange would conduct an auction ( A ) and the winning DSP served the impression. AUCTION DYNAMICS: MULTI-EXCHANGE (WITH HEADER BIDDING) DSP 1 DSP 2 DSP 3 DSP 4 DSP 5 DSP 6 A EXCHANGE 1 AUCTION B EXCHANGE 2 AUCTION DSP 3 WINS DSP 5 WINS C DOWNSTREAM AUCTION IN SELLER S HEADER PUBLISHER PAGE Header-bidding enables publishers to have multiple exchanges compete for a first look at their inventory. Each exchange conducts an auction ( A ) + ( B ), and each winner is passed to a downstream auction in the publisher s header ( C ). The winner of that auction serves the impression.

6 6 Introducing Estimated Market Rate Over the course of 2017, the Rubicon Project team recognized that our buyers were winning fewer header bidding auctions downstream because they were outbid by other exchanges that were first-pricing. Rather than jump immediately to firstprice, we detailed a plan to understand the issues and address them transparently and sustainably. This plan, which involved months of testing various auction types, many conversations with our buyers and sellers, and extensive technical work, culminated in this announcement in December: Starting January 22, 2018, Rubicon Project will select the winner of all header bidding transactions on our exchange on a first-price basis. The winner will be able to choose whether we submit their first-price bid to the downstream auction in the seller s header or if they want to use a free Rubicon Project feature called Estimated Market Rate (EMR). 2 EMR is a free, optional feature that helps buying platforms that aren t ready for first-price auctions to avoid overpaying. They can use EMR on any portion of their winning bids, including all or none of them. We developed EMR because some buying platforms generally smaller, independent players told us they were still perfecting their first-price bidding algorithms, and therefore wouldn t be able to compete effectively at launch. FIGURE A: HOW EMR WORKS IN THE AUCTION DSP 1 DSP 2 $5 $8 FIRST- PRICE RUBICON AUCTION DSP 3 WINS AT $10 EMR YES EMR ESTIMATES DOWNSTREAM AUCTION TO CLOSE AT $8.75 REDUCED TO $8.75 DOWNSTREAM AUCTION IN SELLER S HEADER DSP 3 $10 EMR NO BID KEPT AT $10 As shown above, if a platform that has EMR activated wins an auction for a header bidding impression on our exchange, and the EMR algorithm thinks it can reduce that bid while still winning the downstream auction in the seller s header, it will do so. 2

7 7 EMR is a form of bid shading, a common tactic in first-price auctions in which a buyer attempts to reduce its bids to avoid overpaying. Bid shading is not new: most buying platform have algorithms that do it before they bid. To our knowledge, EMR is the first time that an exchange is offering buying platforms use of an algorithm that bid shades within the exchange itself. Whether or not EMR is right for the platforms you work with depends on their needs and technical sophistication. Either way, the story of how we developed this feature and how it works provides an interesting view into the science of bid shading as a whole. To be clear, EMR isn t about paying unfairly low prices it s about helping buyers transitioning to first-price maintain their competitiveness without overpaying relative to market value. This also helps sellers by enabling buyers to bid more confidently and therefore more consistently, contributing more predictable streams of demand. A Look at the Data The tests Rubicon Project began in September 2017 focused on the win rate and CPM performance of three different auction types for header bidding inventory: Pure First-Price, Reduced First-Price, and Modified Second- Price, defined as follows: Pure First-Price The clearing price is the highest bid. No bid shading algorithm is applied. Reduced First-Price The clearing price is the highest bid, which may be adjusted downward to balance costs against the likelihood of winning. This was our initial testing ground for EMR. Modified Second-Price The clearing price is the second highest bid plus the greater of one cent or the applicable price floor. Insights from the data below, derived from a limited set of auctions between Sept 5-Dec , contributed directly to our decision to deploy first-price on header bidding inventory and to develop EMR. As shown in Figure B on the next page, pure first-price dramatically increases win rate giving buyers access to impressions they otherwise would have lost in the publishers header. Indeed, pure first-price represented a roughly 15% increase in win rate over second-price in our tests two full percentage points in absolute terms. Even the reduced first-price value an experiment which averaged 91-93% of pure firstprice delivered a win rate increase of greater than a full percentage point, in most cases.

8 8 FIGURE B: WIN RATE BY AUCTION TYPE First-Price Bid Shaded First-Price Modified Second-Price WIN RATE Sept. Oct. Nov. Dec. FIGURE C: CPM BY AUCTION TYPE First-Price Bid Shaded First-Price Modified Second-Price Sept. Oct. Nov. Dec. The challenge is that pure first-price win rate increases come at the cost of much higher CPMs. As seen in Figure C, for the same period the CPM for pure first-price is more than 40% higher than second-price. This means that in most cases buyers overpaid for impressions, since increases in CPM (~40%) far outpaced increases in win rate (~15%).

9 9 How the EMR Algorithm Works The key to an effective bid shading strategy is to pay the pure first-price value only when it s necessary to outbid the competition in the downstream auction. In all other circumstances, you can achieve savings by bidding below first-price. FIGURE D: FINDING THE OPTIMAL BID PRICE EMR - OPTIMAL BID PRICE OVERBIDDING Knowing when you have to pay more to win (and when you don t) starts with predicting the price that will clear in the downstream auction. We do this by analyzing historical values of similar impressions, and layering in an exploratory algorithm that continually monitors the relationship between CPM and win rate. WIN RATE (%) CPM The exploratory part of the EMR algorithm groups similar impressions and sends a series of bids to that group, decreasing each bid by a few pennies until it finds the lowest price that still wins downstream. Figure D is a simplified but helpful way of understanding how EMR thinks. When the bid CPM is low, so is the win rate. As the bid increases, the win rate starts to improve slightly, then more dramatically as the values get more competitive. At some point, however, the increase in win rate levels off. The part of the curve where CPM is increasing but win rate is flat represents overbidding. EMR attempts to find the optimal bid price, the spot where the slope is zero, in which further increases in CPM are no longer worth it.

10 10 The Future of EMR Though Figure D illustrates a simple relationship between win rate and CPM, in practice the curve is more complex. Most of the time it is multimodal, meaning it has several points where it peaks and declines based on a wide range of factors, including audience, format, buyer, campaign, and brand. But the general idea of finding the optimal point on the win rate/cpm curve is EMR s anchor. In the coming months, we ll continue to evolve EMR to more effectively recognize and account for these factors in its predictions. For example, we ll: Begin to base predictions on the characteristics of individual impressions instead of groups. Develop buyer-specific distributions to take into account the win-bid sensitivities of different campaigns. Teach EMR to assign values based on anonymized users, including the lifetime value (LTV) that each user represents to each advertiser. In keeping with our initiatives around transparency, the intent is to make EMR as open as possible. We will continue to share how it works and performs, and we look forward to working with you and helping you succeed in this new first-priced ecosystem. READY TO LEARN MORE? Please reach out to your Rubicon Project account lead. If we re not yet working together, drop us a line at rubiconproject.com/contact ABOUT RUBICON PROJECT Founded in 2007, Rubicon Project is one of the world s largest advertising exchanges. The company helps websites and apps thrive by giving them tools and expertise to sell ads easily and safely. In addition, the world s leading agencies and brands rely on Rubicon Project s technology to execute billions of advertising transactions each month. Rubicon Project is an independent, publicly traded company (NYSE:RUBI) headquartered in Los Angeles, California. 1 The Drum Transparency Unmasked: Market Insight Report 2 In the typical case, the winning bid in our auction is passed to the downstream auction, subject to reduction if EMR is elected. However, in some cases the seller requests or requires that we submit our bids net of our transaction fee, so that our bid matches the amount we will owe them if we win. In those cases, we submit the bid net of our fee.