Google’s Latest Ad-Tech Changes and the Likely Future Impact

The programmatic market is in for substantial correction as Google rolls out unified auctions

google ad exchange algorithm
Google is changing how its ad auctions work. Getty Images
Headshot of Ronan Shields

Last week, Google announced unified auctions are coming to Google Ad Manager, its sell-side offering, making this the latest move in what some deem as a major overhaul to the company’s suite of ad tech, aka the entity formerly known as DoubleClick.

Given the scale of Google’s influence, the move is likely to affect multiple tiers of the ad-tech ecosystem, with some even predicting that it could represent the beginning of the end for one of the most significant topics of debate in the sector for the last five years: header bidding. Additionally, it could also undermine the business model of ad exchanges. Adweek sourced opinion from industry experts on how some will have to prepare.

The historic origins of ad tech and auction dynamics 

Google claimed the measure is geared toward ushering in transparency in the often-ambiguous world of programmatic media trading. Others, however, see it differently, taking it as a major sign that second-price auctions in media trading are on the way out.

Will Doherty, evp global marketplace development at Index Exchange—one of the early advocates of the model—said Google’s move would make pricing transparency more uniform across the industry, thus furthering competition. “First-price auctions are truly the only way to make auctions transparent to buyers in a header bidding environment,” he added.

Second-price auctions—whereby the auction winner only has to pay marginally above the bid submitted by the second-highest bidder—were the default means for publishers to monetize remnant ad impressions in the early days of programmatic.

Typically, this was done using real-time bidding and involved multiple intermediaries, each taking their own cut of the ad spend, leading to the popularization of the term “the ad-tech tax” and some acrimony along the way.

However, the demand for greater transparency plus the rise of header bidding—a (relatively new) process that lets publishers conduct multiple, simultaneous auctions before taking the best offer—has prompted supply-side players including ad exchanges such as Rubicon Project, OpenX and Index Exchange to adopt first-price auctions.

Sam Cox, group product manager, Google Ad Manager, noted how programmatic media trading has evolved in a way that both sides of the industry have adopted increasingly complicated ad monetization strategies. Hence, Google’s planned rollout of first-price auctions means that buyers (theoretically) will have to pay exactly what they bid on the industry’s dominant ad-tech platform.

‘Lowball’ no more?  

Speaking with Adweek at the time of Google’s latest announcement, Lauren Fisher, principal analyst at eMarketer, described how parties on the buy-side of the industry would effectively game second-price auctions to increase their win rates (and commissions).

“[The first-price auction model means] you no longer can bet on throwing a high-ball offer out there and feel comfortable that you’re going to win the second price,” she said.

Additionally, Anthony Katsur, svp digital platforms at Nexstar Digital, added that first-price auctions will help reduce the risks posed by actors that operate purely to inflate the price of media for their own gain.

He added, “It mitigates whatever legacy predatory practices exist in the programmatic world …  you have people who are constantly lowball bidding just to listen [to an ad auction and work out how they can arbitrage media].”

By removing the price elasticity that second-price auctions introduced, arbitrage becomes a harder game to play.

Brands need to rethink their supply strategy 

Meanwhile, Brian Fitzpatrick, general manager of demand solutions at Iponweb, noted how the rise of first-price auctions was synonymous with the adoption of header bidding. “Now that they’ve finally made the decision to switch to first-price, all demand-side platforms buying through Google’s Ad Exchange [aka AdX] will need to rethink their bid strategies or risk significantly overpaying for media,” he said.

Jay Friedman, president of Goodway Group, said the fact that Google is joining this movement isn’t surprising, but what makes this move notable from the others is the scale of Google’s market share, as the amount of Google owned-and-operated-inventory on some plans can be as much as 60 to 70 percent.

He added, “Google AdX is such a large chunk of programmatic buyers’ inventory … if we look at first-price auction shifts in the past as being less than half of the inventory, or half of the inventory, this is the other half. This is going to have a dramatic impact.”

Bid shading 2.0? 

To assuage the inflationary impact header bidding and first-price auctions have had on CPMs, many demand-side platforms have devised tactics to offset this trend, including the emergence of a hybrid between first- and second-price auctions. Essentially, the DSP devises an acceptable price between the first- and second-bid value, which is what is then paid for an ad impression. This is also known as bid shading.

Paul Dolan, CEO of independent media agency Varick, noted, “It will be interesting to see if Google introduces a version of bid shading for buyers as a follow-up to this update.”

All sources consulted by Adweek noted how those DSPs that already offer bid-shading services will be in a strong position given the increased rollout of first-price auctions. “It’s also going to be problematic for ad exchanges that are still running second-price auctions … Google has such a dominant market share that as they adopt it, it will become the default,” said one anonymous source.

The beginning of the end for …

However, Ratko Vidakovic, founder of Adprofs and author of This Week in Ad Tech, pointed out that while much of the industry’s attention has centered on the first-price auction element of the announcement, it potentially foreshadows Google’s attempt to counteract header bidding.

‘Independent ad-tech’ advocates devised header bidding as a means to neutralize the widely perceived advantage that Google held in ad auctions given the dominance of its ad server DoubleClick. Prior to header bidding’s prevalence, ad impressions were auctioned off among different exchanges in chronological order, a process commonly referred to as “waterfalling.”

This put Google at an advantage as it could see the entirety of a publisher’s inventory and bid on the most desirable ad impressions first. And while header bidding has risen in popularity in recent years, early versions of it were deemed “a hack” due to its tendency to delay page load times, albeit the rise of server-to-server header bidding eased such concerns and bolstered publisher uptake.

Google has attempted to counter this with the rollout of its Exchange Bidding offering, a service it maintains is much more efficient than header bidding in terms of page load times.

According to Vidakovic’s theory, Google’s latest move also plays into buyers’ desire to source cost-effective inventory, or supply-path optimization. He told Adweek that Google’s moves since the retirement of the DoubleClick brand have effectively blurred the lines between the earlier different elements of its ad stack, especially between its DoubleClick ad server and its ad exchange AdX.

Such a scenario would effectively mean that DSPs can effectively bid straight into an ad server, negating the need for ad exchanges, according to Vidakovic. “Effectively, what Google is doing is collapsing the concept of the exchange and then the ad server into one … this will make ad exchanges look more and more like conspicuous intermediaries,” he added.

“Instead of just allowing other companies to come in and build an alternative to their ad server, I think they’re just trying to become that ad server and long term … this kind of makes header bidding irrelevant,” explained Vidakovic. “While it may not be obvious from the policy update but if you scrutinize their language … this seems like a counter-response to header bidding.”

@ronan_shields Ronan Shields is a programmatic reporter at Adweek, focusing on ad-tech.