Today’s column is written by Eric Berry, CEO at TripleLift.
Header bidding has added significant value to the publisher ecosystem, maximizing revenue and creating opportunities to democratize access to the ad server.
A series of fascinating trends in the header bidding context have emerged that, if they continue, will significantly change the dynamic of real-time bidding (RTB).
Real-time bidding is based on the proposition that the highest bid wins at the second-highest price. While the justification for this principle may or may not be sound, agents can profit if they can correctly value an impression with low demand – or at least with a relatively high differential between the first and second auction prices, reducing the bid price significantly. This dynamic only works if there is a single auction for the impression. That means all bids are compared at the same time, quickly determining the highest and second-highest bids.
Header bidding relies on a number of parallel auctions generally submitting bids to compete against demand in AdX, Google’s ad exchange, and first-party line items in Google’s DoubleClick for Publishers (DFP). DFP does not conduct a second-price auction. Header bids pay the number they submit.
This means that a number of header bidding results compete against the prices from DFP line items and the price submitted through AdX, possibly the result of a second-price auction. If an exchange that submits a bid through a header bidding system includes a buyer willing to pay the highest overall price – high enough that it would win against any other buyer in any other header bid and DFP, but the second-highest price on that same exchange is sufficiently low that it would not win – the choice of what to submit in a header bid presents a challenge.
It would be highly inefficient if the exchange responded with a value in the header at the second price. The publisher loses because its revenue isn’t maximized. The “winning” advertiser loses because it doesn’t actually win the impression it wanted and submitted a high bid for. And the theoretically winning exchange loses because it doesn’t win an impression it could have won and doesn’t collect its margin.
All constituents here would be better served by an auction that clears between the first and second price. But what if that same exchange had submitted a number higher than its second price, such that the advertiser that submitted the highest bid had been able to win at a price still lower than its own bid? The publisher would then earn higher revenue per thousand impressions. The advertiser wins the impression it wants while still retaining some margin below its bid. The exchange representing the highest single demand source also wins.
As a result, exchanges will be tempted to increase the price they’re willing to submit. This would put them somewhere in the range between the first and second prices so they could clear more impressions. This will likely create a race to the bottom where bids submitted by exchanges in the header bidding context approach the first price, minus some margin.
This first-price effect is exacerbated by the fact that the same impression is sent to multiple exchanges in the form of multiple header bid requests. This results in each exchange in turn sending the bids to generally the same set of demand-side platforms (DSPs).
Theoretically, a DSP should bid the same amount for the same exact impression, regardless of exchange. That, however, is not the case in reality. DSPs bid against themselves across exchanges – not just for impressions lower in the waterfall, but at the same exact position in the waterfall.
This means a DSP may see an impression on two different exchanges and bid accordingly based on its biases for each exchange. Because both exchanges will eventually move closer to a first-price auction, the DSP will simply end up paying the highest of its bids for any impression, across any exchange. This duplicates bid processing efforts.
DSPs could be tempted to only choose to buy inventory for a certain publisher from a certain exchange, reducing the overhead from header bidding. Publishers, however, could easily circumvent this by randomly excluding certain header tags on certain impressions, meaning no exchange could see every impression.
These problems are significantly less prevalent for native advertising because few vendors support header bidding and there is no “replication” of bids due to each vendor providing a completely unique experience.
For banner ads, however, the advertising product is more fungible between exchanges. It’s essentially the same underlying asset that’s being shown to the user, without any special rendering by the exchange. In this context, one natural result may be larger DSPs developing their own header bidding solutions to preempt declining bid reduction and the cost of highly duplicated bid requests.
Another result might simply be the natural evolution of RTB toward first-price auctions. This has been discussed before, but header bidding may accelerate what to many industry observers appears to be the natural conclusion of RTB.