The shift to first-price auctions: 3 factors publishers should know

Note: Verizon Media is now known as Yahoo.

By Shawna Larkowski, Director, Global Product Marketing, Verizon Media

In a post header bidding world, and with transparency a continual concern, you've probably heard a lot of talk about recent shifts away from second-price auctions toward first-price. From "leveling the playing field" to boosting a publisher's bottom line, there may be differing opinions on what the transition will mean in the long-term, but general consensus is that this is a shift the industry is embracing.

Need a refresher on the different auction types or background on header bidding and the rise of first-price? Check out our companion blog.

So beyond the mechanics of it, as long as buyers meet their KPIs and publishers get paid, should you really care about the first-price trend?

Having made the shift to first-price on the majority of our media properties, there are three areas that Verizon Media can offer a perspective on across tech partners. Beyond acknowledging the shift and making the transition, it was important for us to do it in a way that ensured long-term sustainability. As such, it required months of testing, bid and clearing analysis, and gathering feedback from our partners throughout our phased rollout.

Transparency: The promise (or myth) of ending marketplace shenanigans

In first-price auctions, if an advertiser wins an auction, they pay what they bid. In theory this offers greater transparency with the buyer essentially getting what they paid for.

With second-price, because there's a gap between what an advertiser bids and what they actually pay if they win, there's more temptation and opportunity for publishers and exchanges to adjust the auction to ensure the clearing price is as close to the bid price as possible (such as SSPs adding a price floor after all bids came in). The discrepancy between the highest bid, the second-highest bid, and any floor prices are not usually disclosed to either advertiser or publisher.

The reality is that the auction mechanics and results can still be a black box in many respects. Even with first-price, downstream from the bid, there is not full transparency around priority, fees, and bidder optimizations designed to level-the-playing-field between auction types. There is less transparency when the auction is conducted on the server side, or in multi-level auctions where it is more difficult to communicate the auction type to bidders.

Sustaining buyer trust and bid health

Legacy second-price auctions place much of the pricing decisioning in the hands of the exchanges, with buyers trusting their bid to be leveled based on market competition, determining a fair value for every impression. With first-price, buyers will be tempering their bids (just as there is the expectation for publishers to lower tactical floors, balanced by the overall higher CPM and increase in fill and responses) - but this shift does necessitate a new bidding strategy which potentially places more onus on the DSPs and advertisers.

There is a clear buyer concern of paying too much for impressions, not only diminishing the scalability of spend, but hindering trust and expected performance among publisher partners. Buyers have adopted multiple strategies for coping with this, including bid shading, testing for the absolute minimum floor, or even shifting spend to PMPs and reserved deals.

However, a trusted exchange partner like Oath Ad Platforms also offers exchange-wide analysis and a dedicated team to proactively work with buyers on an effective bidding strategy that alleviates the risk of overbidding in first-price auctions. Same goes for publisher recommendations on floor setting and beyond, to ensure both publishers and buyers normalize their auctions and have sustainable success in a largely first-price world.

Does this shift signal a change in the exchange's role?

Within the second-price ecosystem, the exchange offered a valuable role evaluating every impression's market value. With a move to first-price, some degree of this function has diminished - though it can be argued use cases will still exist for second-price transactions (especially non-header bidded waterfall impressions).

However, the exchange plays a much larger role than just arbitrating auction mechanics. The protections both buyers and sellers look for in terms of maintaining marketplace integrity are much more easily deployed and scaled with an exchange partner than a direct DSP or advertiser to publisher relationship. From an infrastructure and cost perspective, it's still much easier for buyers to maintain and scale their supply relationships through a few entry points than individual connections.

To successfully continue their relationships and value-added service, exchanges need to double down on their investments in fraud detection and prevention, inventory and volume controls, brand safety requirements, and connecting quality demand with quality supply to deliver on both advertiser and publisher objectives.

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