Google’s ad exchange is finally following its programmatic peers and moving to a first-price auction model, in which the advertiser that places the highest bid wins the impression and pays as much as they bid. It’s a more straightforward setup than the traditional second-price model, in which that advertiser would only pay a penny more than the runner-up bid. However, transitioning from second-price auctions to first-price auctions can be more complicated — and costly — for advertisers.

Google has effectively made first-price the default programmatic model for display ads. Rival exchanges, such as Index Exchange, OpenX and Rubicon Project, began rolling out first-price auctions in 2017. But until now Google remained the major hold-out, which has meant that ad buyers have had to manage campaigns running in both first-price and second-price auctions.

The migration to the first-price model is making programmatic ad buying much more cumbersome. “It does permanently make the bid strategy more complicated because you need to employ sophisticated techniques like bid shading” to keep costs down, said one agency executive.

Not all advertisers may employ such cost-saving techniques and as a result are likely to push up ad prices, particularly for long-tail inventory that is considered less valuable. Buying this inventory on a second-price auction was, to many brands, akin to entering a high bid for a screwdriver on eBay, said Dan Larden, Infectious Media’s global strategic partnerships director. “You know it’s not worth £10 ($13), but you bid that anyway as there will be a few competing bids and you’re likely to win, and at a relatively low price,” he said.

The first wave of first-price auctions in 2017, expedited by the advent of header bidding, drove up ad prices. Excluding bid shading, programmatic clearing prices have increased by 15 percent to 20 percent in some cases, according to Jay Friedman, president of programmatic agency Goodway Group. “We have not been affected by [first-price auctions driving up pricing], though, due to our bidding algorithms being well ahead of this,” Friedman said.

Publishers were still benefiting from the pricing boost as recently as November, according to a Digiday Research panel of over 100 publishers. Costs have gradually come down as savvy traders and bid shading algorithms leveled them off and more conservative bidding strategies were adopted. A similar rise and fall is predicted around Google’s auctions as the market adapts. Tactically, the move underscores the importance of demand-side platforms deploying some form of technology to avoid overspending as they have done with bid shading.

Overpaying for impressions in first-price auctions is “not something we’re too worried about,” said Mike Moore, director of development and senior partner at GroupM’s data and technology unit mPlatform. Given that Google is the last major exchange to adopt first-price auctions, mPlatform already bids under the assumption that it’s dealing in a first-price marketplace and works with DSPs that use bid shading and other tactics to prevent overpaying. “We haven’t seen any dramatic increases in pricing across the board within the exchanges that we know are operating primarily on first price,” he said.

However, many advertisers may not have yet moved to a first-price mentality. For them, the shift to first-price auctions will require a reset in their programmatic strategies because the benchmarks they rely on to inform their bids were developed in a second-price market. “We’re expecting increases in prices. It will take some time to figure out what does a first-price auction mean to our win rates and KPIs,” said Tori Shulman, associate director of programmatic at Digitas.

To help advertisers transition to bidding in first-price auctions without overpaying by too much, Google’s exchange will provide an option for advertisers to allow Google to lower their first-price bids. However, Google will remove this optional bid translation service in 2020, according to the company.

“Having seen a steady shift of SSPs moving from second to first-price auctions — almost directly in-line with the growth of header bidding — we would expect others to now move quickly,” said Nikita Borisenko, technical product lead for demand solutions at ad tech developer Iponweb. “More complicated technologies now need to be developed and deployed by RTB bidders; those players that don’t own them will find it harder to survive.”

“The positive is that it reduces fragmentation in the space by bringing Google into alignment with the rest of the marketplace,” said Ben Hovaness, managing director for marketplace intelligence at Omnicom Media Group.

Ad buyers hope that eventually, the shift to a first-price model will bring more transparency to the programmatic ecosystem. “It allows our clients to accurately measure, plan and optimize the value of each impression. We don’t have to spend time gaming an opaque auction,” said Paul Dolan, CEO of programmatic consulting firm Varick, in an email.

“I feel like it puts honesty into bidding, and prevents certain companies who are known for their retargeting abilities and inventory arbitrage from aggressively bidding to win all bids,” said the head of programmatic at a brand.

Having resisted the first-price auctions for more than a year already, Google’s move is considered by ad buyers to be as much about protecting its own interests from the largest ad tech vendors that were among the early adopters of the trading model. “It’s an interesting strategic signal that Google needs first-price to maintain market share,” said Chris Kane, founder of programmatic consultancy Jounce Media. “But operationally not much will change. The biggest DSPs have spent the year building bid shading algorithms, which they will now apply to Google’s auction.”

Publishers, not just buyers, will also have to adapt, said Wayne Blodwell, CEO at The Programmatic Advisory, who explained the importance of forecasting yield scenarios to understand the fluctuations in prices. “If they’re using Google Ad Manager for their ad serving and or their exchange they’ll see CPMs spike but can expect these to level down to a ‘normal’ base,” he said.

“I think there will be a short-term rise in CPMs [followed by] a steady decrease toward stabilization, and then maybe it will rise again,” said Jeremy Fass, head of programmatic at New York Media. As the market moves to a first-price model, publishers, such as New York Media, will need to reevaluate how they set the price floors, or minimum sale price, for their inventory. “It is very much going to be a big change for us,” said Fass, who plans to do a lot of testing to see how the publisher should adjust its price floors.

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