Myth buster: Bid shading in first-price auctions is not all it appears

When the ad world began the shift from second- to first-price auctions, ad tech vendors were ready with a handy tool to help buyers navigate the new algorithm dynamics without losing too much budget: bid shading.

But publishers and advertisers are increasingly unnerved by the use of bid shading, and many have started to question its legitimacy. Confusion remains as to what the real purpose and value of bid shading in programmatic ad buying is, and who it really benefits.

Here’s a myth buster:

Myth 1: Bid shading is new
Bid shading is not a new technique, but one that has been repackaged to suit demand-side platforms, according to ad tech sources. In fact, the technique of using historical data to calculate a bid that’s a little higher than second-price has been around for the best part of a decade — just called something different, like bid modifying in second-price auctions.

Supply-side platforms used the technique, which then faded and resurfaced with a fresh face during the rise of first-price auctions. The DSPs that then spied a new revenue opportunity: They could use what they claimed was a clever new technique to help buyers transition from a second- to first-price world, for a fee. These algorithms already existed within DSPs,” said Matthew McIntyre, head of programmatic for EMEA at Essence. “The [bid] optimizers were already there in a second-price world, because DSPs had to operate a hybrid of second- and first-price for the last 18 months.”

Granted, they may have updated versions, but the fact is an extra cost is now being applied for something that was already being delivered. “Now DSPs are telling you they will charge you, in order to save you [money on your bids],” added McIntyre.

Myth 2: Bid shading will ruin publisher yields
While publishers eyed the potential yield lifts anticipated from the shift to first-price auctions with glee, they were less keen on bid shading. Understandable, given bid shading was pitched by vendors as a way to help ad buyers stomach the sudden surge in the amount they had to bid, after years of enjoying being able to bid somewhat lazily in a second-price world. Bid shading offered them an in-between. The DSP would determine what the value of that bid should be. Publishers long accustomed to a world in which they had ceded power to SSPs have been wary of an intermediary making the calls on the value of inventory. Many believe bid shading to be yet another a black-box algorithm that could severely damage their yields. In reality, given the tech has been around and integrated into DSPs longer than they let on, there is unlikely to be any sudden major impact on yields, advertising sources say.

Myth 3: Publishers can control use of bid shading
Some of the larger publishers have begun to veto bid shading in their SSP contracts. But given bid shading has shifted from being an SSP to a DSP technique, publishers can’t guarantee that it won’t be used regardless of what their contracts stipulate. SSPs will abide by it, but they have no control over what the DSP chooses to do — only the advertising client does, in theory. Cases currently exist in which clients have requested first-price auctions to be operated, with no bid shading, but DSPs continue to run it anyway — claiming they know better, according to ad exec sources.

“Bid shading is another term for modified second-price bidding. The SSPs started it, but DSPs have turned it into an art form,” said Dan Wilson, CEO of London Media Exchange. “Bid shading is morally wrong. It is dressed up as something else. It’s been happening for a decade under different terms and will rumble on for years in different guises and iterations.”

Myth 5: Bid shading is good for buyers
When bid shading popped up as the newfangled ad tech term a year or so ago, it was cleverly positioned as a way to help buyers navigate from a second- to a first-price environment. The theory was that buyers wouldn’t have to shell out for the full amount they would be bidding in a first-price auction, but they’d have to pay much more than they would in a second-price. But given bid shading was already being used to operate hybrid first- and second-price environments, ad buyers no longer believe it was necessary given it was already happening.

Some DSPs will charge a percentage of what they say they save buyers from bidding in first-price auctions without bid shading. “It is impacting how we evaluate DSPs as we have to factor in the additional costs,” said McIntyre. “It will impact who we partner with.”

Previously, ad tech vendors have looked to charge fees in new areas in order to recoup losses in others often caused by an increase in technical infrastructure costs. If that’s the case here, agencies don’t appreciate how it is translated. “It is not being presented that way to buyers,” added McIntyre. “It feels disingenuous to say this is a brand-new way of doing things.”
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