Look out, there’s new ad tech jargon coming your way. Meet “supply-path optimization.”

Supply-path optimization gives some ad tech aficionados a frisson of excitement. The basic idea: It gives media buyers the ability to bid on and win inventory at the most reasonable price, while it lets publishers maximize their revenue over the long run. Still confused? Read the explainer below to learn more.

So WTF is supply-path optimization?
It is essentially an algorithm used by demand-side platforms to streamline how they interact with supply-side platforms. Each DSP has developed its own strategy for supply-path optimization: Some use it to pick up the bids that are most relevant and have the highest chance of winning, while others use it to turn off SSPs that are not implementing second-price auctions, according to Tom Kershaw, CTO for ad exchange Rubicon Project.

Why is it important for DSPs?
Two major reasons: Bid duplication and various auction mechanisms used by SSPs. Header bidding puts a strain on DSPs, which are processing many more impressions per second than they used to. And the industry needs more transparency of pricing and auction dynamics, according to Kershaw.

Wait, isn’t everyone using second-price auctions?
You might think that, but you would be incorrect. The second-price auction is a well-understood auction model that lets buyers bid the true value. In reality, every SSP has its own logic — second-price, first-price or other formats — for how it submits bids into a publisher’s ad server. As Jason Fairchild, chief revenue officer for ad exchange OpenX, described, a mix of multiple auction models is a problem and the root cause is header-bidding proliferation.

Ari Paparo, CEO for ad tech firm Beeswax, echoed the same sentiment, saying that DSPs have always considered both the supply and the gap between the first- and second-price auctions as variables in the bidding decision process. “There is an increasing need to do [supply-path optimization] given the duplication in inventory created by header bidding,” he said.

How does supply-path optimization work?
AppNexus’ supply-path optimization algorithm looks at a publisher’s SSP partners, analyzes parameters like traffic and win patterns, and automatically turns off SSPs that are using “aggressive auction tactics” like the first-price auction, AppNexus CEO Brian O’Kelley explained in a blog post.

Iponweb, on the other hand, is starting to offer supply-path optimization as a third-party service to DSPs (similar to fraud detection and viewability), and it is currently in beta, said a company spokesperson.

OK. Does supply-path optimization benefit SSPs and publishers at all?
Yes. It helps take out bad actors and benefits the whole ecosystem, said Kershaw. And smart SSPs have already started using filtering algorithms to send only the most relevant inventory to their connected DSPs, said George Levin, CEO for ad tech company Getintent.

“They normally filter most of the bids and send us only those with the highest probability to win,” Levin said. “This technology saves us huge money on server cost. If we buy directly from publishers, we don’t have this layer of filtering and have to listen to all bid requests, which is less efficient.”

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