• by Joshua Koran , July 3, 2013

The real-time bidding (RTB) industry is often rightfully called a confusing landscape with lots of acronyms and concepts that veil what vendors actually do. Even engineering PhDs often find RTB, programmatic marketing, and “big data” to be fairly complex. Some of us in the industry are committed to providing maximum transparency and simplifying access to the technology that makes marketers’ lives easier.

As part of this mission, I’d like to explore how demand-side platforms (DSPs, the programmatic media buying technology) handle this potential scenario: If two competing brands using the same DSP both covet the same bid request, which one should win?  

Each DSP conducts an internal auction, independently evaluating the value of that bid for each of their brands, and returns the highest bid to the inventory seller (often this is a supply-side platform, or SSP). The seller usually conducts a secondary auction comparing the highest bid from each DSP against the bids from all others. Most RTB auctions operate on a second-price auction basis, where the winner pays a penny more than the second-highest bidder. 

What happens next? To help cut through some of the mythmaking in the real-time bidding industry, allow me to explain three essential truths about the programmatic marketplace:

1.Buyers are paying lower prices. In the example above, if the other bids from competing brands using same DSP are higher than the bids submitted from other DSPs, the brand pays a lower price. Obviously sellers want to earn the maximum amount they can, but of course buyers have no incentive to pay more than they should. Thus, the buyer is paying a price equal or below their value for the bid.\

2.Buyers are not missing out on valuable inventory. In the example, if the other bids from the competing brands using the same DSP are lower than the bids submitted from other DSPs, the brand pays a higher price. While true, the buyer is still paying a price equal or below their value for the bid, so the buyer is still happy and the seller in this case is actually getting more than they otherwise should.

3.SSPs are manipulating sell-side auctions. SSPs are increasingly helping sellers bias the rules of the auction to block the highest bidder in favor of a buyer that is more attractive to the seller – perhaps it is a more recognizable brand or it helps alleviate direct sales channel conflict. Because these biases and rules are not transparent to buyers, they end up paying higher prices. For buyers, the solution is not to push more bids into a biased auction, but instead to ensure their information is protected and to put pressure on sellers to operate the auction fairly.

The challenge is that we have two separate entities each trying to maximize the value for their respective customers, SSPs serve sellers, DSPs serve buyers. Some companies try to serve both, but must deal with the conflict of interest in trying to balance the competing needs. If they make more from buyers, they may bias their auction in favor of buyers, or the reverse if they make most of their money from sellers.

The real issue is around market liquidity. Sellers want to drive up prices by creating more demand for each bid. Unfortunately, this drives up costs for buyers (advertisers), who should always pay their true value or less. Publishers should continue to be able to support the wealth of digital content that we all enjoy. However, the industry must look for new creative solutions, such as working with sites to reduce the number of ads per page, and not seek to have advertisers pay more for inventory than it’s worth.