Bar Lazarovitch-Palfi, October 25, 2021
Changes are coming to AdSense. This month, Google announced that AdSense will move from a second-price to a first-price auction model. The update will go into effect by the end of the year, according to the media giant.
With that deadline just weeks away, we’re here to help you understand how these changes will affect publishers and advertisers and what you need to do to prepare.
While some announcements from Google involve massive and impactful algorithm changes or new ad formats, this update is straightforward. Simply put, AdSense will become a first-price auction.
If you’re new to digital advertising or need a little refresher on the terminology, let’s clarify the difference between first and second-price auctions.
Currently, AdSense uses a second-price auction. That means that the second-highest bid actually determines the final price for the impression. The winner (advertiser) will pay $0.01 more than the second-highest bid.
In a first-price auction, bidders participate simultaneously, and the highest bid wins the impression. The winning bid is exactly the same as the final price.
There are a few factors that are motivating Google to make the switch. Although second-price auctions used to be the norm in digital advertising, many other display advertising platforms have since switched to the first-price auction model. That includes Google’s own products, Ad Manager, and AdMob.
Additionally, Google’s blog notes that the change “will help advertisers by simplifying how they buy online ads and make it easier for them to buy your [publisher] ad space sold on AdSense.” Finally, it stands to reason that if advertisers know the winning bid will be the actual price paid, they can plan their media spends more precisely.
The shift to first-price auctions only affects a subset of AdSense, including AdSense for Content, AdSense for Video, and AdSense for Games. For now, at least, the auction model for AdSense for Search and AdSense for Shopping won’t change.
Let’s start with the publisher side of things. Publishers don’t need to make any changes at all. On its FAQs page, Google admitted that it is not exactly sure how the changes will affect each publisher. However, when Ad Manager transitioned to a first-price auction model, Google found “a neutral to slightly positive impact to publisher earnings on average.” With a streamlined auction model across Ad Manager, AdMob, and now AdSense, Google believes that advertiser spending confidence will increase. In turn, publishers should benefit if advertisers increase their spending.
For advertisers, the auction model shift means that many will need to change their bidding strategy and possibly reassess budgets. When advertisers bid in a first-price auction, the winning advertiser ends up paying more than they would have in a second-price model.
For example, in a second-price auction, if one advertiser bids $1 and a second advertiser bids $2 on the same impression, the winner pays $1.01 for that slot. Now, under the first-price auction, the winner will pay the full bid or $2 in this case. While the difference may come down to pennies, it can add up when advertisers spend thousands of dollars or more per month.
In the end, the transition to first-party auctions should show a positive trend for publishers, equaling more money as long as they have a high-quality, valuable audience and ad space. In truth, that also means more money for Google, so we suspect, along with other industry insiders, that that is part of the motivation.
Of course, anything that makes the bidding process easier to understand should translate into a smoother experience for advertisers. Aligning the model with other top platforms goes a long way to creating consistency and giving advertisers an apples-to-apples approach. And, if advertisers have more clarity over their spend from the get-go, they can structure their campaign bids accordingly.
Only time will reveal the true impact of the change to first-party auctions, but, like Google, we believe that this is a positive step. If you’re an advertiser or publisher with questions about this update or any other aspect of the digital marketing ecosystem, don’t hesitate to reach out to us!
Bar Lazarovitch is the Head Of SellSide Services at Total Media Solutions. You can connect with her on LinkedIn or reach her by email.