Current auction models for advertising just don't work

I recently read an article by titled For Online Ad Industry, It's Time To Stop Being Nostalgic which was one of the clearest indications highlighting the fundamental misunderstanding of how single-sided auctions undermine publishers in every case, except search. As a caveat, let’s make one clear distinction before we go on. There is nothing inherently wrong with real-time bidding. The problem with RTB today is that it is only applied to the single-sided auction model.


I was perplexed by the statement "If publishers make peace with the fact that exchanges are here to stay, then they can make peace with RTB as well. Once they do, they can see how their CPMs will stay competitive and even go higher." as it runs contrary to the fundamental economic theory that drives the value of these auctions. Let's take a closer look at one-sided auctions...

Originally, the one sided second-price auction made waves in advertising when applied to search. In the context of search, one sided second-price auctions work very well. The reason is simple, in search all buyers are bidding on exactly the same set of audience attributes: the search terms. In other words, every advertiser that is bidding for the term 'car insurance' is bidding for the exact same set of attributes. Now, let's fast forward to RTB display. In the display market, impressions contain a large number of attributes visible to all market participants, the bid string, and some which are only visible to one or very few parties, 1st party data.

Here is where economic theory comes into play. When all the bidders have the same information and are bidding on exactly the same set of attributes, e.g. search, all buyers rest along a single demand curve and the market is well understood. In RTB one buyer may be bidding on an impression because it is 'in market' and another is bidding on a completely different set of impression attributes. In reality, this means that each bidder, whose bid is driven by a different set of attributes than other bidders, is defining a unique demand curve. The RTB auction collapses all of these demand curves into a single demand curve driven by the buyers informational advantage, thus enabling advertisers to bid down to the 'lowest common denominator' of price.When the buyer knows more than the seller, the seller always loses.

Using traditional premium inventory selling methods, publishers know more than buyers and can thus garner more economic value. In exchanges, information is power and power sets price. By moving inventory to a single-sided auction, publishers give up their informational advantage and pricing power. Display advertising is a different animal than search advertising. Until the innovation being brought to market by MASS Exchange, the single-sided auction was the best solution. Not anymore.

For those of you reading this that have a deep understanding of market structure and economic theory, the double-sided market model used by MASS Exchange will leave you unconvinced. If the aforementioned describes you, stay tuned. Our innovation is like an iceberg, there is far more of it that you can't see than that which you can.