Hal Varian, Chief Economist at Google once said “All of the major search engines use auctions to price ads. The reason is simple: there are millions of keywords that need to be priced and it would be impossible to set all those prices by hand.” Hal’s thesis was the underlying rationale for using the same auction model for search and display advertising. That is why today’s exchange technologies all operate using a second price auction. The problem is that you can’t use second price auctions for guaranteed. Which is why no one is doing it. There is a better way to trade guaranteed media. We can’t leave the best guaranteed inventory to sell through technologies which ecommerce figured out 20 years ago. We need a market driven, technology powered, negotiated marketplace to buy and sell guaranteed media.
At first, it is easy to think that the focus of Hal’s statement is about labor. But if you look more deeply, you find that the key action in Hal’s quote was ‘set all those prices.’ If you can’t calculate and set prices as a seller you need the buyers to set them for you. Or in Google’s case, if ‘can’t’ is because it is too complex or expensive, you let the auction do the heavy lifting for free.
What if the problem of ‘set too many prices’ is already solved? What if there was already a way to automate it too? If that were true, the seller would want to have control over setting the ask price of their sell orders. The nature of guaranteed is that we have much more time to buy and sell it. If the seller has no bids, they can wait. If a buyer sees no inventory they can leave a bid. This type of trading works much better in two-sided auctions.
The fundamental difference is that two-sided auction transaction prices are set by both sides. Neither side has to do the deal right now. Guaranteed media is a negotiated media transaction, there is no negotiation in second price auctions. The auction decides. In a negotiated environment, each side has the power to change the price at which they are willing to do the deal. Negotiation is all about change.
Two-sided is different:
-Auctions match bids and asks, they don’t determine clearing price. -Resting orders. Buy and sell orders stay open. -A continuous auction where a buyer describes demand so it can be understood by any seller, to identify if they have matching inventory they may want to offer in reply, and vice versa. - Depth of forward supply and demand liquidity can be measured. - Supply competes for demand and demand competes for supply in the same auction. - Buyers can search for supply and Sellers can search for demand. Buyers can query sell orders and sellers can query buy orders; each can query the price and amount required to fulfill their order. - Market data is deterministic.
For this, orders have to be kept in a ‘book’ and every market participant needs to be able to see this book. If you know what the supply and demand in the market is, you don’t need to guess what it will be. Negotiation of all those prices is possible because the problem of ‘set too many prices’ is already solved.
As an industry we need to have a new conversation about technology for guaranteed. Current guaranteed models that use the ad server as if it was designed to be the back-end for an ecommerce platform for guaranteed media buying don’t meet the needs of buyers or sellers. There is a much better way than ‘add to cart’ and ‘proceed to checkout.’
We can’t rely on auction models designed for substitutable real-time keyword searches to trade inventory that is not substitutable. We need innovation.