Display Advertising: A portal into the world of digital auctions and real-time bidding

Advertising is the most popular approach to marketing products for the manufacturers and the sellers and is also the primary source of revenue of most of the media platforms. With the internet boom, a whole new space has opened up for the advertisers: online media. This article will introduce, and to an extent go to the intricacies of, online display advertisements and how they utilise simple but effective business logics to serve you the best ads.

Before we move forward, there are a few technical terms which I’ll try to explain, that will help you grasp the main concepts easily.

Ad Server: An Ad Server is a specialised service whose main job is to provide you the correct ad content to be displayed on your websites. It stores, manages, tracks and delivers advertisements in formats like images, videos, text etc. When a user opens up a web-page, a request is made to the ad server, which may contain demographic data about the user, to fetch the ads that should be shown on the webpage. It’s kind of an interface to manage all your ad-related configurations and stuff. E.g. Google DoubleClick For Publishers (DFP).

Ad Network: An Ad Network is an entity that provides a platform for publishers and advertisers to come together and participate in ad servings. It is kind of a middleman between publishers and advertisers. Ad networks manage end to end tracking and reporting of the ads and also decide what advertisement is to be displayed where as per the advertiser’s rules. E.g. Google Adsense, InMobi etc.

Ad Exchange: An ad exchange is kind of an open marketplace where publishers submit their inventory of ad spaces(impressions) and advertisers contest to win them. You can compare it to a stock exchange, where impressions are up for sale and advertisers can bid for them. E.g. Google AdX, OpenX etc.

Ad Exchanges vs Ad Networks

1. Add Networks are companies; Ad Exchanges are tech platforms.
2. Ad networks are like stock brokers who offer select groupings of ad inventory that will satisfy a specific need. In contrast, ad exchanges act like the stock exchange itself.

Online Auctions and Real Time Bidding

Now, since we have the basic terminology clear, let’s look at what happens behind the scenes of an ad display:

1. User loads up a web-page that is serving ads.
2. An ad request is sent to the ad server with some relevant demographic data.
3. The ad server contacts the configured ad exchange which holds up an online closed auction to sell the impression to advertisers.
4. All the interested advertisers bid a price to win the impression.
5. The winner advertiser info is sent to the ad server.
6. The ad server sends a response back to the user’s web browser with the winning advertiser’s ad content.

Interestingly, all of the above steps take place within 100 milliseconds and the ad is served by the time the page finishes loading up in the user’s browser. Since the bidding for the ad impression happens all in real time, it’s called Real Time Bidding.

A closed auction is one where bidders cannot see the bids made by other contesting bidders.

How do Advertisers win an Auction?

When an ad impression goes up for auction, and different advertisers bid for it, how do you think they win the auction? There are different approaches which can be chosen by the publisher:

1. 1st-price closed bid auction: In this type of auction, each participating advertiser bids once and the advertiser with the highest bid wins the auction, and has to pay his bid amount.

2. 2nd-price closed bid auction: In this type also, the advertiser with the highest bid wins the election, but he has to pay the price bid by the 2nd highest bidder plus 1 more cent. This is used by Google to sell their ads.

Hard Price Floor(HPF): A hard price floor is the minimum price the publisher will accept for the bidding on impressions. Bids that are below this minimum price are simply rejected.

Soft Price Floor(SPF): Soft floor is more of a threshold that sellers can set to capture what would otherwise be missed opportunities, especially when all buyers set bids that are only slightly less than the floor.

3. Hybrid Auction:

i) If the highest bid value is less than HPF, then there is no deal.

ii) If the highest bid value is greater than HPF but less than SPF, it participates in 1st price auction. This is to ensure that winning bidder has to pay his highest winning bid and publishers get a reasonable price for their impression.

iii) If the highest bid value is greater than SPF, it participates in 2nd price auction. Thus, the advertisers get benefitted as high-value bidders can avoid paying surplus, as they are charged per the second highest price.

4. Guaranteed Auctions: In a guaranteed auction the bidder agrees to pay a pre-determined price or guaranteed budget for 100% of a specific type of impression, trumping all other bids. E.g. Samsung is launching a new phone, then it will engage in guaranteed auctions to ensure those ads will get in front of users, and the other advertisers be damned!

There is a 5th type of auction called Vickrey-Clarke-Groves (VCG), which is a type of 2nd price auctions. It is used by Facebook for displaying their ads. I’ll talk about it in later posts.

Waterfalling

Suppose in an auction, the highest bid falls below the HPF. What will the publisher do? It can’t just leave the ad impression empty!!

To tackle this problem, publishers employ a strategy called, “Waterfalling” which involves having multiple ad exchanges. Multiple ad exchanges are configured in the ad server in a sequential manner; if the first exchange fails to offer a winning bid, the auction is passed on to the second exchange and so on. The position of an exchange in the ‘waterfall’ sequence is determined by the deal it has struck with the publisher.

Here, the HPF is set to $3.75. First, AdX conducts the auction and the winning bid is $3.55, which is below the HPF and hence doesn’t clear the auction. The auction then passes on to AppNexus and so on. Finally, Rubicon provides a bidding price of 3.80 which clears the HPF and the impression is sold.

In most setups, the last exchange at the bottom of the waterfall is set to AdSense, so that if none of the ad exchanges are able to clear the auction, publishers just obtain an ad from AdSense and display it.

There are a lot more concepts like Header Bidding, VCG Auctions and Pricing, which I’ll discuss in upcoming posts.