What the Tech is an ad auction?

The word “auction” evokes either a man with a bolo tie, 10-gallon hat and thick Texas accent yelling out numbers in rapid-fire succession or a posh British man selling priceless works of art, punctuated by the stately banging of a gavel.

But both of these scenes pale in comparison to the excitement of an online ad auction.

Much like the invaluable antiques at a Sotheby’s event, many of the ads you see online are bought auction-style, with countless brands and agencies bidding against one another for the right to serve their ads in front of your eyeballs. This ad-delivery system can be dizzyingly complex, however, which is why we’ve assembled this handy guide about how ad auctions work, why they’ve been in the news lately and why the ad auction market could be fundamentally changed by a recent antitrust court case.

How do ad auctions work?

Ad auctions for publishers and advertisers facilitate the buying and selling of ad space on websites, apps or digital platforms via an online marketplace. These transactions are coordinated via sell- and buy-side technology platforms, respectively known as SSPs or DSPs.

Pretty much any ad inventory you can think of — via online publishers, mobile apps, video-sharing platforms, audio services, connected TV streamers — is made available for purchase in these auctions where a vast pool of advertisers (brands and agencies) can bid on the available slots. This process is commonly referred to as real-time bidding. Each auction happens in about a tenth of a second and the winning bid gets to put their ad in the corresponding ad slot.

Why auctions? 

As with any exchange, the online auction system has two distinct advantages: One, it’s easy, and two, it enables price discovery.

Prior to online auctions, advertising deals were often hashed out over fax and marketers had to individually broker deals with each publisher and TV network, often executing the deals months in advance of them reaching the market. With exchanges, marketers can execute cross-channel campaigns, buying inventory from a range of sites and platforms, all from one place, and in real time.

Ideally, auctions aim to ensure a fair market price for the ad being bought and sold. When a large number of parties engage in a marketplace, selling and bidding on the same items, in a transparent fashion, the price for those items should eventually settle at their natural rate. This is classic ECON 101, supply and demand, marketplace dynamics, and ad auctions are no exception. They can help publishers earn the greatest-possible revenue from their advertising inventory and aim to assure marketers they’re paying the accurate value of the audience they’re after.

What are the downsides to auctions?

A good ad auction, like any marketplace, relies on transparency and fairness. It’s only possible to determine the fair market price for an ad when there is a competitive market — when marketers and publishers know what other parties are buying and selling their ad inventory for and that the exchange itself remains an impartial broker. Some exchanges don’t operate as such, though, which has been a point of frustration for marketers for years, and the basis of the government’s antitrust case against Google.

Google is the largest advertising company in the world, and as of 2023 controlled a significant portion of the online ad market in the U.S., according to Statista.

One of the problems with Google, at least according to the Department of Justice, is that it plays both sides of the online advertising market, allegedly engaging in self-dealing. Google supposedly acts as an impartial provider of advertising inventory through its ad exchange despite the fact that many of the ads available in the exchange are from Google-owned properties, such as YouTube and its display ads network. The fact that Google also owns a number of ad tech tools (such as an ad server and SSP) — all of which are involved in the complicated process of targeting, measuring and serving ads — was highlighted in the recent U.S. v. Google antitrust trial.

Drama! We told you online ad auctions were exciting.

What auctions should buyers use?

With so many different exchange marketplaces to choose from, it can be difficult to know which ones are legitimate and which are prone to chicanery. There are several auction exchanges offered by independent third-party companies, that can offer more transparency and objective campaign reporting, and whose primary incentive is to provide a fair, open marketplace for both buyers and sellers. After all, a marketplace is only as good as it is neutral.

What are some recommended practices for winning an auction?

Winning an ad auction may not be all about having the highest bid price. Many ad exchanges also factor in the quality of the ad when determining a winner. Ads that have engaging imagery, clear information about the brand and that lead to a legitimate landing page when users click through are likely to have a higher engagement rate, and thus more likely to win in an auction than ads that are poorly designed and spammy. All quality factors being equal, though, it comes down to price.

For publishers hoping to have advertisers bid on their ads in auctions, providing clear information on the ad inventory is crucial. Information on the content of the site, the format and placement for the ad, and any audience data can help increase visibility in an auction and makes ads more appealing to marketers, while boosting monetization for the publisher.

As more scrutiny is placed on these auction dynamics, publishers and marketers are circling a critical question: what needs to change to fix the integrity of the supply chain? At this moment in time, there’s cause for optimism that auction shenanigans will start to decline as the industry becomes less bashful about calling out bad actors. We’ll be watching with interest.

The Current is owned and operated by The Trade Desk Inc.