WTF is dynamic allocation?

Google’s biggest ad tech rivals, the companies that compete with the search giant serving ads to websites, have always feared it was too powerful. Its hold over so much buying and selling power in online advertising meant it could set the rules under which websites and advertisers would operate.

Google has been accused of bundling ad tech services and other potentially monopolistic practices. So, yesterday, it made a grand gesture: Google is opening up what it calls “dynamic allocation” to allow all bidders, including itself, to compete evenly for ad inventory on websites.

If opening dynamic allocation works as promised, it could eliminate the need for header bidding, a tactic used by Google’s top competitors to reclaim power in the auctions. So with all these changing rules, and shifting power balances, it’s important to take a look at dynamic allocation in Google auctions and what it means for advertisers and publishers.

What is dynamic allocation?
Dynamic allocation had been a way for Google to offer advertisers on its exchange a way to swoop into auctions for ad space and buy the best inventory if they could beat the going market rate. Publishers would benefit because they technically got a higher price from an advertiser through Google than if they had sold the inventory to a rival exchange. However, this method of selling inventory may not have always yielded the best prices.

“Dynamic allocation allowed Google’s exchange to cherry-pick the best ad impressions as they came through the Google-owned ad server, DFP,” said Alex Magnin, CRO of Thought Catalog, a new media publisher.

Google would beat any bid based on the average rate that exchanges like The Rubicon Project or Open X would offer. If the average rate on Rubicon was $2, Google could top that and win the inventory at $2.01, even if Rubicon might have paid $5 for the same inventory based on the value of the consumer on the other end, not its average rate. Basically, DoubleClick for Publishers was dynamic for AdX, but dumb for other exchanges that couldn’t bid in real time.

“Google had an informational advantage to buying the best impressions, and the informational advantage came from the fact that they own the ad server,” Magnin said.

So what’s changing?
Google said it’s testing opening up dynamic allocation to rival exchanges, which will be able to see the same information as Google’s Ad Exchange and bid accordingly. Giving publishers a clean, open auction process to maximize the price on inventory.

“It’s a gutsy call from Google putting the interest of publishers first. The pain here was all on the publisher’s side, and doing this improves the publisher side at the expense of AdX,” said Ari Paparo, CEO of ad tech startup Beeswax. “It’s a solid move for them.”

It’s still only in the test phase and many ad tech players remain cautions. Publishers in the test include Hearst, Zillow and Meredith, and ad platforms Index Exchange and Rubicon, according to AdExchanger, which first reported on the new bidding test.

“Exchange bidding in Dynamic Allocation will allow publishers to invite trusted third-party exchanges and SSPs to submit real-time prices using industry-standard RTB calls. These prices will be considered along with bids from the DoubleClick Ad Exchange and the publisher’s reservation campaigns to pick the highest-paying ad,” Jonathan Bellack, Google’s director of product management, said in a blog post.

What does this have to do with header bidding?
Header bidding evolved because of Google’s powerful position in auctions. It was getting all the information, and rivals were getting none, until they came up with a way to cut in line in the bidding process. Rival exchanges struck deals with publishers looking to increase the competition for their ads, and they were able to get a code placed into the headers of websites. The code would show rival exchanges ad inventory, and the characteristics of the user on the other end, ahead of Google, so they could bid accordingly for desirable impressions. Having this header bidding insight has become an advantage for some top Google rivals like The Rubicon Project, Open X and AppNexus.

“Header bidding exists to help DoubleClick for Publishers customers access multiple demand sources directly, on equal footing, in a transparent auction. If today’s announcement signals DFP’s full embrace of open dynamic allocation, that’s great news for publishers. But if publishers are still unable to work directly with demand partners of their choosing, or if those demand partners are compelled to pay a tax, then the rationale for header bidding remains firmly in place,” said Tom Shields, svp of strategy for AppNexus’ publisher technology group, an an e-mailed statement.

Is this the end of header bidding, then?
Not so fast. Google is still only running limited tests of these more level ad auctions. Ultimately, the need for heading bidding-type practices depends on how open Google makes the dynamic allocation process. It’s unclear if every exchange will have, or even want, a seat in DoubleClick for Publisher auctions and ones that don’t might have to deploy header bidding. Google could also limits access to its exchange by charging a fee for a seat at the auction, although it has not indicated that’s the plan.

For now, the ad tech community sees a path forward, away from header bidding, which was really just a hack to get around Google’s built-in advantage. It was never a long-term solution, according to Magnin.

Header bidding also has its drawbacks for publishers, because managing that other layer of ad auction slowed down their pages. “Google’s changes are eliminating reasons for publishers to augment their DFP implementation with other tactics, including third-party header bidding implementations,” said Jennifer Lum, co-founder of Adelphic. “Publishers should benefit from access to more demand, higher-yield optimization and faster page-loading times.”

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