Earlier this month, Google announced that (by the end of the year) they would be moving their AdSense (AdSense for Content, Video, and Games) auction from second-price to first-price.
This came as a bit of a surprise because Google AdSense has held on to second-price auctions for decades. In the statement to creators, the company explained that the change will “make it easier for buyers to purchase your ad space sold on AdSense.”
Is it that simple, though? Let’s break down how the AdSense framework operates and some possible implications of this impending change.
Google AdSense 101
Google AdSense is a program run by Google through which website publishers in the Google Network of content sites serve text, images, video, or interactive media advertisements that are targeted to the site content and audience. These advertisements are administered, sorted, and maintained by Google. They can generate revenue on either a per-click or per-impression basis.
Google uses its technology to serve advertisements based on website content, the user’s geographical location, and other factors. Those wanting to advertise with Google’s targeted advertisement system may enroll through Google Ads. Due it effective targeting system and ease of use, AdSense has become one of the most popular programs specializing in creating and placing banner and responsive ads (the type that adjusts themselves based upon user’s device size) on websites and blogs.
Image provided by Google
Overall, these advertisements are considered less intrusive than some of their more brazen counterpart and have the added benefit of typically being relevant to the website on which they are displayed. Many websites use AdSense to make revenue from their web content (website, online videos, online audio content, etc.). It has proved particularly useful for generating advertising revenue for small websites that do not have sufficient resources or other significant sources of revenue.
Second to first-price auction
When online display advertising was first coming into its own, ad space was sold to advertisers in a second-price auction, where the amount of the second-highest bid determined the final price paid by the winner. However, over time, many ad selling platforms in the display advertising ecosystem, including Google Ad Manager and Google AdMob, switched their auction to first-price. In a first-price auction, the final price reflects the winning bid.
Image provided by Ezoic
Why the change now?
“In our continued effort to simplify AdSense, we will be moving the AdSense (AdSense for Content, Video, and Games) auction from second-price to first-price in the coming months. This change will make it easier for buyers to purchase your ad space sold on AdSense. There is no action for [creators], and [they] will likely not see a change in earnings. We’re making this announcement now to help our advertiser partners prepare before we change how the AdSense auction works.”
Potential benefits to publishers and advertisers
It is fair to say that the move will simplify things for advertisers. As Google puts it,
“We are aligning our AdSense process with other ad selling platforms in the display advertising ecosystem, which we think will simplify the experience for buyers who can now use a single approach to bidding across AdSense, Ad Manager and AdMob, and improve advertiser spending confidence.”
Which AdSense products are affected
The transition to a first-price auction only affects AdSense for Content, AdSense for Video, and AdSense for Games. It does not affect AdSense for Search or AdSense for Shopping.
Why we care
To dig deeper into the potential impact that this change could have, we spoke to GANDT CEO Remco Livain.
Were you surprised to hear about the switch?
This is a big deal. As Google has held on to second-price auctions for ages, this is bound to catch a few people off guard. Indeed, when the change is made, anyone who has set ridiculous max prices for their ads will get a short-term shock.
Will this drive up the price of ads, or could it make it easier for some advertisers to plan their spending?
For now, it remains a big question for me and, I think marketers in general, what will happen to the prices through the auction. If we have the highest price bid always getting the impression, it could get quite expensive if you don’t change your bids right now, especially for those who are used to setting bids quite high. I’ll use myself as an example. I’m only paying one and a half cents for a certain click, on average, on a specific keyword. As it stands, I can still set my bid to five euros, and it doesn’t make a difference.
Image provided by SK Educates
With these changes, though, if I don’t alter my bid and bring it down to 1.05 or 1.10, or whatever I would be willing and able to pay—then I will be forced, short-term at least, to pay the full five euro for the same click. Of course, this could result in many advertisers paying a very high price for a short period. I think the market will change in this respect, and we will see that those who can pay more will ultimately end up getting more impressions.
Will it mean that smaller businesses are at a bigger disadvantage?
That is something we need to think about it. If it is simply those with the highest budgets and can afford far higher bids that will get more traffic, this will definitely discriminate against smaller players.
At the end of the day, though, it is still going to come down to whether or not people are clicking on your ad, and they aren’t going to keep doing that if the ads aren’t any good. So click-through rate will still matter a lot, and there has to be some sort of sensible algorithm behind that as well. It can’t just favor those who have the deepest pockets. The short-term impact will be that advertisers have to watch out and be careful how they spend their money and how accounts are set up, or they would end up overspending in the short term.