Latest / The Yield Doctor with James Deaker / FTC ruling on Amazon Ads - What was Amazon thinking?

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FTC ruling on Amazon Ads - What was Amazon thinking? · The Yield Doctor with James Deaker

• 0:00
  There is something strange about the
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  FTC's allegation against Amazon ads that
• 0:06
  I don't think has received enough
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  attention.
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  Amazon told advertisers that it was
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  running a seconded auction. And the FTC
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  alleges that Amazon gradually changed
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  the model mechanics so that for much of
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  the time advertisers were effectively
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  paying their own bid, which is the
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  outcome that you would expect in a first
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  price auction. Amazon denies the
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  allegations. But here's the thing that I
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  find interesting because there is
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  inherently nothing wrong with running a
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  firstpriced auction. In fact, most of
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  the display ecosystem moved from second
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  price auctions to first price auction
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  many years ago. So the important
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  question isn't simply whether Amazon's
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  auction behaved more like a first price
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  auction. It's this. If Amazon warranted
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  the economics of a first price auction,
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  why didn't it simply tell advertisers
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  that it was running one? It turns out
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  that there is a technical argument about
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  auction mechanics that runs into
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  something much more meaningful. This is
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  simply a question of trust. If you need
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  a refresher on what the difference is
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  between a first price auction and a
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  second price auction, I'll link to a
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  video here that explains it in more
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  detail. But the short version is that
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  second price auctions have been
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  traditionally more attractive,
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  particularly to economists, because they
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  encourage buyers to bid close to their
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  true value rather than trying to guess
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  what they need to pay in order to win
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  the auction.
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  So in the early days of programmatic
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  advertising, independent exchanges and
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  SSPs, the supply side platforms all used
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  some version of a second price auction.
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  However, with the rise of header bidding
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  where publishers auctioned a single
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  impression across multiple exchanges
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  simultaneously,
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  this broke the second price mechanism.
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  It created multiple auctions. It created
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  chaos. There was fee stripping, hidden
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  arbitrage, which was often called match
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  rate arbitrage or bid caching. And so, a
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  lot of different stuff going on. But in
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  my opinion, there were two main problems
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  that needed to be addressed. The first
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  was that the ecosystem of intermediaries
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  had become so complicated that with all
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  of the hops from one buyer to another, a
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  second price auction simply doesn't
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  work. The second is that a profound lack
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  of trust existed in the industry where
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  everybody doubted that anybody else was
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  actually running a true second price
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  auction, which is the theme I'm going to
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  return to now as we talk about Amazon
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  because Amazon told its advertisers that
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  it was running a second price auction.
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  Ads rank on a blend of bid and relevance
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  and the winner pays a penny more than
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  the next ranked bidder. And the FTC
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  complaint alleges that from 2018 to
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  2019,
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  Amazon began implementing undisclosed
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  reserve prices and that raised what the
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  in winners actually paid. And by 2024,
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  sponsored product advertisers were being
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  charged their full winning price up 80%
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  of the time. And the FTC describes this
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  as converting a nominal second price
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  auction into essentially a first price
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  one and puts the figure extracted by
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  Amazon at over $20 billion. And again,
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  Amazon denies these these allegations.
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  And the area that's covered by all of
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  this includes all of their auction
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  formats. So it includes sponsored
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  products, sponsored brands, display ads,
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  and all those tied to search queries.
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  And again, the timing is what makes this
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  so fascinating. I was at Yahoo when we
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  made the decision to transition our
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  display exchange from to a first price
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  auction in 2019 and we were actually
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  late to the game. We followed Microsoft
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  who' transitioned via Xander at the time
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  who moved in 2017. Other players like
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  OpenX, Magnite, and Index Exchange all
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  moved earlier. And the definitive
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  turning point came at the end of 2019
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  when Google Ad Manager moved. And so by
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  the end of 2019,
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  effectively the entire open web had
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  moved from a second price to a first
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  price auction.
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  But Amazon chose to stay with second
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  price auctions at that time. And when
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  you look at the Amazon FTC lawsuit
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  through this lens, it highlights a stark
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  irony. While the entire open web was
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  forced to modernize, clean up its
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  auction plumbing and adopt radical first
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  price transparency around 2019.
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  Amazon was allegedly moving in exactly
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  the opposite direction, secretly
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  engineering a pseudo firstpric auction
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  behind a second second price marketing
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  promise years after the rest of the
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  adtech industry had already moved on.
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  Another thing that isn't talked about
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  very much is that again back in 2017
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  2018 the companies that moved to first
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  price auction first actually saw a
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  revenue benefit and that's because the
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  biders hadn't really adapted to needing
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  to shade bids down. So many of the
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  bidders came into those first price
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  auctions and treated them like second
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  price auctions and so were bidding at
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  inflated prices which benefited those
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  who moved early. So Amazon missed the
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  some of the economic upside that the
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  early movers got when you know in
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  switching to first price auctions.
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  Were there legitimate reasons to stay
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  with second price? Certainly second
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  price as I already mentioned have real
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  theoretical advantages particularly
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  around encouraging bidders to bid close
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  to their true value if it's a real
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  second price auction. But by 2019 first
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  price auctions were no longer unusual or
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  controversial in digital advertising.
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  They had become the norm. Which makes
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  the Amazon situation even more puzzling
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  because if Amazon wanted the economics
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  of a first price auction, there was an
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  obvious path available. Openly move to
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  first price, explain the change to
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  advertisers, and let the buyers change
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  their bidding behavior accordingly. So,
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  what are the implications? I mean, some
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  people that I've been talking to over
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  the last week say that this is just
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  proof that the big guys get to live by
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  their own rules or try to live by their
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  own rules. But what are the implications
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  for the broader industry? And the thing
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  to think about here is who is still
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  running a second price auction and who
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  is going to be under pressure to move to
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  first. And the answer is that there are
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  a number of retail media networks that
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  are running second price auctions,
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  particularly on their sponsored product
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  listings. And I expect that right now
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  they're all scrambling, running around
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  trying to work out exactly what they
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  should say, whether they can comply
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  with, and what they whether they need to
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  change their auction mechanics. And so
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  every RMN that's describing sponsored
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  products as second price is probably
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  asking questions like what do we tell
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  the buyer that this auction actually
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  does? What does it actually do? How are
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  the reserve price users? And what under
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  what circumstances does the winner pay
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  its own bid? and who approves inside of
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  each of these companies the changes to
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  those mechanisms.
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  In contrast, I don't think either Google
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  or Bing will see this as a sign that
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  they need to change their search
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  marketplace dynamics because they're
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  very different. But where this gets
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  interesting is some of the new
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  participants.
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  What are the AI ads marketplace is going
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  to do? They have tried to model
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  themselves in many respects after Google
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  search and so they have defaulted to
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  second price but now many of them have
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  buyers from the display ecosystem which
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  as I mentioned is first price auction
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  and so many of them may feel that they
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  are under the same pressures.
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  Unfortunately, despite all of this, I
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  don't think enough market participants
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  are going to look at the FTC action and
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  see it as a sign that they need to check
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  that their own houses are in order. I'm
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  James Deika. I am the yield doctor.
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  Thanks for watching.