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The Winner's Curse: How Auction Anarchy Dominates Digital Media

The Winner's Curse: How Auction Anarchy Dominates Digital Media

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Published by GroupM_Next
Our report provides data-driven insights into what GroupM Next has defined as anarchy within online advertising auctions. It also includes analysis and projections of cost implications – up to a 137% increase – for brands that advertise on Twitter as the social network broadens opportunities with the introduction of its Self-Serve advertising platform. As media trends in the direction of online ad auctions and brands enter the bidding environment across more and more channels, there are steps advertisers can take to ensure auctions are cost-positive. Otherwise, brands without a strong data strategy around media buying will be left at the mercy of the anarchy of the auction that publishers enable.
Our report provides data-driven insights into what GroupM Next has defined as anarchy within online advertising auctions. It also includes analysis and projections of cost implications – up to a 137% increase – for brands that advertise on Twitter as the social network broadens opportunities with the introduction of its Self-Serve advertising platform. As media trends in the direction of online ad auctions and brands enter the bidding environment across more and more channels, there are steps advertisers can take to ensure auctions are cost-positive. Otherwise, brands without a strong data strategy around media buying will be left at the mercy of the anarchy of the auction that publishers enable.

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Categories:Types, Research
Published by: GroupM_Next on Apr 19, 2012
Copyright:Traditional Copyright: All rights reserved

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10/27/2012

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April 2012Authors: Jesse Wolfersberger, Predictive InsightsChris Copeland, Chief Executive Ofcer 
The Winner’s Curse:
How Auction Anarchy Dominates Digital Media
 
1
Auctions are the pervasive system for buying digital advertising. All major searchengines use auctions, and social, display and even television are moving thatdirection. While the digital auction is a fair system for all parties involved, thestructure cultivates market anarchy, a chaos of bidding inaccuracy that can hurtbrands and swing a publisher’s fate by hundreds of millions of dollars.
Twitter’s ad revenue in 2011 was $140 million and, according to eMarketer, is expected to top $250million in 2012. Could that forecast be an underestimate? Twitter has introduced a new self-serveplatform which GroupM Next is predicting will more than double the average cost-per-engagement.That change alone would mean Twitter’s revenue could be $300-plus million this year. Add the factthat the site’s trafc is constantly growing and its paid ads are expanding to mobile and internationalmarkets, and even $400 million in revenue for 2012 looks attainable. Twitter is poised to ride a waveof increased competition and anarchy into the upper echelon of digital advertisers.Digital auctions are not going anywhere. Whether on established platforms such as Google, or theemerging platforms of Facebook and Twitter that, comparatively, are still in their infancy, it is a systembrands will increasingly become more reliant on for buying media. Competition and anarchy willalways be factors to the bottom line of publishers and advertisers, so brands need to take control sothat ad auctions are cost positive, not negative. In order to thrive in digital auctions that exist todayand those that will come in the future, brands
must 
use data and strategy to inform their buying. For brands to get there:
»
Determining the value of an impression, click or other engagement is imperative. Without this,brands are simply guessing.
»
Data is the path to understanding value. Data should be robust with cross-channel information.
»
Bid with consistency and condence. This is how brands avoid anarchy instead of feeding it.
»
Pick your spots. Big auctions require big bids; target your audience and nd the auctionswhere you can get the most return for your investment.
Anarchy and the Winner’s Curse
In an auction, digital or not, the information available about the item beingauctioned is imperative to its nal sale price. When the value of the item is easyto determine, the distribution of bids will be tightly grouped. In the oppositecase, where little is known about the item, the spread of bids will be wider. Thisspread is the anarchy of the market, and the more anarchy that exists in anauction, the more revenue the auctioneer makes.Imagine an auction for a 1952 Mickey Mantle rookie card. If the condition of the card is known as poor, the bidding will be tightly grouped around the valueof the card. If the condition of the card is unknown, the spread of bids will be
Hidden Factorsof an OnlineAuction
Market Anarchy
The spread of bids inan auction.
The Winner’s Curse
The theory that the highestbidder in an auction alsohas the highest proba-bility to have overpaid.
The Winner’s Curse:How Auction Anarchy Dominates Digital Media
April 2012
 
2
wider, with bidders guessing about its condition. The winning bid for the cardwould most likely be higher in the second scenario, because it only takes onebidder to speculate that the card is in good condition to win the auction.Market anarchy is higher in digital media than in an ofine auction because thevalue of the purchase – or action – a brand is bidding for is undened. Althoughsearch and display have been around for years, only recently have the dataand technology been available for brands to set bids in a truly sophisticatedmanner. Today, brands can efciently price the value of impressions and clicks,and hit their volume goals at efcient spend levels. For newer platforms such asTwitter and Facebook, market anarchy is at its extreme because most advertisershave yet to determine what a retweet or a like is worth to their brand.If anarchy is the re that heats up an advertising auction, the number of competitors is gasoline. Themore brands that are involved in an auction, particularly the more that are also ofine competitors, themore anarchy reigns. In these cases, analysis and data are ignored in favor of emotion.
When positionbecomes more important than prot, the only winner in the auction is the publisher.
Another hidden factor of the online advertising auction is the “
Winner’s Curse
,” where the winner of the auction has the highest probability of taking a loss. It is possible that the auction winner is the onlybidder that accurately valued the item, but it is more likely that the actual value of the item is lower thanthe winner’s bid because the rest of the bidders, the majority of the market, valued the item less.In order to estimate the effect of anarchy and the Winner’s Curse on advertising auctions, GroupMNext performed a Monte Carlo simulation, which mimicked the structure of an online advertisingauction. A Monte Carlo simulation is a statistical method that measures the likelihood of outcomesof a system through simulation of that system. In this simulation, a random number of competitorsenter the auction, they are each given an amount of “anarchy” – a random disturbance that either inates or deates their bid amount, the advertisers are ranked, and the results are measured.In paid search, where bidders are ranked into positions instead of having a single winner, the winner’scurse is mitigated, but it still exists because the most expensive positions get the most volume.
»
In an auction where there are a multiple winners, such as Google, for every 10% increase inmarket anarchy, the average cost-per-click will increase by 5.4%.
»
In an auction where there is one winner, such as Twitter, for every 10% increase in marketanarchy, the average cost-per-click will increase by 5.7%.
The more advertisers a publisher can draw into its auctions and the more anarchy thatexists in that market, the more ad revenue the publisher generates.
The Winner’s Curse:How Auction Anarchy Dominates Digital Media
April 2012
Source: Topps
® 

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