The Rise of the Ads Auction
tl;dr: From theoretical auction models to sophisticated real-time bidding systems, the evolution of online advertising auctions reflects a dynamic interplay of economic principles, technological innovation, and market forces. As platforms like Google and Meta continue to refine their models, understanding this history offers valuable insights into the future of advertising.
1. Origins: Academic Foundations
The concept of auction-based advertising has its roots in economic theory. In the 1960s and 1970s, economists William Vickrey, Edward Clarke, and Theodore Groves developed the Vickrey-Clarke-Groves (VCG) auction model, emphasizing truthful bidding to achieve efficient outcomes. These theoretical frameworks laid the groundwork for later applications in online advertising.
2. Pioneers: Key Figures and Business Innovators
Bill Gross: In 1998, Gross launched GoTo.com, introducing the first pay-per-click (PPC) model where advertisers bid for search keywords. This innovation transformed online advertising by aligning ad placement with user intent. Wikipedia
Hal Varian: As Google's Chief Economist, Varian played a pivotal role in refining the ad auction model. He introduced the Generalized Second-Price (GSP) auction, where advertisers pay the price of the next highest bid, adjusted by a quality score. This approach balanced advertiser bids with ad relevance. Wikipedia
John Hegeman: At Facebook (now Meta), Hegeman implemented the VCG auction model, focusing on maximizing user value by ensuring ads were both relevant and non-intrusive. This strategy prioritized long-term user engagement over short-term revenue.WIRED
3. Technological Advancements: Enabling Real-Time Auctions
Real-Time Bidding (RTB): Introduced in the late 2000s, RTB allows advertisers to bid on individual ad impressions in real-time, enabling precise targeting based on user behavior and context. adtaxi.com
Machine Learning Algorithms: Platforms like Google and Meta employ sophisticated algorithms to predict user behavior, optimize ad placements, and adjust bids dynamically, enhancing the effectiveness of ad campaigns.
4. Supply and Demand: Evolving Dynamics
The advertising ecosystem has witnessed significant shifts in supply (ad inventory) and demand (advertisers):
Growth in Advertisers: The number of advertisers has surged, driven by the accessibility of online platforms and the effectiveness of targeted advertising.
Increase in Ad Inventory: The proliferation of websites, apps, and digital content has expanded the available ad space, offering more opportunities for advertisers to reach audiences.
Although the true picture of all users, inventory would be nigh on impossible to establish we can make a rough estimate based on some available data, which research tools such as chat GPT allow us to synthesize. The best guess might look something like this:
Inventory, Advertisers & Users in the UK
Sources: IAB UK Digital Adspend Reports, Statista, eMarketer, LOCALiQ UK Digital Marketing Statistics
So what?
Pretty much every indicator we might assess from the business “tailwinds” suggests auctions are here to stay. If we pause and reflect on one simple human truth it might be that that digital usage is now so ubiquitous, even for those we might have once said aren’t ‘digitally-native’, that it seems very hard to imagine a world where the ads auction isn’t the backbone of any future trading mechanic for an advertiser to access publisher inventory.
There is a huge onus therefore on businesses to know the true value of their products so they aren’t at the mercy of the auction’s arbiters who set the floor price.
They only way that the auction prices won’t inflate in proportion to the ratio of advertisers to users is for them to make more inventory available.
