• by Joel Melby , Op-Ed Contributor, October 7, 2015

Programmatic is the craze du jour, yielding positive benefits for digital buyers and sellers alike.

Real-Time Bidding (RTB) is an integral aspect of digital programmatic, so it’s only natural to think about applying auction-based approaches to Programmatic TV.

But the rationale of “TV should work like online video” completely ignores the structural differences between the two media. It ignores the concerns that many premium online video publishers have with buyer bidding.

Auctions can provide definite benefits in appropriate circumstances, but TV media owners need to clearly understand these circumstances if they are to avoid outcomes detrimental to their businesses and the TV industry at large.

Auction approaches, in which ad opportunities are offered up to buyers one or a few at a time, all use decisioning algorithms that mathematicians refer to as greedy. They assume that making a locally optimum decision on each opportunity will yield the best total solution (or at least one that is close enough to the best).

For a media owner, that translates to “if I get as high a price as I can for each spot, I’ll end up with as much total revenue as I can.” That only works when one decision doesn’t affect any other, such as when there is little to no perceived contention for a given opportunity, or when the opportunities are clearly known to be exceptional and rare (more on this later).

That’s not how TV, or any truly premium content, really works.

There’s generally not enough inventory to satisfy all buyers; the media owner has to decide which orders to take and how to best fulfill them. In these cases, the optimal solution to the whole problem (assigning orders to inventory) can’t be achieved by short-sighted aggregating optimal solutions to the individual pieces of the problem: which ad to run in a given avail.

The optimal solution can only be found by considering the big picture.

Here’s an example: you have a shoe box containing 37 baseball cards and a bunch of potential buyers. You start pulling out one card at a time and asking the buyers to bid. Let’s say the first card (Andy Merchant) goes for $2, the second (Steve Dillard) for $1, and by the time you’re done, you’ve sold 25 of the cards for a total of $45.

And that’s when one of the buyers says: “You had a complete matching set of the 1975 Red Sox? I would’ve given you $500 for the whole set!”

The last example highlights another reason media owners should be very selective when consigning inventory to auctions – information asymmetry. You didn’t know that buyers would’ve paid you more for a complete set. A similar problem often occurs in auction-based markets: the media owner has no idea why a buyer bought an opportunity and thus no way to understand the value of the rest of his inventory. 

Looking at it from the other side, buyers love bidding because they can cherry-pick — which is why you’ll see people with buy-side backgrounds pushing such approaches.

That’s not to say that all auctions are bad.

Currently, there exists both auction-based and order-based marketplaces on behalf of TV media owners. Auctions tend to generate upward price pressure when a) the ad opportunities are exceptionally differentiated because of program (such as the Super Bowl or directly within a highly-rated program) or the ability to leverage specific context (such as within a news program), and b) the auction is price-transparent (all the bidders have an understanding of the current highest bid).

The moral of the story is that TV media owners should be highly selective in the inventory they put up for bid and they should do so in a manner that more resembles an art auction than a flea market.

Caveat venditor.