Advertisers aren’t the only ones irritated by hidden fees and undisclosed inventory sources. Dataxu is claiming it’s been victimized by shady auction mechanics following a soured partnership with RhythmOne.
The situation came to light after RhythmOne filed a lawsuit in July against dataxu to recover $1,900,000 from three unpaid invoices between January and March.
But dataxu filed a counterclaim in August, saying it hadn’t paid those invoices because RhythmOne violated a 2015 business agreement by using a fake auction to consistently overcharge dataxu for inventory purchased in RhythmOne’s exchange.
Additionally, dataxu alleges that RhythmOne procured that inventory from other exchanges, and then marked it up.
While it’s for the courts to decide who’s right, dataxu’s counterclaim – in which it asks for damages and attorney fees from RhythmOne – provides a detailed look at how second-price auctions can be manipulated by the supply side. And it underscores why the demand side is increasingly dissatisfied with second-price auctions.
Per RhythmOne’s complaint against dataxu, the two agreed in August 2015 that dataxu would pay 1 cent more than the next highest bidder for inventory purchased through RhythmOne’s exchange. Dataxu would be billed in a single monthly statement that includes both media and fees – and it would get a separate bill for fees related to third-party data. RhythmOne’s reporting would determine the bill.
Of course, dataxu didn’t pay its bill from January through March. Dataxu said in its counterclaim that RhythmOne sold dataxu arbitraged media from other exchanges, which is contractually forbidden.
Dataxu also alleges that RhythmOne charged undisclosed fees above industry norms, which dataxu, had it known about them, would not have allowed.
Dataxu also argues that the nature of RhythmOne’s fees weren’t described in the agreement that set the terms of the partnership, and that RhythmOne didn’t itemize the fees on the subsequent invoices.
It is probably for the lawyers to debate whether RhythmOne was compelled to either describe or itemize those fees.
Regardless, dataxu’s evidence for RhythmOne’s auction manipulation is that the difference between dataxu’s actual winning bid was often very close to the clear price – aka the value the exchange placed on the inventory.
Which was odd, dataxu claims, because the difference between its winning bid and the clear price in other exchanges was substantially higher.
In March, for instance, the average difference between dataxu’s winning bids and the clear price in nine other exchange partners ranged between 15% on the low end to 53% on the high end.
By contrast, the average difference in March between dataxu’s winning bids on RhythmOne’s exchange and the clear price was 2%. So dataxu concluded that RhythmOne was manipulating the auction, such that dataxu wasn’t actually paying the second price as one might expect in a second-price auction, but in fact was paying RhythmOne’s clear price.
And if that’s the case, it violates the pricing agreement which dictates that dataxu would pay 1 cent more than the price offered by the second-highest bidder.
So basically, a demand-side company refused to pay its bill because it claims its supply-side partner violated their agreement by running a fake auction instead of the promised second-price auction. And that alleged “violative activity” had been successfully hidden for months, thanks to a very basic technique: unitemized bills.
"As reflected in the public record, we filed a lawsuit because, after 15 months into a business relationship, DataXu stated it would not pay three outstanding invoices," said a RhythmOne spokesperson. "Instead of paying three outstanding invoices, as further reflected in the public record, DataXu chose to assert counterclaims against us. We deny the material allegations in DataXu’s counterclaims."
Dataxu declined to comment.