To competitors like Microsoft and Yahoo, Google must seem like a greased pig. You can see the damned thing running amok in your garden, but you can’t figure out a good way to get hold of it. The grease that Google has slathered on itself is mainly, I think, pricing, particularly the use of AdWords and other auctions to set the price of advertisements. In a rare but little noticed moment of extreme candor during a November 2005 interview with Fred Vogelstein (which was only recently published), Google CEO Eric Schmidt noted the great competitive importance of the company’s auction pricing:
Schmidt: Another example of Sergey [Brin]’s observations is that our advertising network is very powerful because it’s quite resistant to certain competitive attacks.
Vogelstein: Such as?
Schmidt: Because it’s an auction market you cannot under-price it. This point is lost on many, many people.
The barrier that an auction presents to a price war is, as Schmidt implies, crucial to Google’s strategy – and doubtless a big source of frustration to rivals, particularly Microsoft. Through superior technology, superior foresight, and a generous helping of luck, Google has built up a dominant position in the extremely lucrative market for serving search, or contextual, ads – and that’s providing the beachhead and the cash for its aggressive expansion. One of the best ways to attack a competitor, particularly in a market like automated ad serving where the marginal costs of executing a transaction are basically zero, is by undercutting the competitor’s price. That strategy can be particularly effective if the competitor is much more dependent on the line of business in question than you are – the precise situation that currently obtains between Google and Microsoft in ad-serving. (Slash the price of ads, and Google suffers greatly, whereas Microsoft suffers hardly any immediate material damage.) Needless to say, Microsoft has used precisely this strategy with devastating effectiveness in the past.
But the auction model effectively removes this option because there are no fixed prices to undercut. Every price is set dynamically by the market and is hence outside the supplier’s control. You could subsidize customers’ purchases, by, for instance, providing them with credits to use in an auction, but that would simply distort the auction market, artificially inflate prices, and drive buyers away. The inability to cut prices makes it very hard – not impossible, but very hard – to unseat a dominant rival like Google. You have to fight with one arm, probably your best arm, tied behind your back.
But if Google isn’t vulnerable to a direct pricing attack on its core AdWords service, it is vulnerable to a pricing attack on its AdSense service. AdSense’s customers aren’t the buyers of ads but rather the sellers of ads – publishers and other site owners (including, in its own trivial way, this blog). Google doesn’t directly charge publishers a price for running ads on their sites, but it does take a price, in the form of a percentage of the revenues that the ads it serves generate. Except when it negotiates a special deal with big publishers, Google doesn’t tell its AdSense customers what cut it’s taking, but it’s a substantial one, probably running somewhere around 30 or 40 percent.
So here’s what a Yahoo or a Microsoft or any other competitor could do: Introduce a free version of AdSense. By free, I mean that you tell publishers that if they run your ads on their sites, they get to keep all the advertising revenues. 100 percent. You won’t take any cut. Immediately, you put a lot of pricing pressure on an important source of revenues and profits for Google.
Now, practically speaking, this would be a tough strategy for a Yahoo to undertake, given its own dependence on advertising. But it would not be a tough strategy for a Microsoft to launch, because this is (at the moment) a fairly trivial business for Microsoft. And it would bring two potentially large benefits to the company:
1. It would hurt its competitor a lot more than it would hurt itself. Even allowing for the fact that a chunk of Google’s AdSense revenues come through negotiated arrangements with big publishers (through which Google may already be giving the publishers close to 100 percent of ad revenues), turning the delivery of contextual ads into a free service for publishers would put Google under financial pressure. (Google’s revenue from ads on third-party sites amounted to $1.3 billion in the last quarter, well over a third of its total revenues.) But it wouldn’t cause any harm, of a material nature, to Microsoft.
2. It would help promote Microsoft’s own ad-serving business. In essence what Microsoft would be doing in giving away its product to ad sellers is redefining that product (for itself and its competitors) not as a profit-making business in itself but as a complement to the core ad-serving product that it offers to ad buyers. Expand the presence of your ads on third-party sites, and you make your core ad-serving business more attractive to ad buyers. So Microsoft wouldn’t simply be sacrificing potential revenues; it would be promoting revenues in a complementary (and more important) area of its business.
Now, I’ve made this simpler than it really is, because publishers also have to take into account the productivity of the ads being served, and by all accounts Google continues to maintain a productivity edge. Nevertheless, turning the AdSense market into a free market would help neutralize that edge and generally redefine the competitive dynamic to Microsoft’s benefit. And, anyway, what does it have to lose?
I agree Nick – I’m disappointed that we haven’t seen any of the also ran contextual ad networks try and rock the boat a little bit in terms of disrupting AdSense. I also wouldn’t be so quick to write off Yahoo here – they’re not nearly as dependent on YPN as Google is on AdSense, and they would seem to be getting increasingly desperate.
You may have seen this post – it basically makes the same point you do, but with a different conclusion (that it will be an open source AdSense that goes after Google):
http://www.readwriteweb.com/archives/googles_potential_vulnerability_open_ad_network.php
I also wouldn’t be so quick to write off Yahoo here – they’re not nearly as dependent on YPN as Google is on AdSense
Yeah, you’re probably right, and a move by Yahoo would pose a bigger immediate threat to AdSense, I’d think.
Thanks also for the link to the Read/Write post, which I’d missed but indeed covers similar ground. My own sense is that an open-source model is good in theory but probably unlikely in practice. The bigger threat is for a competitor to offer a “free” version.
Okay, I’ll talk about the elephant in the room: virtually nobody I know actually sees adsense anymore due to adblockers (e.g. adblock plus in firefox). For example I see no ads on this blog, except for the “organic” ad you have for your new book.
If microsoft really wanted to hurt google, they would just include adblockers in the next explorer update, turned on by default. The click spam sites (they are everywhere) would instantly vanish, along with it you’ll find an astonishing amount of google revenue.
And that’s just getting warmed up :)
dubdub’s right for AdSense – although I think that’s not the bulk of Google’s revenue. Would still be a mighty blow…
Does Google break out its revenue between AdSense and AdWords? I’ve never understood how much revenue each brings in. Sounds like Thomas has an idea. Can anyone be more precise?
Tom S — a bit off topic, but some terminology clarification: adwords is where google advertisers spend their money; an advertiser can choose to put ads on the “google+search network” (what I think you are calling adwords), or the “content network” (what we are calling adsense).
Adsense publishers are really “middle men” between the adwords advertisers and google. Think of the money they make as sales commissions for advertising both google and the advertiser’s brand (it’s a hilarious myth that google spends nothing on advertising — the spend is to their adsense publishers).
Of course, “content network” is enabled by default, and those advertising with google via third parties may have no idea there’s a distinction.
Note a black-hat advertiser can buy adwords to send a user to an adsense spam page (google gets paid for both sides of the transaction). None of this stuff is illegal, and there’s even some disagreement on whether it’s “black hat” (google “keyword arbitrage”). Worst than can happen is that google terminates your adsense or adwords account.
And it could all end some patch tuesday :)
Tom S., just to follow up on dubdub’s response, I’m using the term “AdSense revenues” as shorthand for the cut of the (AdWords) ad revenues that Google gets through the third-party sites that carry Google’s ads. In its financial statements (scroll to the bottom of this page), Google divides its ad revenues into two categories: what that comes in through ads appearing on its own sites (“Google web sites”) and what comes in through ads appearing on other sites such as those run by AdSense members (“Google Network web sites”). In the latest quarter, the former generated 62% of revenues and the latter, 37%. The remaining 1% came from non-advertising businesses.
>>> Google doesn’t tell its AdSense customers what cut it’s taking, but it’s a substantial one, probably running somewhere around 30 or 40 percent.
Come on, you really are falling for that don’t be evil propoganda.
With no competitors to AdSense and there lack of any transparency with publsihers like yourself, do you really think they are only taking 30%-40%?
En el mundo del papel (diarios y revistas) o de la TV tradicional lo anterior no tiene equivalente ya que el rol del colocador contextual de mensajes tipo AdWords como hace Google no existe. Lo que el anunciante paga es por una parte la elaboración creativa del mensaje y luego la exposición del mismo a una audiencia inmerso dentro del contenido de su productor (el medio). No hay garantías ni nadie cobra por ésto, de que el mensaje surta algún efecto (que se haga click en él por ejemplo). Tampoco existen medios cuyos contenidos sean creados sin sombrilla de ánimo de lucro, como si existen en la Web
Lo que Google ha hecho con el texto (AdWords) Joost va a hacerlo con la TV, la promesa es que todo Joost – televidente no tendrá que volver a ver jamás un comercial que no sea de su interés, y más importante aún (para el anunciante) que pueda ver muchos que si. La pregunta del millón es ¿Cuál va a ser el equivalente del click de Google, prueba de la adecuada contextualización y targeting del mensaje? ¿Tal vez que no haya en los cortes de comerciales switch de canal ni mute? Una fácil (tanto para el Joost – colocador contextual como para el Joost – televidente) sería una combinación de Share, Add Star, Email, Mark as Read y Add Tags, tal como en el Google Reader de hoy en día. Cada una y cualquier combinación de éstas demostraría de alguna manera el impacto (y el estatus de éste) frente al mensaje
>> Note a black-hat advertiser can buy adwords to send a user to an adsense spam page.. Worst than can happen is that google terminates your adsense or adwords account.
Google is doing just that – shutting down keyword arbitrage players’ Adsense accounts as of June 1.
http://www.jensense.com/archives/2007/05/google_adsense_16.html
Isabel: arbatrageurs can avoid shutdown by autogenerating “unique” content on landing sites, etc. There’s even software out there that will help you do this (and the most serious ones write their own).
Besides, keyword arbitrage isn’t even the most-profitable way to “rob” adsense advertisers.
Consider the email spam and virus writers out there — in those cases the financial rewards are minimal or nonexistent, and there are very real legal consequences: for adsense scamming it’s completely the opposite! Don’t you think that will attract a few highly-motivated individuals/teams/networks?
Add to this google’s highly conflicted position as profiting from the behaviour, and I think Mr. Carr may have the outline for his next book :)
dubdub says: “If microsoft really wanted to hurt google, they would just include adblockers in the next explorer update, turned on by default. The click spam sites (they are everywhere) would instantly vanish, along with it you’ll find an astonishing amount of google revenue.”
Actually, a lot of people I know have gone the other way – turning off adblockers, because the ads that Google serves up are either amusing or actually useful. I’ve found lots of interesting stuff through adwords, that I’d have never found through anything else.
But then that just goes to show – personal experience isn’t a great judge of wider trends :)
@DubDub – I actually thought IE7 was doing that for me, then I remembered I’d installed IE7pro ;)
I was looking at my own blog the other day and wondered where the ads were…. IE7pro had eaten them ;)
I think Google are starting down a slippery road. Their recent deal with Dell to pre-install DNS redirection software, their continued support for splogs on blogspot, the growing spam/malware/linkfarm sites in their search engine … I wonder how long before they jump the shark?
Fascinating post. Couple of things:
Free Adwords. I’m not an auction expert but, in the absence of transparency on Google’s cut, the effect of a ‘free’ competitor would to wobble the market a bit (and probably jog prices down by n%) but, overall, to grow the whole market substantially. Advertisers would, in aggregate, get more for their money, the effectiveness of online ads would go up, ad spend would increase. So, conclusion: a free competitor would benefit Google substantially.
And another thing: blocking Google ads on people’s blogs is immoral. Seriously. You should be ashamed of yourself.