Google’s House of Cards

2003 was a very good year for the world’s favorite search engine. Google is now the Web’s fifth most popular destination, drawing close to 60 million visitors each month. The company boasts over 150,000 advertisers and powers search results for 8 of the top 10 Web properties. Searchers want to use Google, sites want to be listed on Google, and competitors want to be Google.

Though in no danger of losing its sterling reputation with consumers, Google is running afoul of advertisers and publishers. Advertisers report return on investment (ROI) and customer service have deteriorated. Publishers are incensed after recent updates to Google’s search algorithm pushed many hard-earned top listings down in the results.

Key to Google’s relationship with advertisers and publishers in 2004 — in fact, key to the company’s long-term growth — will be development of its AdSense contextual advertising program. With many predicting massive growth in contextual advertising, the program could become a major revenue source for the company. A look at AdSense’s structure reveals fundamental problems.

AdSense, launched in February 2003, increases advertisers’ reach by placing their Google text ads on relevant content pages across the Web. Participating sites get a share of the revenue generated when users click on the ads.

Although some large sites participate in the program, the program has proven especially popular with small publishers. AdSense’s text-based banners have become common on the Web. That Google refuses to disclose the revenue share it offers AdSense sites — even to the sites themselves — doesn’t faze publishers, most of whom are just happy to see revenue from low-value inventory.

But advertisers aren’t as happy. Although AdSense brings them more traffic, many find it also lowers their ROI. The drop in ROI, sometimes exceeding 50 percent, springs from three key differences between Google’s typical paid listings and its contextual ads:

  • User motivation. Paid listings are only served when a user has searched for a specific topic, so users are motivated and well qualified. Users who see AdSense ads are not necessarily actively searching a topic.
  • Targeting. On a search results page, users have defined what they’re looking for. With contextual ads, Google must guess at the page’s most important topic.
  • Distribution. Although Google’s paid listings appear on prominent sites such as AOL and Google itself, its contextual ads often appear on much smaller sites that traditionally provide lower-quality leads.

With AdSense delivering lower ROI than paid listings, advertisers and search marketing firms have vocally demanded Google allow them to make separate, lower bids on contextual ads. In particular, panels at the two most recent Search Engine Strategies shows have revealed a well of frustration over the inability to make separate bids.

Google adamantly denies a problem exists. It points to case studies in which AdSense provided good ROI. In October, it bought and closed Sprinks, the only company that allowed advertisers to bid on contextual ads and paid listings separately. Despite Google’s insistence nothing is wrong, many large search advertisers and search marketing firms have been removing their ads from the AdSense system.

The true reason Google refuses to budge is the program is built on a shaky foundation. To secure the large distribution network AdSense needs, Google must pay publishers good prices. But if advertisers make separate bids for contextual ads, most would bid significantly less than they do for paid listings. Publishers would see revenue fall dramatically. This, in turn, would lead many sites to either remove the AdSense tags from their pages or demand a better revenue share.

AdSense is a house of cards, built on a foundation that forces advertisers to overpay for contextual ads. If Google allowed separate bids, it would risk losing revenue on multiple fronts: from the lower bids, the loss of distribution, and the loss of revenue share. The company bet it could keep prices high and revenue shares low as it built this program. But with smart advertisers turning off their AdSense ads, it’s time for Google to give advertisers what they want.

Google must create a separate marketplace for bidding on AdSense ads. Contextual advertising will be a very large business. At appropriate prices it can be a very effective advertising tool. Forcing advertisers to pay inflated prices can only stunt the business’s growth and hurt Google’s reputation as a fair and friendly company. Creating a separate marketplace would probably also force Google to reveal the revenue share it offers publishers. An added measure of transparency would surely be welcome.

Google still attracts more advertisers and enjoys better distribution than any other search engine. But whether it can recover from its recent stumbles and keep its lead over the next 12 months will depend largely on how it handles AdSense. Creating a separate bidding system and revealing the publishers’ revenue share would help restore the Google gloss that lately has started to dull.

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