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Higher prices don’t necessarily bring better clicks
July 15, 2008
Google doesn’t set the prices for its adverts, advertisers do, by bidding in an auction. So if advertisers are willing to pay more on Google, it must be because Google delivers better clicks (or leads.) Why should anyone get hurt if Yahoo wants to feed some of its own inventory into the Google auction to take advantage of this?
That’s the basic argument that the two companies pulled out again today as they locked horns with Microsoft in front of two Congressional committees.
It sounds fine in principle. The reality, though, is more complicated. There are both short- and long-term reasons why at least some advertisers might benefit from keeping the two companies’ advertising systems at arm’s length.
The short-term case is that keyword advertising systems are not like the stock market - these are not “perfect” markets where it is easy to arbitrage away inefficiencies between the systems. Prices may be lower on Yahoo because of illiquidity - there are just fewer clicks for some search terms, so some advertisers won’t feel it’s worth incurring the fixed costs of running a Yahoo campaign.
Other advertisers benefit from this effect. They will lose out if Yahoo feeds these lower-value searches in future to Google to benefit from that company’s greater liquidity.
(There was some evidence today to support that argument: according to research from SearchIgnite, it is the low-volume “long tail” queries where Google does best in extracting higher prices for its adverts than Yahoo.)
The long-term case is that the company which runs the auction gets to decide how it works. If competition between markets declines, price competition between advertisers is not on its own enough. This is not the New York Stock Exchange - Google’s governance doesn’t give its users, or outside regulators, any say.
The lack of transparency accentuates this. Google doesn’t just look at the prices that advertisers bid when deciding how to rank adverts, it also applies a “quality score” to determine how “useful” it thinks an advert will be to users. There is no way for outsiders to assess the fairness of this process.
Google also sets minimum prices for some keywords (a recent change that it said was to spare users from the clutter of low-value adverts, but which also had the effect of putting up prices for some advertisers).
I find most of what is coming out of Yahoo and Microsoft is very cloak and dagger, it’s a bid like a build up to a war particularly with all the rhetoric coming out of Carl Icahn with encouragement from Microsoft. Both companies seem to have forgotten that the enemy is really Google, not each other. Google have been surprisingly quite when not have to say something to government officials about anti trust issues, but then they don’t really need to say anything do they! On the Google - Yahoo deal I find it odd how Yahoo are trying to create a market for something that doesn’t presently exist. I’m not sure advertisers on Yahoo will be happy about paying higher costs that Adsense generates. Whether Yahoo gets bought by Microsoft or either company buys AOL or even if the PPC deal goes ahead or not I can only see one winner in all of this and that’s Google.
Posted by: Tim Hawkins | July 17th, 2008 at 4:30 pm | Report this comment