As the Adwords system continues to expand and adjust to both changes in the marketplace and those driven by Google’s own tinkering, a trend is emerging. Changes which claim to be aimed at benefiting either advertisers, publishers, or searchers – and may provide some level of such benefit - but much more clearly benefit the economic interests of Google itself at the expense of advertisers.

Three that come to mind are the recently revised ‘bid-ask’ system, ‘max-bid for top position’ requirements, and now the ‘adsense probation period’.

• In ‘bid-ask’ Google raises minimum bid prices by up to 60x (in our experience) for an unspecified period of time.
• In ‘max-bid for top position’ an invisible surcharge is levied in order to get ads out of the right gutter and up to the top center of the page.
• And ‘adsense probation’ offers lower fees to new publishers during the initial time they display ads.

In each of these cases (reviewed in more detail later in this post) Google appears to be getting/charging more money with slim to no advertiser, publisher, or searcher benefit.

According to Wikipedia, economist Adam Smith launched the notion that ”in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand”. He argued that each individual maximising revenue for himself maximises the total revenue of society as a whole, as this is identical with the sum total of individual revenues.”

Pay-per-click advertising is popular in part because it appears to works on the same principal. Advertisers bid on visibility to potentially interested prospects, but only pay when someone clicks as an expression of genuine interest. The price of the click is set by the market (via competitive bidding for the advertising slot) and if the advertising network (Google for instance) is syndicating the ad to run in someone else’s space rather than their own (publishers like The New York Times for example take ads from Google and run them on their pages) then the publisher gets paid a portion of the fees representing the value of the space and clicks they provide.

It’s a win-win-win–win for advertisers, consumers, publishers, and the ad network itself. Money changes hand throughout, but most of the fees and percentages should be self adjusting. Advertisers pay less if they and other bidders collectively lower their offers on price for space. The networks make more if they deliver ads the visitors find relevant (as expressed by clicks) or less if they don’t. And publishers similarly should see both click volume and their revenue per click increase based on the quality of their visitors (as expressed in their delivery of ad responses) in both absolute terms and relative to other publishers offering similar space.

But self correcting economic systems require two attributes to avoid compromise and collapse – transparency and fairness. If the participants don’t have enough visibility into what’s going on they can’t trust the system or make good self-interested decisions. If the system gives favor to one player over another, in measures beyond reason or acceptability, the self-interest of some becomes not to play.

It appears that Google is treading further and further onto thin ice in both categories. Let’s look at the above mentioned changes for examples:

The Bid-Ask System

The minimum bid required to run a text-ad against any particular keyword used to be $0.05 and then $0.10 and increases from there were determined by the competitive market. Anyone could run any ad anywhere, for a small and reasonable price, with the clear stipulation that if you didn’t get a minimum click-through rate within a very short initial window (around 1000 impressions) then it was be assumed that the searchers had deemed your ad not relevant and Google would therefore shut it off. It was however possible to try new ad copy and/or raise the bid (and thereby potentially your position on the page) and try again.

Today when running new ads on new keywords, Google often sets an ‘ask’ price (which stipulates the minimum you must bid in order to have your ads run) on the keyword bid at astronomical figures. While recent Google blog posts have claimed adjustments and made the impact sound minor, we’ve recently seen and had others tell us about thousands of keywords – many of which have no other advertisers bidding for them – get hit with ‘ask’ prices of $5 and $10 per click in categories where experience tells us that the normal bid value is closer to $0.25 at most.

Google says these ‘ask’ prices are leveled only until an ad establishes sufficient ‘quality score’ and ‘account history’ and click-through rate. Yet even new ads with high click-through rates right out of the gate, with text ads and landing pages bursting with only relevant content, are subject to these crazy ‘ask’ prices.

So the only way to play is to pay $10 per click for a $0.25 cent word, at least for a while. The price does drop over the course of a few days as you pay the $10 or $5 or even $1 per-click and later $0.50 and then $0.40 fees (much to the horror of your CFO). And the ‘ask’ prices of even paused new keywords does drop as your history builds, so the best strategy is to launch with just a few words and expand as prices drop. But during this time:

• Hundreds or thousands of dollars are being spent in impossibly unprofitable ways.
• Searchers are not having their experience improved unless you believe that by scaring off advertisers with these fees you truly only prevent poor or non-relevant ads.
• Syndicated publishers are not sharing in the huge excesses of the bids made to hit these ask prices (I can’t prove that as Google never says how much or why they share with publishers but have heard nothing of publishers reporting recent windfall revenue increases from Google).
• Google is reaping this windfall for as long as it wants without any clear message to the advertiser how long they’ll have to pay at these rates before the protection-fees are paid-in-full and we can go about normal business.

So this relatively new ‘bid-ask’ price setting system Google wins while advertisers, publishers, and to a lesser degree searchers lose. There is virtually no visibility into the system – you aren’t told why ‘ask’ prices are set so high, or what conditions will make them drop.

The Max-Bid for Top Position

This month-old change can be read about here and here, but basically forces advertisers to raise maximum bids (even if competition has them pay far less than their current maximum for good or even top slots) in order to hit a secret threshold which causes an ad to move from the right gutter to the top of the page above the organic listings. This move can cause a 4X increase in clicks, so is very valuable.

The new system removes or reduces market competition and takes the process of setting value for a keyword and a position and makes it dependent upon arbitrary and secret Google decisions. Advertisers are left with pure ‘how bad to you want it’ economics. Google makes more money, advertisers spend more, and it’s very very hard to see how searchers get a better experience.

Adsense Probation

When website owners (known as publishers in Google’s world) sign up to run Adwords on their site they agree that Google will decide which ads fit with their content, and basically pay the publisher some undisclosed portion of the click fees in return for the space. With some very large publishers the terms are negotiated and disclosed but most publishers just have to take it on faith that Google pays them a fair amount and on actual click traffic.

The publisher network is certainly no picnic for Google, with the click-fraud issue being a primary problem. Nothing really stops anyone from putting ads on their site and clicking them either themselves or via some system just to defraud Google and ultimately the advertiser of lots o’money. The subject is well covered elsewhere. Google has previously announced that the percentage of money they share with publishers is set on a case-by-case basis dependent upon the quality (with an unspecified definition) of the click-through traffic.

Friday they took a further step announcing what is in effect a probation period, during which new publishers get an unspecified less than the unspecified percentage they’ll get later. Even less transparency than ever for publishers, no indication that these lower fees are going to be shared back with advertisers, and only possibly indirect benefit to consumers as less reputable publishers might be scared off from running ads in the first place. But for clicks that do happen, Google makes more money.

Conclusion

It’s good to be Google. The farther this trend goes, the more the rest of us are going to have to decide how bad it is to be advertisers or publishers.

As far as I know Google has the absolute legal and moral right to do everything they’re doing. But their lack of transparency is undermining the Adwords system and as more advertisers start to grasp the subtle complexity of what they’re doing, a backlash could be brewing. Google claims much of what they keep secret is based on competitive issues, but in reality if Yahoo and MSN knew exactly how these system work it wouldn’t buy them one iota of market share in the foreseeable future.

Google has built an amazing system, but the balance of power now rests firmly in their hands. Recent events make it hard not to come to the conclusion that they’re abusing it. Their announcements and posts put a positive and even benevolent spin on everything they do - but unless they more clearly explain the rational and the inner-workings of these and other recent policy changes the number of people who believe them is going to dwindle.

Note: Coincidental-but-not-unrelated article on Google today in NY Times and from Nick Carr.