Is This GOOG's Mammoth Conflict Of Interest?
By Tom Foremski - May 6, 2007
Over on New Rules Communications I was writing about Google's ad networks and the bad economics for media companies.
Link to: This Is Why Online Ad Nets Can't Save Media Companies
I noticed that there is an interesting conflict of interest emerging at the heart of Google's business model.
Please check my reasoning:
Google makes almost all of its revenues from two ad networks:
-AdWords: Customers advertise on Google web sites.
-AdSense: Customers advertise on Google partner sites, which includes many media companies.
Google's revenue in 2004 was about evenly split between AdWords and AdSense.
Since then, Google's revenue from its own sites has grown by 24 percent to 62 percent of total revenues. AdSense has fallen.
And this makes sense because Google makes far more money from its own sites than from partner sites. It is better for Google's shareholders that it channel more of its revenues through its own sites because:
-Google gives back about 80 per cent of AdSense revenues to its partners.
-It keeps all of its AdWords money.
And this is where it has a mammoth conflict of interest:
Which advertising network should Google invest in?
-A dollar invested in its AdWords produces far more profit than invested in AdSense, its partner network. Management has a fiduciary duty to its shareholders to maximize profits.
-Google can boost overall profits by undercutting AdSense at anytime it wants, say by offering a discount on AdWords compared with AdSense. A 20 percent discount on AdWords would make more money for Google than the corresponding loss of business through AdSense partners.
-Google can undercut AdSense in other ways, and is already doing it, by investing in technology that improves AdWords conversions over AdSense. Google can apply technologies to its own sites that make them more efficient at selling ads. It can't do that with partner sites. And partner sites don't have the resources to improve their advertising conversions at a similar pace.
Which means AdSense revenues for media companies will continue to fall because AdWords is more efficient.
---
Media companies that partner with Google in its AdSense program do it because they don't know what else to do. The economics of partnering with Google are poor and the relationship is unsustainable because of the inherent conflict of interest.
Why Would GOOG Maintain AdSense?
-There are strategic purposes, it forces media companies in its network to compete with its far more profitable business model which weakens them as potential competitors.
-Also, it keeps third-party sites out of rival ad networks.
-AdSense is a great "cookie jar" because if GOOG ever needs to meet its numbers for its quarter, it can push more ads through its own sites rather than through partners.
UPDATE: Independent Advertising Network Advantage
Independent advertising networks, which don't compete with their publisher partners, such as Blue Lithium, Federated Media, and others, will be able to attract partner sites away from Google because they can invest in technologies to improve revenues for the entire network.
But how much freedom do large publishers have in leaving the Google network? Some have contracts with Google that could tie their hands for years.
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Comments (7)
Am I missing something? As far as I know, AdSense is a network for **publishers** to publish Google ads on their sites, AdWords is a network for **advertisers** who are looking to promote their products on either Google or AdSense member sites.
Posted: May 6, 2007 9:15 AM
i think you're missing a key factor here. i have found that the non-google network doesn't generally work well for advertisers. why would i allow my ads to be syndicated when the results stink? most online marketers i know are now selecting to advertise only on google.
Posted: May 6, 2007 9:36 AM
Here's another conflict of interest you missed... The reason ads are so successful on Google is because they are more relevant than the natural results (frequently). So, where's the incentive to improve the relevancy of the natural results?
Posted: May 6, 2007 10:32 AM
This is a red herring Tom.
If advertisers are savvy and use the statistics provided they will decide to opt in or out of the Adsense network (default is opt in).
With the number of 'pyramid bloggers' creating sites specifically for eliciting clicks and the tools (a la cashkeywords) on the increase en masse Adsense's effectiveness is being watered down.
Google will keep pumping traffic to its adsense partners. So for every lost adwords click they still mop up with adsense.
It becomes a mire though when keywords arbitrage kicks in when adwords is exploited by publishers to drive latent traffic and profit on the numbers.
Posted: May 6, 2007 1:14 PM
Emre: Both are Google adnetworks and both generate nearly all of GOOG's revenues.
Lucinda: Yes, exactly, AdWords is more effective and continues to improve. Google itself is the largest competitor to its publisher partners.
Jarid:Yes, Google can apply better ad converting technologies to its own sites.
Dan:Yes, click fraud hurts the AdSense network causing prices to drop. Investing in stopping click fraud benefits AdSense, but that investment raises Google's profitability by far less than investing those same resources in improving AdWords. It is Google's partners that lose out. And this opens the door to independent advertising networks that don't compete with their partners and invest in improving the entire network.
Posted: May 6, 2007 2:36 PM
You're right about the conflict, although I don't see it different from any other business model that has direct and indirect sales channels. And there are plenty. The direct channel is more about keeping your margins to yourself (maybe even cherry picking), and the indirect one is more about trading off your margin in favor of scale and meeting more niche needs. There are limits to how much traffic Google can pull thru its own 'direct' pages, and how much advertiser demand it can fulfill with its own ad inventory. Whatever demand it cannot fill, it makes sense to let specialist content partners fulfill those advertiser needs. Its lower margin business for Google, but its good enough for partners. And if someone in the channel gets very big, hey, maybe they're good enough to buy out!
Posted: May 8, 2007 10:34 PM
Mohit, yes, you are right, there are many other businesses in similar situations.
This post is part of a series of posts over the past two years where I am trying to point out to other media companies that Google is not just a tech company. It is technology-enabled-media-company. Highly technology enabled, compared to a YHOO or anybody else. Which means it is focusing on the lowest operating costs
And at this point in the evolution of the internet, it is a killer business model. It is a business model that leverages the scale of the internet and also the confusion about who is a competitor or not.
GOOG might not consider itself a media company, so waht? After all, Eric Schmidt says Google is not a media company (that doesn't mean anything btw...)
Let me state things slightly differently: GOOG competes for the same pot of money that traditional media companies compete for. And, it is better at converting that money into sales for its advertisers.
Should you partner with GOOG? That's up to you. My position is why? Figure out how to do it without GOOG, you'll be better off.
The New York Times, and other big news sites run Google ads on their home pages, and at the bottom of the ads there is a link to click: would you like to "advertise on this site."
Handing over the customer relationship to a company that competes for the same revenue is not a smart thing to do for any business, imho.
Posted: May 9, 2007 1:08 AM