AOL Only Adwords – Marketplace & Revenue Impact

So, if you haven’t heard by now, AOL is receiving their own version of Google Adwords (Private Label deal).

I’m not going to rehash the background and deal info, referenced at SearchEngineLand, but instead, I’ll try to explain what I see the market impact as being.

I’ve long argued the point that we should be able to price keyword by partner on all the major search engines, as they all have quite different conversion rates and “Not every click is created equally”, to paraphrase. The AOL deal has forced Google to make this move, and I think it will probably hurt their margin numbers and not just their revenues. Overall, it’s probably close to a zero sum gain as the money will flow to AOL, but their cut will just reduce. I haven’t done the math, but they might be just slightly worse off on revenues, but definitely down on margin.

Also, this impact will hurt many of Google’s partner sites that relied on high conversions from AOL to “slip” clicks through the door at higher than market value (respective earning or value per click), because of the fact that marketers cannot price each partner differently.

This is quite a complicated post, so please bear with me – I’ll try to explain this as simply as possible.

Currently, when buying Adwords ads, you pay a single price for a click & keyword that goes to Google’s distribution network.

For example (and I’m using hypothetical, BUT REALISTIC numbers here), let’s say that a keyword received 100 clicks and the breakdown by partner is as follows:

25 Clicks from AOL – 5 Conversions
50 Clicks from Google – 4 Conversions
25 Clicks from Google Partners – 1 Conversion

Total Clicks = 100 x CPC of 25c = $25 in costs
Total Conversions = 10 divided by $25 in costs, leaves us with a $2.50 CPA (Cost Per Acquisition)
Assume an average position of 3 and as you can see from above, AOL has the better conversion rate.

Let’s assume that your breakeven point is $2.50 CPA. Now, because Google runs a single blind marketplace, there is no price discrimination, which means that there is cross subsidization of keyword value (you pay an average price for everything, yet some clicks are worth more and others are worth less).

For the record, our logs indicate that AOL has the best conversion rate across all Google partners, and this simple means that if there is a separate marketplace for AOL, that prices across the Google Adwords network (especially direct) should fall, IN THEORY (see conclusions).

Now, let’s assume that we removed the AOL numbers:

50 Clicks from Google – 4 Conversions
25 Clicks from Google Partners – 1 Conversion
25c CPC x 75 Clicks / 5 conversions = $3.75 CPA

By AOL moving out of the marketplace, this would effectively mean that the remaining traffic would become too expensive, because AOL would not be cross subsidizing it (and obviously, they know this already, and that’s why they want their own marketplace). This would mean that prices would drop in order to offset the drop in traffic quality.

What would this mean for AOL?

$2.50 CPA x 5 Conversions = $12.50 / 25 Clicks = 50c CPC – almost DOUBLE what Google was raking in for them by cross subsidizing, is what the merchant would be willing to pay direct on AOL, because of the higher conversion rate.

Now, here are the possible conclusions vis a vis Google CPC’s:

1. Google CPC’s will drop as marketers move their spend directly onto AOL and adjust ROI’s according on Google. This will impact Google’s financials, as they will have to pay out a lot more money to AOL.

2. Google CPC’s will increase as dumb money floods the market because marketers are either too lazy or overworked to load AOL campaigns (highly unlikely in the long term) and instead they make it more profitable for Google to show Adwords direct ads for AOL, than AOL marketplace ads. I doubt this would occur though, but it’s a possibility.

3. Google CPC remain unchanged as AOL take-up rates are too low to impact the overall conversion number in the short to medium term.

So, logically speaking, by removing the “bane of mankind” *according to me* (Cross Subsidization) from the Adwords system, we as marketers will be able to align ourselves far more closely with the value per click.

Where do I get this insight from? Well, as an affiliate marketer, we have to watch the earnings per click very closely. EPC is a key metric and we are also able to distinguish (using our proprietary technology) the different conversion rates and therefore effective EPC’s per network partner for all the search engines. This data allows us to derive very accurate statistical models and also understand how the market is interpreted (well, as best as possible) by other players.

Every cent we spend is our own, so we have to ensure that we’re as closely aligned to value per click or EPC as possible, and therefore we’re very excited about the AOL prospects, but realise equally that it’s a lot of work.

I think this is a great move by Google and I applaud them. They’ve thrown the gauntlet down to the other search engines, and let’s see how they respond!

Comments

  1. Good post Vinny, and I’m very much in agreement with your description of the situation. In terms of whether it’s (1), (2) or (3), I have to say it’ll be some of each. One point of distinction, though – my understanding is that this is *not* something Google is pushing but is rather being led by AOL who wants to (and has the rights to) sell their traffic directly for its higher ROI value and, frankly, because they have the rights to in their 2005 agreement with Google.

    Another point of distinction – as far as I understand, AOL does not have the rights to sell their traffic directly to anything other than a list of 2000 top advertisers as determined by an independent 3rd party.

    Google CPC’s will not be impacted much, if at all, in the short term, advertiser adoption (even among those 2000) will happen over a period of 3-9 months because of work loads, lack of ROI understanding, and AOL’s newness to search ad sales – and IMO because of the AOL/Google deal structure not making it easy to launch a la Site Targeting or Content bidding.

    Markets want to be efficient, and this is AOL being sick of seeing their CPC’s diluted by G’s lower-quality [and IMO non-search] search distribution partners. Good advertisers who adopt AOL directly will be able to profitably spend more overall in search, Google will see a little bit less spend overall, and perhaps most importantly, many of those 2000 advertisers will opt out of G’s search network once AOL’s in place – at least until/unless G allows Search Network-specific bidding.

  2. Good post Vinny, and I’m very much in agreement with your description of the situation. In terms of whether it’s (1), (2) or (3), I have to say it’ll be some of each. One point of distinction, though – my understanding is that this is *not* something Google is pushing but is rather being led by AOL who wants to (and has the rights to) sell their traffic directly for its higher ROI value and, frankly, because they have the rights to in their 2005 agreement with Google.

    Another point of distinction – as far as I understand, AOL does not have the rights to sell their traffic directly to anything other than a list of 2000 top advertisers as determined by an independent 3rd party.

    Google CPC’s will not be impacted much, if at all, in the short term, advertiser adoption (even among those 2000) will happen over a period of 3-9 months because of work loads, lack of ROI understanding, and AOL’s newness to search ad sales – and IMO because of the AOL/Google deal structure not making it easy to launch a la Site Targeting or Content bidding.

    Markets want to be efficient, and this is AOL being sick of seeing their CPC’s diluted by G’s lower-quality [and IMO non-search] search distribution partners. Good advertisers who adopt AOL directly will be able to profitably spend more overall in search, Google will see a little bit less spend overall, and perhaps most importantly, many of those 2000 advertisers will opt out of G’s search network once AOL’s in place – at least until/unless G allows Search Network-specific bidding.

  3. Andre says:

    Hi Vinny,

    Now I remember why I enjoyed following your blog so much… Somehow I dropped the Vinny-feed after I switched to Google Reader.

    Love the analytic thinking, simple explanations and conclusive round-up.

  4. Andre says:

    Hi Vinny,

    Now I remember why I enjoyed following your blog so much… Somehow I dropped the Vinny-feed after I switched to Google Reader.

    Love the analytic thinking, simple explanations and conclusive round-up.

  5. [...] Lingham has a great blog post about the overall impact that the Adwords for AOL is going to have: For the record, our logs [...]

  6. Thanks guys!

    Two other posts of interest relating to this topic, which would add some additional strategic background logic (in my opinion, anyway!):

    (MSN/Yahoo/Google)

    http://vinnylingham.wpengine.com/2006/05/the-clash-of-the-titans-a-fresh-perspective.html

    (Return on Effort)

    http://vinnylingham.wpengine.com/2007/03/return-on-effort-with-ppc-campaigns.html

  7. Thanks guys!

    Two other posts of interest relating to this topic, which would add some additional strategic background logic (in my opinion, anyway!):

    (MSN/Yahoo/Google)

    http://vinnylingham.wpengine.com/2006/05/the-clash-o

    (Return on Effort)

    http://vinnylingham.wpengine.com/2007/03/return-on-e

  8. coRank says:

    Vinny Lingham’s Blog » AOL Only Adwords – Marketplace & Revenue Impact…

    AOL is receiving their own version of Google Adwords – possibly lower the CPC of Google?…

  9. coRank says:

    Vinny Lingham’s Blog » AOL Only Adwords – Marketplace & Revenue Impact…

    AOL is receiving their own version of Google Adwords – possibly lower the CPC of Google?…

  10. Worth noting… AOL’s white label program is only available to AOL’s 1,000 biggest advertisers. One of many little clauses in their renewal deal they renegotiated last year.

  11. Worth noting… AOL’s white label program is only available to AOL’s 1,000 biggest advertisers. One of many little clauses in their renewal deal they renegotiated last year.

  12. Cat Seda says:

    More work but more control. So overall, this is good news for PPC advertisers. Thanks, Vinny, for including examples and possible conclusions. It’ll be interesting to see what happens…

  13. Cat Seda says:

    More work but more control. So overall, this is good news for PPC advertisers. Thanks, Vinny, for including examples and possible conclusions. It’ll be interesting to see what happens…

  14. [...] a white-label PPC marketing platform based on the backend of Adwords. Vinny Lingham has a detailed analysis about how the deal will affect both Google and PPC [...]

  15. Linda Garcia says:

    Does anyone know if and when AOL’s white label program will be available to smaller advertisers?

  16. Linda Garcia says:

    Does anyone know if and when AOL’s white label program will be available to smaller advertisers?

  17. Searchquant says:

    Linda,

    I don’t think it ever will be. AOL’s deal with Google gives it the right to sell to 1000-2000 top advertisers (as defined by a 3rd party I believe), and no one else. So either you’re on the list or you’re not.

  18. Searchquant says:

    Linda,

    I don’t think it ever will be. AOL’s deal with Google gives it the right to sell to 1000-2000 top advertisers (as defined by a 3rd party I believe), and no one else. So either you’re on the list or you’re not.

  19. Shon says:

    I dont think AOL gets enough targeted traffic probaly like 70% off people uses google..

  20. Adwords says:

    AOL is nothing.
    They dont drive that much Traffic.

  21. alison says:

    Quite interesting topic covered here about AOL. Thanks for sharing valuable information and I will be waiting for new updates.

  22. club penguin says:

    I'm very much in agreement with your description of the situation. In terms of whether it's (1), (2) or (3), I have to say it'll be some of each. One point of distinction, though – my understanding is that this is *not* something Google is pushing but is rather being led by AOL who wants to (and has the rights to) sell their traffic directly for its higher ROI value and, frankly, because they have the rights to in their 2005 agreement with Google.

  23. I kind of have to say I like the idea – normal publishers can't even get away with that, why should aol? I mean – just because they're a bigger company doesn't mean they should be allowed to trick their users into clicking ads. That hurts everyone all around…

  24. Wireless says:

    Google was better than AOL, everyone know that

  25. Jose says:

    AOL cant trouble Google and we all know that…

  26. guccis says:

    Thanks guys! Two other posts of interest relating to this topic, which would add some additional strategic background logic (in my opinion, anyway!):

  27. hayden says:

    Put the right person in charge of your
    ad program
    ..which is very important..

  28. AOL cant trouble Google and we all know that…

  29. Quite interesting topic covered here about AOL. Thanks for sharing valuable information and I will be waiting for new updates.

  30. Blog Tips says:

    thank you for sharing

  31. I don´t think that AOL PPC will get a good impact at the search market.
    Nice post!

  32. IR35 says:

    Time proved AOL to be a poor Google competitor in the paid search battlefield. Does anyone still actually use AOL anymore?