Two wrongs don’t make a right…

Let’s look at the math:

Microsoft does not understand search monetization.
Yahoo does not understand search monetization.

Combining the two does not mean they suddenly will. The only company laughing at all this is Google…

I’ve written extensively about how to improve search monetization but both Microsoft & Yahoo place both internal and geographical politics above efficient business (running separate bidding marketplaces per country). As long as merchants are making considerable returns from Google – they are not going to use their valuable time on other search engines. Ok, so perhaps this merger will now improve return on effort for running MSN/Yahoo campaigns by combining the traffic, but it’s still a long road ahead for the combined company if it continues to focus on running multiple bidding marketplaces.

On a lighter note, I heard a great joke today:

What do you get when you merge Microsoft & Yahoo? Microsoft

Microsoft acquires Yahoo?

It’s finally happened…Microsoft has made a bid for Yahoo. It’s a potential smart move on Microsoft’s part, with a really good bid that will make shareholders think. There may be some anti-trust issues as this effectively merges the #2 & #3 company in the search engine market and gives Microsoft a run on Google’s dominance in this space. It’s also puts Facebook into the Yahoo camp… I’m interested to see how this unfolds. I know people from both sides of the coin, and I think that the cultural differences will be hard to overcome. Also, it is often quoted that 70% of acquisitions fail to create value for shareholders – nearly 2-1 in odds – will this be any different?

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!

Google Apps Launches

Google just announced the launch of Google Apps – a direct attack on Microsoft’s multi billion dollar Office Suite – although right now, they are just rolling out basic applications.  The idea is that they will private label their suite of applications to make it seamless for companies to use and brand as their own.  This is another step further into the Web Applications space.  I’m positive that Google will launch an operating system (for free) at some point in time.

MySpace & Google ink deal!

Well, as expected, MySpace have opted NOT to build their own PPC system as speculated and instead have decided to partner with Google – instead of rehashing the news – here is a link to Bloomberg‘s article.

I’m quite shocked at the  value of the deal as I would think that it would have a much higher value over nearly 4 years, but be that as it may – it will be interesting to see how Yahoo counters this move.

Google’s Portal Endeavours…

One of my favourite blogs/new resources is the daily newsletter from Good Morning Silicon Valley, written by John Paczkowski.

Today’s post is about how Google’s market share of it’s different properties do not even step up to Yahoo’s market penetration for similar properties (according to Hitwise).

As an industry “insider”, even I don’t get a chance to play and use all of Google’s toys, nor do I even know about everything. They’ve done a lot in short space of time, and I’m sure the average user is oblivious to what they’re up to.

That said, let the showdown begin…

The Math Behind Google’s Latest Move…

Ok, so Danny Sullivan has written a nice post on Google’s latest decision in certain markets to remove the Agency rebate. The real reason behind this move, in my opinion, is that it will increase relevancy.

I personally have a problem with any kickbacks/rebates that are given to advertisers in an auction driven marketplace, as those who receive these rebates effectively have an edge over other advertisers – which is not fair play. Many agencies who receive these rebates, actually refund the costs directly back to the advertiser, or factor it into their bid prices (i.e. increase their prices by up to 10% more as they receive this discount back).

So, here’s the math as to why Google is in the process of removing the agency discount, and why it’s a relevancy issue:

Let’s play our a scenario where 8 advertisers are competing for position on the front page of Google. Let’s also assume that their sites convert equally and they have the same product, therefore the same margins and by chance, they also have the same relative (to position) conversion rate on their site for each position and their max CPC starts at $1 . Let’s also assume that the price that they pay in the positions just below is also the maximum profitable price that they are willing to pay. Due to the quality scores of each advertiser, their ranking & CPC are determined as follows:

1. Advertiser A – $1
2. Advertiser B – $0.99
3. Advertiser C – $0.97
4. Advertiser D – $0.96
5. Advertiser E – $0.95
6. Advertiser F – $0.94
7. Advertiser G – $0.93
8. Advertiser H – $0.92

So, if we assume for a minute that the positions indicated above are ranked in terms of user relevance, then this represents a perfect win-win scenario for Google where all advertisers are ranked both upon their maximum price & user relevancy.

Ok, now if all of a sudden, Advertiser H was given a 10% rebate, he could then effectively offer a Max CPC of $1.11 . This result in the following re-ordering:

1. Advertiser H – $1.01
2. Advertiser A – $1.00
3. Advertiser B – $0.99
4. Advertiser C – $0.98
5. Advertiser D – $0.97
6. Advertiser E – $0.96
7. Advertiser F – $0.95
8. Advertiser G – $0.94

So, what has now occured is that the least relevant advert on a given keyword now receives top position, because of the rebate, even though Google themselves are not earning a higher CPC for that position. I realise this is rather simplistic and that there are other variables not mentioned, but the effect is even more pronounced when you expand it into the real world marketplace (you’ll just have to take my word for it – I have two actuaries in incuBeta :-) ).

Google is not trying to launch an attack on Media Buyers & Search Agencies – what they’re trying to do is remain true to their users & their ranking algorithms and remove any form of bias to any advertiser. The sooner that Media Agencies come to terms with the fact that Google is full of mathemagicians…the sooner they will feel more comfortable with their policies.

I understand that it’s contradictory in some ways, as we look at China, but in essence China is such a different market and from our experiments with the ranking algorithm in this market, it’s being engineered in a slightly different way (or so we think!).

Obviously, as a performance marketing company, we welcome the removal of rebates to level the playing fields, as we do believe that we’ve been at a disadvantage by not receiving the rebates. Our business model is also geared around maximising spend toward a certain conversion metric, not brand marketing or managing client PPC spend as an agency or in-house team would. We also don’t rely on rebates and branded terms to make a campaign “look good” to a client, and in the process just pull wool over their eyes as many agencies and in-house teams do.

Our business is focused on leveraging technology and people to create systems that allow for us to rank high on well researched, niche keyword terms that our clients are not on, or are not ranked as high as they could be. Sure, it makes some agencies & in-house teams concerned and insecure, but the really advanced agencies & in-house teams never have a problem working with us and often give us valued support, because we have a common goal – increasing revenues for the client and maintaining costs to a profitable level for all parties. The removal of rebates will further pressurize the inefficient players in the market, which also benefits all parties concerned.

In closing, I believe it’s just good business for Google to focus on keeping the integrity of their ranking algorithms in line with what the end user wants and in making sure that they keep coming back.