Eye of newt: Inside Google's AdWords auction

Analysis When Google chief legal officer David Drummond testified before Congress last week, he didn't disappoint. He splattered Capitol Hill with the sort of shameless nonsense we've come to expect from Mountain View's number one huckster. In short, Drummond told all those Congresspeople that if Google is allowed to rule 90 per cent of the search advertising market, the web will be a better place for just about everyone - including advertisers.

"Advertisers will benefit from better ad-matching capability, giving them improved ways to reach online customers more efficiently," Drummond said. And he insisted that a 90 per cent monopoly would have exactly zero effect on market economics. "Google does not control the prices charged to an advertiser when a user clicks on a Google ad. Rather, advertisers themselves determine prices through an ongoing competitive auction for particular keywords."

Drummond and his Mountain View cohorts have spent years telling the world that advertisers set the prices on Google's web-dominating AdWords platform. And most of the world believes them. They have a knack for convincing people of almost anything. In recent weeks, at least one person was convinced that Google is the end of science.

But with Google threatening to own the internet through an ad pact with (former) arch-rival Yahoo!, it's time we dispelled the last of the great Mountain View myths. Google does control the prices charged to its online advertisers. And AdWords is not an auction - at least not an auction like any other.

Yes, advertisers bid for ad placements, vying for a spot near the top of that Google results page. But this is hardly an unfettered, eBay-style bid-off. If AdWords is an auction, it's an auction where your $10 bid may lose out to a bid of 5 cents, where you may be banned from bidding unless you outbid the rest of the field, where some bids are ignored from time to time and others are ignored all the time, where you don't know the rules - and the rules are always changing.

Naturally, those rules are set by Google. If you're an AdWords user, you know full well that Mountain View controls your ad dollars.

A Question of Quality

When you lay down an AdWords bid, you're bidding on a particular search term or perhaps a collection of terms. If you bid high enough, your very own text ad will appear when an unsuspecting web surfer turns up at Google's search engine and types something along the lines of "ranch dressing" or "hemorrhoid removal." And if that web surfer actually clicks on your ad, you'll pay Google a fee somewhere below that bid.

Of course, a search results page typically serves up multiple ads. You aren't just bidding for a spot on the page. You're bidding for a spot near the top, where you're more likely to land a click. So, with each AdWords auction, the winning bidder gets spot number one, the second place finisher gets the next spot, and so on.

But, again, this isn't eBay. It's not the bids - or, at least, not the bids alone - that determine where you finish. Each bid is multiplied by a mysterious something known as a "quality score," and its this black-box calculation that decides where your ad ends up.

The trick is that quality score varies from advertiser to advertiser, from keyword to keyword, and sometimes from day to day. And no one knows how it all works except the Oompah Loompahs inside Googleplex.

"Quality Score," Mountain View tells us, "is determined by your keyword's click-through rate (CTR) on Google, relevance of ad text, historical keyword performance, the quality of your ad's landing page, and other relevancy factors." Those last three words mean that Google can do whatever it likes with your quality score. It can tweak those AdWords algorithms from now to Kingdom Come, and if it doesn't like what the algorithms are doing, it can rejigger your quality score by hand.

Yes, this is all part of Google's grand scheme to "provide better ad-matching capability," to serve up ads that web surfers actually want. But the point is that Mountain View decides what's better and what's not. And if you disagree, you're out of luck. Sure, Google has a right to set the rules on its own ad platform. But what happens when Mountain View commands 90 per cent of the market? Or even 70 per cent - as it does right now?