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Pricing power goes virtual

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Antitrust 2.0 Why did Google leave outgoing Yahoo! chief executive Jerry Yang heartbroken at the search engine altar? If you believe the words chief ad broker and CEO Eric Schmidt funneled through The New York Times, Google chafed at the prospect of winning a Department of Justice (DoJ) antitrust suit.

"We canceled the deal with about one hour to go before a lawsuit was going to be filed against our deal," Schmidt said. "We concluded after a lot of soul-searching that it was not in our best interest to go through a lengthy and costly trial which we believe we ultimately would have won."

But surely, when Schmidt speaks of costs, he's not concerned with paying his lawyers. A monopoly-expanding ad pact with Jerry Yang and Yahoo! would bring Google hundreds of millions of dollars a year. If the company was convinced of an antitrust triumph, legal fees were a drop in the bucket.

As head Mountain View lawyer David Drummond tells it, a long legal battle could damage relationships with Google advertisers - many of whom opposed the Yahoo! marriage. But the costs are even greater: An antitrust trial would finally give the world a window into Google's black box of an ad engine.

The genius of the Mountain View money machine is that no one knows how it works.

The auction that isn't

Even in the face of a probing DoJ, Google insists that its ad platform is an auction - that advertisers set their own prices. But the AdWords auction is hardly a free market. You can't bid your way to the top of Google's search results page. Each bid is crunched by algorithms hidden inside the Google chocolate factory. Ad placement depends on ever-changing Google math that's not only outside the advertiser's control - it's outside the advertiser's line of sight.

AdWords is an auction where you don't know the rules, the rules are always shifting, and you don't quite understand what you're bidding for. Ultimately, you're at the mercy of the auction house. AdWords is famous for The Google Slap, where search ads suddenly vanish from results pages as Mountain View decides your current bid isn't worthy.

Google's ad engine is so far from an eBay-style bid-off, even Google admits that advertisers can't wrap their heads around it. "We have seen some large advertisers complain [about the Yahoo! ad pact]," Eric Schmidt said during the company's third quarter earnings call. "In my view, many of the complaints are based on the fact that people do not understand how the auctions really work."

This would seem to undermine Google's contention that advertisers are in control. As telco-backed blogger Scott Cleland has asked: If advertisers don't understand the auction, is it really an auction?

The truth is that if you want a particular ad placement, you're forced to pay whatever Google decides you should pay. And since Google controls at least sixty per cent of the search market, turning to a competitor isn't the best of options.

Later in that earnings call, Google senior vice president Jonathan "Perfect Ad" Rosenberg was asked whether the average cost per ad click had risen during the third quarter. He wouldn't say. But he seemed to indicate that it had - and that demand hasn't slowed.

"Our experience is advertisers are willing to take all the clicks we can give them at the current CPC [cost per click] - even in tough times," he said. "We think that will continue to be true because nobody wants to turn away a customer."

Does that sound like pricing power?

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