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Google - the world's first firewalled monopoly

Pricing power goes virtual

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A question of quality...

In early September, Google revamped its ad platform, rolling out several changes that expanded its advertising coverage, tossing more ads onto more pages.

During the third quarter, a time when so many other companies were feeling the heat of The Meltdown, Google's paid ad clicks jumped 18 per cent over the previous year. And revenue soared 31 per cent. Considering that advertising drives all but a thin slice of its revenue, Google didn't just expand coverage. It sparked a significant price increase - whether Jonathan Rosenberg admits it or not.

Google will tell you those AdWords changes were "quality improvements," meant to fill search pages with ads that netizens are more likely to enjoy clicking on. On some level, that's probably true. But this is ad quality as Google sees it. Not as the advertiser sees it. And Google has improved it in a way that makes the company more money.

The trick here is that Google can so easily raise prices while claiming it doesn't. Because the system is set up as an auction, Schmidt and crew can honestly say that advertisers bid for placements. But at the same time, the company can boost the platform-wide cost per click with a spin of that algorithmic dial.

And since the system is a black box, it can spin without scrutiny. It's not just that the algorithms are top secret. All the bids are top secret too. The monopoly is hidden behind the firewall. Individual advertisers may complain they can't get traffic without exorbitant bids. But Google can always cry quality. And we have no way of knowing what that means.

Yes, Google gives advertisers a certain amount of insight into when their ads are posted, supplying long lists of keyword searches and third-party sites serving up impressions. But the system is so complex, its reach so vast, separating the Google signal from the advertiser noise is an impossibility - whether you're a newbie or the most clever of seasoned users.

It's not that an antitrust suit would suddenly clarify things for advertisers. The nature of the system is that it's far too complex for Joe The Advertiser to grasp - even with algorithms in hand. But if Google were forced to open its virtual books, we would know whether it's limiting impressions for advertisers low on the totem pole, creating a kind of artificial scarcity where the prices are cheap. And we would know just how much the Mountain Viewers can juice revenues with a few algorithmic tweaks.

If the DoJ had launched an antitrust suit over Google's ad pact with Yahoo!, it may have undermined more than just the ad pact with Yahoo! So Eric Schmidt was right: the potential costs were enormous. ®

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