Original URL: http://www.theregister.co.uk/2008/07/24/the_google_auction/

Eye of newt: Inside Google's AdWords auction

Or whatever it is

By Cade Metz

Posted in Financial News, 24th July 2008 14:02 GMT

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?

At a Minimum

If Google doesn't like your quality, it may even force you off that results page entirely. With each so-called auction, Google gives every advertiser a separate minimum bid, and this too is a product of quality score. For one advertiser, the minimum might be 10 cents. For another, it might be 10 dollars. And unless you bid your minimum, you can't join the bidding.

There are ways of improving your quality score - and your minimum bid. But you can't improve it unless you pay it - over and over again. And many smaller advertisers can't afford to play that game.

If your quality score is low and your minimum bid is high, you typically end up at the bottom of Google's results page, paying more for less traffic. "Roughly speaking, an ad that has twice the quality of another ad will tend to get about twice as many clicks, and will only have to pay half as much per click as the competing ad," Google chief economist Hal Varian wrote in a recent blog post. This, of course, makes it all the more difficult to improve your quality score. And so on. And so forth.

Again, Google is working to weed out what it sees as dodgy ads. But in doing so, it puts the squeeze on newer advertisers who've yet to learn the ropes - while raking in some added dough. "Even for experienced advertisers, setting up an AdWords account is a real challenge," consultant Andrew Goodman, the man who wrote the book on AdWords, has told us. "If you're a new advertiser, either you fail or Google makes a bunch of money off you."

For some, the only option is a switch to some other search platform - an option that grows less attractive by the day.

"An ad that has twice the quality of another ad will tend to get about twice as many clicks, and will only have to pay half as much per click as the competing ad." -Google

False Impressions

But at least Google acknowledges that the minimum bid exists. Though Mountain View remains largely mum on the matter, there's evidence the company exerts even more control over the alleged AdWords auction. It would seem that those who typically receive higher placement on the results page also receive more impressions - i.e. their ads appear on more pages.

With his blog post, Google's chief economist indicates that AdWords does limit impressions for certain ads at the bottom of its list. "Ads that have particularly low quality may be disabled, and not shown at all," he says.

But Mountain View may go much further. According to a study run by one high-volume advertiser, Google plays games with impressions not only at the bottom of its ad list, but at the top. For each keyword, this study indicates, the ad that typically sits at the top of the page receives significantly more impressions than the ad that typically occupies the second spot, the ad in the second spot receives more than the third, and so on.

"If you bid your ad to rank 1, you get about 60 per cent more impressions than if you bid it to rank 2. Rank 2, in turn, gets about 30 per cent more than rank 3, and below that, there is about a 10-per-cent-per-rank boost," this advertiser says.

The study compares AdWords to Yahoo!'s original search advertising platform, which was replaced in the middle of last year. Yahoo!'s old school platform was a straight eBay-style auction. The highest bid got the highest spot. And Yahoo! gave the same number of impressions to each bidder.

In this graph, compiled by that high-volume advertiser, the fractional boost in impressions per rank is plotted against an ad's typical position on the results page (0.5 is equal to a 50 boost). The blue line represents the old Yahoo!, the red line Google:

Google AdWords Impressions

Does AdWords fiddle with impressions?

Though we've asked Google countless times whether it apportions impressions, the company has yet to give us a direct answer. It does acknowledge that if ten advertisers bid on a particular key word, there will be cases where the results page shows fewer than ten ads. But that could mean anything.

It's well known that Google targets ads according to a searcher's geographical location. And in all likelihood, it also targets according to a searcher's click history. The question is whether Google fiddles with impressions in an blatant effort to give certain ads more exposure than others.

Google does say "an ad that has twice the quality of another ad will tend to get about twice as many clicks." At the very least, by tying quality score to click through rate, Mountain View drives more traffic to ads that already receive considerable traffic. Whatever's going on inside that black box, Google has built a system where entrenched advertisers have a significant advantage over newbies.

But Google isn't just playing favorites. It's driving prices higher by limiting the number of clicks available at low prices. In a way, it's creating an artificial scarcity.

But is it an Auction?

Google maintains such control over the AdWords auction, you have to wonder if auction is the right word. In the broadest sense, it is. "An auction is an allocation mechanism in which people bid for something that's valuable to them," says Paul Klemperer, Edgewood Professor of Economics at Oxford University and the author of Auctions: Theory and Practice. "Though [AdWords] is clearly a more complicated auction than you get at Sotheby's or Christie's, you can see that it's an enriched version of the same process."

But AdWords isn't what the Average Joe expects when he hears the word auction. The rules aren't clearly defined. Google reserves the right to change the rules at any time. And in the end, you don't quite know what you're bidding for. Advertisers assume they're bidding for a spot on that results page every time someone types in a keyword. But that's just not the case.

As Klemperer points out, there are other auctions where you don't know the rules. "If I am an architect bidding for a contract, I supply a drawing and proposed price," he says. "And it's completely up to the panel to decide how they value certain architectural attributes."

But the architect doesn't pay the panel. The panel pays the architect. With AdWords, you don't know the rules, you don't what you're bidding for, and even if you're unsuccessful, Google grabs your cash. Would you call that an auction? ®