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Saturday, January 23, 2010

AdSense Revenue Share: 72% for partners, 28% for Google

Google's impressive Q4 2009 earnings report makes certain aspects of the business clear for all to see. For example, they report that revenues of $2.07 billion in revenue was generated by "Google partner sites through its AdSense program," and that "amounts ultimately paid to our AdSense partners" totaled "$1.47 billion in the fourth quarter of 2009".

Misleadingly, the report states that "TAC (traffic acquisition costs) as a percentage of advertising revenues" is 27%. True, but as a percentage of same-channel advertising revenues, it's 72%. There are virtually zero TAC's for "Google-owned sites."

Speaking of those Google-owned sites, they generated $4.42 billion, or 66% of Google's revenues.

In these numbers is the usual picture of impressive strength -- including the fact that the overall number of paid clicks rose 13% YOY (indicating continued success in optimizing page layouts while satisfying users) while click prices rose just above the rate of inflation, at 5% (indicating a leveling-off). But coupled with that strength is the interesting point that financially speaking, Google continues to provide only the illusion of a diversified company. It continues to do well, very well, based on its core cash cow. Elsewhere, it serves as a relatively polite intermediary that continues to face downward margin pressures.

The growth picture is an interesting mix: heavy investment in new areas like mobile (a longer road to profitability), and a relatively smooth path to continued growth simply by enjoying the great upside that remains in international markets in its core strength.

Which, in case anyone has forgotten, features the catchy advertising product: "Google AdWords."

The financial picture for GOOG remains very bright, but mainly because its core strength has such high margins, and Google (needless to say) owns the key "publication" (Google Search) outright.

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Posted by Andrew Goodman




Wednesday, November 25, 2009

When Is It Shouting?

Google has always prided itself on its "unmarketing".

Release products in beta, quietly. Don't buy mass advertising. Let people discover your offerings organically, through online discovery, word of mouth, and a little bit of presence at the key trade shows.

But things seem to have changed. Has Google stepped up the urgency of their outbound effort, at a time when they seem to have reached unprecedented profitability anyway? What if 1,000 Googlers quietly doing their jobs all hit you (quietly) over the head at once? Does it feel like a relentless onslaught of Google this, and Google that? When is it too much?

Recently I was struck to notice Google's presence rivaling that of companies like global financial institutions... they had purchased a whole row of big billboards in the airport, to promote their enterprise software division (www.google.com/gogoogle).

They also have a major presence in a lot of airports right now because they're sponsoring the free wi-fi.

When you get back to your desk, you notice that a house ad on Google Finance is promoting the Google Chrome browser.

Entering my GMail account today, I got an offer sent to me as a CafePress shopkeeper. (This was positioned just below the ad in GMail encouraging me to use Google AdWords, as you can see from the attached screen shot.) A coupon for use in a new Google AdWords account.

I have a pile of unused, similar coupons sitting on my desk, sent to past tenants at my office building.

Does 1,000 earnest voices quietly whispering "Google" add up to a shout? Not quite, but it's an eerie sound, isn't it?

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Posted by Andrew Goodman




Monday, October 12, 2009

Badly-Managed AdWords Accounts -- Worse for You Than for Google

With a few high-profile exceptions, water always flows downhill. If you want to calculate which way a river flows, all you need to calculate is which end is on the high ground, and which on the low ground, and there's your answer.

Similarly, the flow of advertiser dollars from other channels into paid search platforms like Google AdWords has been predictable over time because of one factor: measurable performance when compared head-to-head with other channels.

In accounts where that condition hasn't been satisfied, companies don't increase budgets for paid search. They don't always shut off their accounts, though. So the end result is an account that sort of wanders along, hoping for the best, performing far below potential.

At different points in time, this state of affairs might benefit Google a lot or a little. The times when it benefited Google less were when their relevancy incentives (mostly CTR-based) were set in a dogmatic sort of way. If your account was really lazily and loosely targeted, eventually stuff would get "disabled" or "deactivated." That would kill volume for you, but you were probably doing horribly anyway, so it was actually a savings. Google, meanwhile, didn't get to exact as much of an "idiot tax" out of you. So they had to rely on other mechanisms, such as ego bidding or a hot economy, to further their profitability.

It's not quite like that now. Google has a sophisticated set of mechanisms for selectively allowing you to screw things up. They may not particularly like your fuzzily-targeted ads, but they're willing to show a certain percentage of them in certain verticals as long as your bids are sky high.

The end result of a low-volume, fuzzily-managed campaign, of course, is a poor ROI for the advertiser. But here's the curious thing. If the company has invested something in people and plans to run ads in this channel, they don't shut it off completely. They treat it like their other underperforming channels: shrug their shoulders, hope it gets better, turn the budget down a bit so it doesn't cause significant harm. From day one, I've suggested that this isn't a true savings, but a squandering of potential. "All in" or "all out" should be the advertiser's mentality. It is difficult, but not impossible, to optimize your campaign so that increasing the budget is feasible. If that's not happening, why run it at all?

The fuzzy, meandering, high-CPC-low-return campaign is not a negative scenario - short term - for Google's revenues and profits. These inefficient campaigns collectively spend heavily, smoothing out the ups and downs of the keyword auctions where advertisers are managing more tightly to customer responses. That's one of the reasons why, in the near term, Google's revenues will continue to rise gradually or at least be flat, avoiding the severe hits that other advertising media have taken during the recession. Look for proof of this with Google's upcoming Q3 2009 earnings release on October 15.

At Page Zero Media we inherit such accounts fairly often. There are two common targeting errors that companies make in the early days of planning AdWords campaigns:

(1) Loose and broad targeting, particularly of the type that addresses a mass market when you're going for a niche market. A company will say to themselves (perhaps having watched Conrad Hilton in Mad Men saying he wants to put a Hilton "on the moon"): "We want someday to be the biggest and best insurance company in the world!" But for now, they're just focusing on being top-of-mind in car insurance for high-risk drivers, especially those under the age of 25. Somewhere along the line, possibly in a text message from a golf banquet with impressive friends, the CEO forced the associate to the assistant marketing director to try broad matches for the words "insurance" and "car insurance" in the campaign. They're still eking along, in select markets, costing the company $18 per click whenever they are clicked, eating into the allotted budget for all the good stuff.

(2) Insider thinking. Companies get into their own jargon, right down into the regulatory mumbo-jumbo from arguments in Congress about all the players in their industry. The next thing you know, there are ad groups containing all the jargon about high-risk drivers -- jargon that's only ever come up in those Congress debates, in board meetings, and expensive consulting reports. People click on the ads occasionally, but they're inevitably just looking for information, not a car insurance vendor.

As these cardinal errors continue to eat away at the overall budget, the ROI for the whole campaign looks poor. The budget stays where it is. And the company concludes that the channel doesn't match the hype.

--

I got a note from a colleague who has spent years building out paid search campaigns that have formerly failed for the above reasons. Here's his tale of woe - the industry sector changed to protect the innocent:

If I can lend a "yes this is the way it works" rule to any PPC work for [insurance] that we should inscribe into our core being: Seth Godin needs to be read by every one of the people who do campaigns for them. Most of the time (probably CEO driven) they focus on the whole "getting their name out there" thing. Each new one I see is a broad, undisciplined mess. They constantly target information seekers with words like "best insurance" or "top insurance companies". The people who click those 1) Already have a vendor and are satisfied with them; and 2) Are simply looking for ideas; 3) In no way are targeted properly. The kicker is that those words are $5, $6, or $10 a click. They might as well spend that money on a TV commercial because that is akin to interruption marketing, PPC style. You can get fooled as well, because if someone has an article on top insurance companies on their site, like our client does, people will read it and stay. The bounce numbers tend to be pretty low, so if you are looking at that only, you get a false sense that the words are working. But when you look at signups, they are very close to 0%. I am not sure many of them do it, but content and blogs should be king for these sites, for those words; and they should spend that money on writing content. If you have and write articles based on all the key buzzwords like "car insurance comparison", you should get bang for that on organic search for $0. Example: "Best [(competing but ultimately very different type of) insurance]" and so on. Our new client spent $22,000 on those words via adwords. They got one person to sign up for an account. ONE! [Edit: we did more checking, and it might have been two.] Conversely: Targeted to their selling proposition of [doing more research on individuals in high risk insurance categories to offer them a break on rates if possible], those words [all having to do with insurance rates, unfair insurance rates, demographics of insurance rates] and so on, with a good ad, had $4000 spent and they got 20 people to sign up. OK, long story short: For financial services, not unlike others but especially for them, being targeted to exactly what you do if you are spending $4 a click or more is so vital it is not funny.

--

Google has worked themselves into a situation where the "idiot tax" helps Google's bottom line. So although they'd prefer it if most advertisers improved the relevancy of their advertising, the current system is built to hedge against idiocy. That being said, then, Google doesn't stand to gain a whole lot as advertisers become savvier and more efficient. In the past, the genius of the ad platform meant that Google's earnings and profits raced ahead faster than expected. During the recession, they're outperforming everyone else. But as the economy recovers, this current efficiency also means that you may not see Google grow as fast as you expect. They've wrung a lot of cash out of relatively wasteful advertising. Less wasteful practices will definitely help individual advertisers... a lot. They won't help Google nearly as much.

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Posted by Andrew Goodman




Tuesday, July 21, 2009

Struggling to Make Sense of Google Earnings

In the wake of Google's recent earnings release there are few surprises. Financial analysts had a few takes on things to try to lend insight. But beyond that, I've been struggling with coming up with something interesting to say. Especially when you look at the bar graph of the last six quarters of revenues (from the slide show).

The word that fits all of it for the past six quarters is, pretty much: flat.

  • Total revenues are flat.
  • International revenues are flat, though slight trends upwards have been noted.
  • Revenues from search ads are flat.
  • Revenues from the content network are flat.
  • The stock price is basically flat (down 8.9%) over the past year. Then again, it depends on your perspective. It's up 40.9% over the past six months.
  • Over the past one month and over the past five days, the stock is within 1% of where it traded at the beginning of the period. Can you say flat?
Some things have to be up a bit (total paid search clicks for example), so that these other numbers can actually be flat, because some other things are down.

Down:
  • CPC's, especially in some competitive bid-war-driven areas
  • Your mileage, however, may vary.
Also down:
Which means that:
  • Profit is up.
So:
  • It's business as usual with an ever-growing cash pile at Google. The company has added over $3 billion to its cash on hand over the past 6 months.
  • World domination is still on the agenda.
Maybe Google's world isn't as flat as it looks.

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Posted by Andrew Goodman




Sunday, May 17, 2009

A Hitwise Report Does Not a Financial Report Make

The recent Hitwise report as related by analyst Heather Hopkins should have been vital reading to anyone into digital marketing or search technology. Paid search clicks, the cash cow that almost entirely drives the industry leader, Google, were being portrayed by those reporting on the item as "down 26%" year over year in Q2. Easy conclusion: "the meltdown" has "finally hit paid search."

Economic weakness affects the click auction, no question about it.

But given the potential economic bombshell this represents, it's eye-opening to see the lack of actual responses to these reports. Look at any of the main stories reporting on the item, and they range from the misleading, to the credulous, to the snarky. Cade Metz's snarky response was at least an attempt at analysis. Hundreds of others linked to the story or retweeted it, without it apparently entering their heads for a second that flipping a link up of an oft-retweeted story isn't giving us any more insight than we had pre-re-tweet.

This has actually been a typical pattern. A few weeks after Google's financial reports for a quarter give us real insight into how the business has been going, everyone seems to go back to not understanding how the business works. Speculations on the next quarterly report tend to predict imminent doom, for whatever reason. We're in that "dark, suspicious" period now. We'll wait for next quarter to see if all the weird speculation was based on reality.

Since last year's misleading comScore report that tanked Google's stock before producing a clarification from comScore, it seems that no one's prepared to offer much of an interpretation of third party data at all. So into the void of no analysis, rushes headlines that seem to say paid search clicks are down 26% year over year. Or more accurately, the proportion of overall traffic referrals to (the subset of) websites (in Hitwise's sample), among all sources, that comes from paid search, has dropped by that much.

What can we make of this, really? Here's a stab at it.

1. The data may not be accurate.

1a. Or at least, the data might not be insightful because it treats a click as a click as a click. Some clicks are expensive or meaningful; others are not. There's a whole host of potential reasons for skew.

2. Why are we paying so much attention to travel sites? They do spend a lot. They may be spending a bit less. Their sector has been hard hit. It's hard to say, unfortunately, how the stats on clicks affect the dollars being spent on those clicks (see below). We do know from a study put forward in a webinar offered by Google that travel searches are holding pretty steady, but conversion rates are down. You can certainly see how in a sector like this, with massive overcapacity developing and brand-building efforts in the distant past, dozens of travel sites like travelocity, Expedia, Hotwire, and others, may be scaling back campaigns, and bids. They're one of the top paid click generators, ergo that looks pretty bad for Google on the surface, until you look at the financials overall. Does this mean, then, that the "sky is falling" on the "Google money machine"? That the sky is falling for the travel websites? I doubt it, for either. The much bigger problem is at the end of the suppliers - the hotels and airlines - who are being forced to go to thin and negative margins to fill rooms and seats.

3. The theme that came to light with misinterpretations of last year's comScore numbers has yet to be digested fully by observers: 0verall, the nature of Quality Score keeps more white space on the page more often. (Google's overall monetization rate, % of pages with ads on them, remains relatively low.) Many conventional advertisers are barely affected, though they've been annoyed by arbitrarily high "reserve" prices on less competitive phrases and keywords that supposedly aren't relevant. Many conventional advertisers are still seeing growth in paid clicks; some in weak economic sectors are seeing appropriate declines. Google's purge of affiliate marketers and click arbitrageurs has been widespread, so it removes a lot of low-quality, low-priced ads from the system entirely. Financially this is only a short-term hit for Google. It increases satisfaction with search results and maintains pricing on keywords with high commercial intent. Granted, pricing power is diminished as smart advertisers take this opportunity to lower their bids, but the decline in sheer volumes of paid clicks isn't purely due to a weak economy, but rather, the side effect of a deliberate Google policy that was still going strong throughout 2008.

4. Has Google experimentation with various blended search results and page layouts actually resulted in more people clicking on SERP's, local results, and video content as opposed to looking at paid clicks? This is a pretty bold move on the surface, but owning local business relationships and video ads in the future is part of the overall strategy, so it's perhaps expected that Google will be willing to see users click on the paid ads slightly less often. If it was a shift that terrified Google, I don't think they'd continue pressing forward as aggressively with the changes.

5. Some - maybe many - large-company CEO's are ganging up on Google, informally, as this "don't buy your brand clicks" meme seems to spread. While that adds up to quite a few clicks, those are inexpensive clicks anyway. Brands' refusal to buy those clicks hurts them, in my opinion, more than it hurts Google. Anecdotally talking about "ranking on those terms in the organic results anyway" is not an accurate way to measure the incremental sales lift from those keyword ads, for a host of reasons, including a 2003 view of what it means to "rank in organic". Some folks will continue to try to pinch pennies in the digital channel in spite of the waste going on in other channels; others will get over it and go back to putting more profit in the till with straightforward direct marketing to searchers, including those parts that focus on brand terms.

6. By quasi-organizing against Google and collectively angling to take revenue out of Google's pocket on brand terms (despite Google playing nice by policing trademark in a variety of ways), it appears the Moose Lodge of CEO's may have incurred Google's revenge.

Google may have grown tired of being handcuffed in monetizing those terms by both the rhetoric of trademark holders and Google's own editorial policies. They've launched the first major initiative in the direction of re-opening that monetization avenue, especially in the U.S., starting in June. (Although it refers specifically to ad text, I believe the announcement may also signal a shift in overall stance towards trademark terms.) It almost feels like the Hitwise report spurred Google's timing of the announcement. Insofar as the Hitwise report did a good job of showing that many brand keywords got taken off the board year over year, Google's response is going to be to put them back on the board. IMHO that means not only less editorial squelching of ad copy, but a relaxing of punitive Quality Scores on brand terms. Maybe Cade Metz's verbiage is apropos here: Google's going to "turn the dials" on something they had dialed way back on (largely to avoid the nuisance of legal squabbles and CEO's carping). "Turning the knobs" back towards a more relaxed setting for brand keywords should mean more paid clicks back on the board, more fun and profit for some qualified and creative advertisers, and more revenue for Google.

To put it another way: if you don't want to pay a few dollars here and there for your brand keywords, not only will we let someone else do it, but we'll let them use your name in their ads, as long as it's legal. So there.

No doubt, advertisers and search marketers today need to shift to a more comprehensive strategy of being visible in searches across various search "forms" as search behavior shifts and new blended search formats emerge. But that said, the fact that Google's stock hasn't dropped much on reports of a supposed 26% decline in paid search clicks indicates that investors, at least, now understand that the paid search auction is highly predictable, still a real cash cow for both advertisers and Google alike, and user behavior in clicking on ads remains surprisingly resilient, even in the worst period of negative economic growth seen in most of our lifetimes.

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Posted by Andrew Goodman




Friday, April 17, 2009

Google Revenues: What's Up? What's Down?

Reading Google's financial summary for Q1, it may be worth looking slightly more closely at what is still driving the company's growth, and what is finally accounting for a hint of weakness in the GOOG's overall profit picture. One thing that seems clear right off the top is that improved profitability has come as a direct result of responsible cost-cutting activities and decreased headcount, after a long run of breakneck growth.

All comparisons here are year-over-year for Q1 of 2009 vs. Q1 of 2008.

What's up?

The growing areas are as follows.

  • International revenues. They make up 52% of Google's total revenues now, as compared with 50% in Q1 of 2008.
  • Total paid clicks. Up 17% year-over-year. This doesn't break out search vs. network.
  • Google sites revenues overall. This is extremely tricky because it doesn't prove that Google Search revenues are up significantly. Other properties, including the money-losing YouTube, contribute to this year-over-year growth number. And more recently there is weakness here. There is growth year over year but a sequential decline from Q4 to Q1.

What's down?

  • Click prices in the U.S. No specifics given, but doing the math, there is weakness in the auction and prices are no longer rising on many keywords.
  • Network revenues. Partner revenues aren't growing even though total clicks may be growing slightly. This is down 3% year over year and sequentially from Q4 to Q1. There seems to be both a lack of growth in the network and weakness in click prices; more so the latter, perhaps. Given that there is more room for growth in the network than on the relatively finite Google-owned properties front, this is disappointing news for Google. It may be too early to start pointing to flaws in Google's network technology and its approach to partnerships here, especially given the potential for their integrated DoubleClick division to launch new initiatives. If we're still seeing no growth by Q1 of 2010 then it may be panic time, and Google's ad serving competitors may be emboldened to take further share from them.
  • UK revenues. These are down year-over-year. It appears that Google has broken out this particular item because it's their second-strongest national market behind the U.S. It would be interesting to see financial numbers for other markets, but it's unlikely we'll see these anytime soon.
Despite massive continued profitability, Google's Q1 profits are proof, at least, that the company lives in a finite world. Until investments in new lines of business lead to growing standalone businesses, its financial fate rises and falls with the ups and downs of click prices and search behavior on Google-owned properties and network partners. The fast growth phase is drawing to a close, but certainly there is lots of room for continued innovation in the space. What's possibly most impressive is that Google has managed to grow search advertising to this point without alienating finicky users.

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Posted by Andrew Goodman




Tuesday, April 14, 2009

Revenge of the Analysts

A couple of interesting interventions over the past week from the Wall Street analyst community, no doubt weighing heavily on decisions forthcoming from the major search engine companies.

Today's talk is of number-crunching by Jefferies analyst Youssef Squali that points to a potential $1 billion saving that could be realized if Yahoo outsourced search to Microsoft. Any partnership scenario would have significant and positive financial outcomes for the two companies, it seems.

Prior to that we had Credit Suisse's view that Google's YouTube division currently loses over $400 million a year. Turning on the monetization spigot isn't something that can happen overnight, and that gap's just a bit too wide to gradually make up over several years, especially given the harder sell facing most ad formats in an economic downturn. So there, we can expect major changes.

It's been fashionable to say Wall Street doesn't dictate how the search engines are run. But certainly, by bringing these numbers to light and forcing them onto the agenda -- without prompting from the companies being analyzed, and no doubt out of step with those companies' wishes to soft-pedal their current inefficiencies -- the investor community is setting itself up as an influencer.

And rightly so. These are public companies. Is it OK for them to waste gobs of banked profits because decisions aren't being made crisply enough? Is it OK for them to expect to gloss over the specific P&L's of specific parts of these companies, as long as they can put a nice sheen on the aggregate results each quarter and year end? It's obvious Wall Street doesn't believe so.

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Posted by Andrew Goodman




Thursday, January 22, 2009

Google Q4 Earnings: Business as Usual?

Yep, pretty much. Growth slowed but the sky didn't fall. On an annual basis, the 2008 gross revenue figure of $21.8 billion was at or a bit ahead of where most predicted it would land, back at the start of the year.

If anything, the economic downturn (and all the talk about it) provided a solid impetus for Google to shut down its non-performing, distracting projects. If they had tried to do this in better times, there would have been more grumbling.

Now, naturally, talk will turn to speculation that it is Q1 of '09 that Google is really worried about. And maybe there will prove to be some truth to this, finally. Surely, click prices will have to soften some quarter. Advertisers looking for bargains can only hope so.

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Posted by Andrew Goodman




Wednesday, November 12, 2008

Something Funny's Going On

Google has been unusually active with product releases and good-news announcements all of a sudden. Historically, this has often coincided with a PR strategy to blunt the impact of bad news in the immediate news media and blogosphere reaction.

In the last few days, we've heard of upgrades to Google Ad Planner, major new developments with Google Analytics, the release of Google video chat, and this flu-tracking thing has gotten so much play I heard Marissa Meyer on the lunchtime radio news.

And there is more to come, with more significant announcements slated through the next week (just watch).

This has me thinking something must be up. The stock has taken a major hit this afternoon, to close to $290 (down 6.75%). Maybe that's just a reaction to further analyst downgrades, which usually signal a bottom for stocks in solid companies. Maybe the vagaries of federal bailout plans and stimulus or lack of it, election results, and general market conditions are making this safe stock look riskier than the rest of the stocks in the index. But something makes me suspect another shoe is set to drop.

Maybe that's market psychology at its most acute, though. It's spooky, whatever it is.

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Posted by Andrew Goodman




Friday, October 24, 2008

This Will Be My Final Comment on the Stock Market

...for a long, long while.

Pretend Investors:

I was recommending you dollar-cost-average your way into tech stocks, by buying GOOG and YHOO at bargain prices. Today is another sickening day on the markets, so what better time to get our buying over with and go back to sleep for another five years.

I no longer feel strongly about following up with more YHOO, however. If you like gambling on takeover offers, then take a plunge here at $12.04, much as if you were betting on the Browns to cover at home for the rest of the season. But that isn't rational investing, it's educated roulette. (There is a difference?)

Take your remaining imaginary funds and plow them into GOOG. They have good prospects and this is a relatively safe entry point here at $341. Plus: emoticons in GMail!

If you're a real investor, though, you should probably be finding well run companies that are trading near cash value. Real bargains won't be found in these large tech stocks still trading at multiples much higher than the S&P average.

Edit: did I say $12.04 and $341? I meant $11.86 and $337. I told you this thing isn't for the faint of stomach!

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Posted by Andrew Goodman




Friday, October 10, 2008

Buy! (2)

Continuing where we left off in the bargain bin stock picking vein...

Today would be a great time to move forward and buy your second of three tranches of hypothetical Google (GOOG) shares as we dollar-cost average our way into the market.

But more importantly, take as much as you can muster, and buy your first half of two globs of Yahoo (YHOO) shares. Any serious buyout offer coming in now will have to go over $18-20, which is in itself a huge discount to what Microsoft actually offered awhile back. There is a more than even chance of a 50-100% pop in YHOO over the short term. Go for it.

Disclaimer: I don't recommend stocks. This is a paper exercise. Do your own due diligence.

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Posted by Andrew Goodman




Monday, September 29, 2008

Bloodbath

OK, enough is enough.

RIMM is down another 13.5%, and GOOG is down 9.1% to this point today.

BUY!!

Disclaimer: This is not investment advice. Do your own due diligence and plan your investments with an appreciation for your own risk tolerance. The expression "BUY!" refers to a dollar-cost averaging strategy that in this case means "begin buying". The strategy refers to solid, profitable, "blue chip" growth tech stocks only.

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Posted by Andrew Goodman




Thursday, August 28, 2008

AdWords 2.7, Beautiful Plumage, and the Shading Effect

With another major change to Google's Quality Score formula and reporting comes much uncertainty for advertisers. The changes: fixed minimum bids have been eliminated, and Quality Score is calculated in real time, at the time of the query.

I can come at this from a few angles, and probably will, in the coming months. Today, just one piece of the puzzle to address: efficiency for both the advertiser and Google.

First, some background assumptions:

1. New advertisers (and unevenly-engaged advertisers returning to refresh their memories) do keep pouring into the space, especially internationally. The optics of high minimum bids don't look good. They're alarming and off-putting to newbies.

2. Google likes its black box, and likes to avoid black-white distinctions. Building very flexible (read: confounding) architecture helps Google achieve a number of goals. And even those goals are subject to change.

3. Yet Google faces pressure for additional disclosure. So for every layer of complexity they build in, they try to offer up at least an equivalent step forward in terms of disclosure.

4. At Google AdWords, CTR is king. Clicks drive revenue, and continue to be a reasonable proxy for relevance. This is the biggest constant since 2002.

5. The platform as it stood at version 2.6 (my nomenclature), contained pockets of inefficiency. It did a good job of ramping up the "quality" bar, to the delight of users, but as even Sergey sheepishly admitted to investors, they might have "overtightened" the calibration of the platform, showing too few ads for advertisers', Google's, and investors' taste. The new release is intended to offer Google the ability to "untighten" selectively, without giving anyone the satisfaction of being able to point definitively as to exactly how that is being achieved.

--

Further detail:

The "pockets of inefficiency" buried in the fixed minimum bid regime were evidently ferreted out by smart Google engineers who realized that fixed minimum bids for keywords were too rigid. Rather than determining that a keyword in a given account should be "all on" or "all off" no matter what the context, Google has designed the new system to give keywords a fighting chance to show ads in all cases. (The official explanation is that no keyword is ever technically inactive for search.)

Quality Score is now determined in real time, per query. But wait. Don't think that means the only negative thing that happens to a Low-Quality-Score keyword is that it's relegated to a Very Low Ad Position. No, it can still be inactive at query time if it fails to meet what Google is calling a Bid Requirement. (Among other things, this gives Google an excuse to charge high prices for clicks in some instances, even if no other ads are showing up on the page.) What's different in this version is that the same keyword is eligible to be re-evaluated for the next query, and the one after that. So like the parrot in the sketch, it's not dead, just resting.

Let's be especially clear about this much: keyword quality (whose formula is outlined in Google help files, but clearly rests on measures of CTR history as well as predicted relevancy, especially for newer accounts with less data history) will determine both where your ad ranks for a given query, and whether it is eligible to show up or not at query time. So "fighting chance" and the "chance you might show up" even on a low quality keyword, some of the time, doesn't mean the same as "free for all." Advertisers aren't being encouraged to "go to town" with unrelated keyword experiments just to "see what sticks" -- in fact, that tactic is as bad as ever, because this can hurt account-wide quality.

Through all of the complexity of the explanations you'll read, then, and the potentially excessive focus on some tweaks in reporting (scale of 1 to 10 transparency for Quality Scores) and projections (First Page Bid estimates), the efficiency angle, and Google "shading" its quality initiative to make it more flexible and subtle, is the main story here.

And not a moment too soon, I'm guessing. By Google standards, the months of July and August were likely slower than they or investors would like. By notching up revenue in September, Google can turn in a respectable Q3. (Especially internationally, I'd expect to see click arbitrageurs given some respite, and getting a chance at more clicks - raising Google's revenue, but lowering overall search quality.) By the time things are off to the races for Q4, Google can always tighten things up slightly from a quality standpoint, and raise prices at the same time. If you asked, I'd predict steady-looking year-over-year revenue growth in Q4, with a bump in profit margins. Investors will cheer, and Google (GOOG) stock will head back to $700.

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Posted by Andrew Goodman




Thursday, July 17, 2008

Google Earnings Still Incredible

A couple of major announcements have come down the pike from Google on the product side. We'll get to those shortly.

But first, the earnings. Google shares (GOOG) are down about 8% in after-hours trading based on them missing Wall Street estimates, whatever that means. By all accounts they continue to rake it in in remarkably robust fashion across all sectors.

Absolutely, this thing will slow sharply soon. It has to. If Google winds up the year with $21 billion or so in revenues, it's hard to see how any company like Google could get much past $50 billion in revenues from advertising, ever. They can't keep growing at 50% a year forever unless they start invading nations and colonizing other galaxies (which, I understand, they're working on). Google has shown no propensity to make money in other lines of business, either. They are good at creating massive value to funnel users back into the same economic engine. When they eventually move into revenue-generating new fields like telecommunications, they can keep growth moving that way - but again, the profit margins and overall financial outcome is bound to "disappoint Wall Street."

The final growth slower for Google is the people equation. To continue growing at a breakneck pace without slackening their headcount increases is near impossible: they'd have to start hiring dumb people. They're sort of averse to that.

For now, even Google economist Hal Varian's confident statement that Google is benefiting from a "Wal-Mart effect" in that this highly targeted advertising is the "last thing" companies want to cut in this weak economy, is tilted a bit conservatively. The reality is that many brands with big kitties of cash remain skittish, and have barely migrated any of their wasteful offline spends to online channels. The migration is ongoing. As such, Google will get to that $50 billion top-line number before you know it. That's going to be disappointing only if your "estimate" says $53 billion.

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Posted by Andrew Goodman




Thursday, April 17, 2008

Google Earns a Lot of Money and Is Getting Slightly More Evil

OK, so that's not what I would normally say. I don't tend to speak about the love of my life in sound bites (I like paragraphs :) ). But if I were forced to boil it right down for the media seconds after the earnings report, that's probably what I'd say.

Anyway: near a TV? Live in Canada? If so, tune into BNN at 6:40 (or it might be 6:50) Eastern, to see what I have to say about the GOOG.

Update - the segment is here (wait for the ad).

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Posted by Andrew Goodman




Monday, February 04, 2008

Internet Freedom Fighters: Remember Us?

So on the heels of news of a war of words between Google and Microsoft (complete with counter-punch)...

It's evident that "what's good for consumers" is trotted out constantly as the justification for big companies' new initiatives, including M&A's or complaints against them. A lot of those platitudes, I agree with. Google, in particular, has been a revolutionary company. But their very might is starting to blind them to their own possible role in creating an arbitrary economy that is increasingly set up to benefit Google first.

Behind in a vertical like email? Worried that your two biggest competitors, if combined, could be "uncompetitively competing" in that vertical? Why should regulators or consumers care? Nothing stops anyone currently from using GMail, and it's unlikely their competitors are going to obliterate the open Internet anytime soon. It would appear that being the leader in online advertising and still feeling like an underdog leads to a complete loss of perspective on the whole evil-not-evil question. Has it just come down to: "if not invented (or assimilated, aggregated, or ripped off) here, it's evil"?

As search engine companies with huge power, companies like Google have made strides towards gaining that worldly perspective, through initiatives in reaching out to the interested community (not only users). They've put together things like the Sitemaps protocol, webmaster tools, and the like. Many of those initiatives would never have happened without goodwill and hard work on the part of identifiable Googlers. And they definitely would never have happened without concerted pressure and cohesive arguments coming from the interested community - in particular, vocal advocates such as Danny Sullivan. Maybe that's the takeaway here. Forgive me for being vocal, but if everyone just shuts up, we tend to be forgotten.

It's that goodwill - that stuff that can only come from individuals and their sense of community, as opposed to an algorithm or a balance sheet - that threatens to be forgotten as these companies grow in size and become more concerned about bashing each other than behaving in civilized fashion.

As consultants, resellers, advocates, authors, and agencies, we feel like no matter how much we try to understand and even advocate complex things like Quality Scores on keywords, we're treated to arbitrariness and large variances in the human interventions that can make or break the not-entirely-automated process. In other words, there is a growing suspicion by agencies and advertisers that a lot of your dealings with Google - especially around questions of website and landing page quality - revolve around how much someone over there likes you. Public releases like the one I commented on here, about "business models that tend to get bad quality scores," do nothing to assuage such concerns. We're left to wonder whether even worse arbitrariness lurks beneath that not-altogether-shiny veneer: whether random likes and dislikes are being invoked to harm particular, identifiable companies.

So it's fair enough to say that consumers have benefited from many of the giants' well-priced services, but it's also the question that a huge middle swath, of suppliers, partners, agencies, and related vendors, out there in the ecosystem, are impacted by the industry giants.

It's like yoo hoo, we're out here too. Remember?

On that front, no one's going to call Microsoft an angel. But what they do have in terms of grassroots reseller relationships and partnerships is decades of experience. If they weren't doing something right, they would have been chased out of all those countries they successfully operate in, years ago.

In response to such concerns - they began to be expressed 3-4 years ago - Google has spent some time building partnerships with agencies and resellers. For example, newly-developing products like Google Analytics and Google Website Optimizer have reseller programs (even though the products are, um, free). Google recommends companies who produce radio ad content. And so on. Relationships are beginning to be forged.

In other areas of course, these companies move to aggressively consolidate verticals, and disintermediate stray dogs in the marketplace. On some of their websites, Google steps beyond just aggregating information, to competing directly with perfectly good content creators (knol's just a recent high-profile example - do you want the full list?). They can use confidential information in many ways, to compete with other large entities in the ecosystem. And the smaller players are little more than an afterthought in some cases. When Google or Yahoo "knock off" someone's third party products, publications, services, etc. - which happens, luckily not all the time - where does that stand on the "freedom and responsibility" meter? Can I get access to that algorithm?

Isolated practices at these giant ("Internet freedom fighting") companies still need work, in other words. We're grateful for the strides they've made - not so crazy about the times when loyal third parties are treated as afterthoughts, or worse, enemies to be crushed. Beyond platitudes about consumer choice, respect for channels seems to be still in the somewhat nascent stages.

If the Big Merger goes through, the online advertising ecosystem will need to band together and chant the lyrics that most memorable hit from Scottish crooners Simple Minds: "Don't You Forget About Me."

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Posted by Andrew Goodman




Monday, January 28, 2008

Google and Recession?

The "Google's going to have that bad quarter we've all been waiting for" prognosticators are out to play again.

I think the question turns on this premise that the spending on these ads, especially by small to midsized advertisers, is largely discretionary. Either that, or it's mostly measurably ROI-positive and dropping the spend would cause a company to stop making money.

In the mix here is Google's increasingly aggressive revenue optimization through its opaque bidding system that has returned many advertisers to the days of high minimum bids.

Anything could happen here. We'll have to read about it in the funny papers. But the long and the short of it is: if GOOG wants its revenue growth to look steady and smooth, it can do that.

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Posted by Andrew Goodman




Wednesday, August 01, 2007

When Will Google Have a Flat Quarter? ... OK, Now

Google missed some inflated expectations in a couple of the past 16 quarters, but other than that, they've done exactly as I've expected -- grow explosively.

Right now though, tangible evidence is mounting that finally, keyword prices in several key verticals should be affected by an economic downturn. Previous rumblings about "problems in the subprime market," etc., hadn't really filtered their way through the economy, let alone the click economy.

Now, in several key indicator verticals, it's looking like lead quality is dropping, and some big spenders are getting gun-shy about their campaigns.

This is not an all-or-nothing proposition, and growth and advertiser adoption remains spread out across thousands and thousands of niches. But this soothsayer sees a softening of Google's U.S. growth in monetization of, primarily, "Google properties," in the current quarter.

Internationally and in terms of the big picture of all ad spending (including contextual ads) through the search engines' auction platforms, the trend is still up, of course.

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Posted by Andrew Goodman




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