9.23 Google Ads

Google Inc. is an American multinational public corporation offering Internet search, cloud computing, and advertising services. The company processes over a billion searches a day, and operates more than one million servers in data centers round the world. Google has grown organically and by acquisition of varied companies, but still earns over 95% of its revenues from advertising {1}

AdWords allow advertisers to publish advertisements on Google search pages and on the websites of Google affiliates (AdSense publishers). Advertisers pay per advert clicked (pay per click marketing), the amount paid (bid price) being determined by the demand for the particular keyword, and the value to advertisers of that keyword — 'investment services' being more valuable than 'gardening tips', for example. The Value Proposition is attractive to advertisers for two reasons: because Google's search engine is popular and efficient, and because advertisers can tailor their campaigns to specific searches and demographics. {3}

Google's search engine is thus an essential part of Google's business model, and most surfers know that Google lists sites on its search engine according to 1. the relevance of the site to a searcher's keyword phrase, and 2. the number and quality of incoming links. Precisely how that works in practice is a trade secret, of course, and no doubt the algorithm can be adjusted to meet Google's AdWord/AdSense requirements, {6} which in turn is governed by the percentage clicking on a particular AdWord and the percentage of clicks converting to sales. Involved as that sounds, the reality is a good deal more complicated. {4}

Business Model Development

As first set up by Larry Page and Sergey Brin in 1998, Google's assumption was that revenue would come primarily from licensing the search technology and selling Internet servers. It was Google's ninth employee, a 22-year-old Stanford graduate named Salar Kamangar, who concentrated on ad revenue, which was initially offered in two varieties. Ads at the top of the search page were sold the traditional way, by NY sales folk wooing wealthy clients over dinner, these clients being billed by the number of user views, or impressions, regardless of whether anyone clicked on the ad. Down the right side of the search page were a second variety of ads, aimed at smaller companies, and these could be bought online.

Then came an important change. As business developed, Google decided to market the right side ads by auction. Advertisers would bid on search terms ( keywords), but instead of bidding on the price per impression, they bid on a price they were willing to pay each time a user clicked on the ad. In effect these were sealed bids where winners were selected algorithmically in fractions of a second. As a safeguard, to protect both Google and advertiser, each bid would be accompanied by a budget of how many clicks the advertiser was willing to buy each month. This new system was called AdWords Select, and the ads at the top of the search page, their prices still set by agreement, were renamed AdWords Premium.

Two further innovations appeared. First, AdWord slots were sold off in a single auction. Second, to prevent advertisers lowballing their bids, Google decided that the winner of each auction would pay the amount (plus one cent) of the bid from the advertiser with the next-highest offer. So if A bid $5, B bid $4 and C bid $3, A would get the top slot and pay $4.01 per click, B would get the second and pay 3.01, and so on.

Revenues from AdWords Select soon dwarfed those from AdWords Premium , and it dawned on Google theoreticians that AdWord Select was a case of what is called ' two-sided matching market', which can be understood mathematically, is indeed a branch of game theory. Crunching the numbers carefully, Google then decided to make all Ads of the AdWord Select type, though only succeeding in bringing over some its previous AdWords Premium customers (whose revenues had been hard-negotiated and brought in hundreds of thousands yearly). Nonetheless, so successful were AdWords Select (now simply called AdWords) that Google decided to allow ads to be placed on other, third party, web sites, which were termed Google Affiliates (the Google AdSense program). Again Google used its auction technology to allocate ads, as it did to allocate servers among business units.

To level the playing field between small advertisers and large, Google used a variety of the Dutch auction model, (as do airline companies when they oversell a flight, offering vouchers till enough customers give up their seats). To make sure that Google users could have faith in their searches, however, the company added a further criterion: quality. A quality score was based on several factors, including the relevance of the ad to the specific keyword, the quality of the landing page the ad is linked to, the frequency with which users actually click on a given ad, and finally the frequency with which the click-through converts to a sale — plus other factors Google won't discuss. If the quality score falls below a certain value, Google slaps a minimum bid on the advertiser.

To properly quantify a quality score, however, Google needs to estimate in advance how many users will click on an ad, which it does through a 'Keyword Pricing Index', a statistically-derived function that Google also uses to prevent click fraud. Categories are ranked by the cost per click that advertisers generally have to pay, weighted by distribution, and then separated into three bundles: high cap, mid cap, and low cap. High caps are 'hotels' and 'financial services', mid caps are 'gardening supplies' and the like, and low caps are are the stuff of long tails.

It is these algorithms, run as real-time auctions, that allow Google to police its ad services, ensure that advertisers' monthly budgets are met, and that AdSense revenues are kept within some ambit thought reasonable by Google.

Points to Note

1. Evolution of an advertising model.


1. Describe in detail how Google Ads now works.
2. How and why did the Google Ads model evolve?
3. What additional features did Google employ to make their service attractive?
4. How do Google Ads tie in with Google AdSense?

Sources and Further Reading

1. Google. Funding Universe. Extensive article with short list of references.
2. The History of Google. WebHostingReport. One of many IT company histories.
3. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Alexander Osterwalder and Yves Pigneur. Wiley 2010. 80-81.
4. Secret of Googlenomics: Data-Fueled Recipe Brews Profitability by Steven Levy. Wired. May 2009. Details of Google's search model.
5. Why Google Panda Is More A Ranking Factor Than Algorithm Update by Danny Sullivan SearchengineLand. June 2011. Google's ranking factors and latest update.
6. Everything you wanted to know about Google. . . But were afraid to ask. December 2008. Slideshare. Slide 13. Google's search algorithm was subject to 450 modifications in 2007.
7. Feds to Launch Probe of Google by Thomas Catan and Amir Efrati. WSJ. June 2011. Possible abuse of Google's dominance in web-search advertising