Quality Score: Less Effective by The Day

I speculated a few months ago that an economic recession could lead to a decline in Google’s Quality Score standards. To put it bluntly, as Google’s ‘quality’ advertisers cut back spend, Google would have no choice but to let affiliates, MFAs, and the like back into the AdWords ranks.

Over the last few months, that is exactly what seems to be happening. The affiliates running faux blogs and “how does your IQ compare to Brett Favre’s IQ?” ads seem to be appearing more and more frequently. The quality bar has indeed been lowered, and I suspect will continue to remain low until the Countrywides and Walmarts of the world can afford to pay more per clicks again.

I found yet another example of Quality Score gone AWOL yesterday. I did a search for “Acai cookbook” (in case you are interested, my Mother has published such a book, hence the search) and got the following top three listings:

Basically the same exact ad text, taking a user to the same exact fake review/blog site, just with different URLs. This isn’t double-serving, it’s triple serving, and in a way that isn’t even attempting to veil it. Surely Google’s secret Quality Score algorithm could figure this out pretty quickly, that is, if it wanted to.

The problem, though, is that these advertisers are likely paying $5 or $6 a click for these ads, and there is no ‘legit’ advertiser with which to replace them. Apparently, desperate times call for desperate looking the other way. With Google’s stock already down about 70% from its high, quantity of ads and ad revenue is clearly more important that quality.

 

Online Advertising, Becoming More Fraudulent By The Day. We Need to Stop It

Over the last year, I’ve written several posts ‘outing’ clearly fraudulent ads I’ve seen online. There was the “American Anti-Aging Association“, a fake trade association with a fake building and fake wrinkle cream ratings; the Yahoo Answers ‘results’ that were really just an ad; and the MarketWatch ‘article’ that was actually a press release for a ‘turn your cash into gold site.’

I thought of this point again when I saw an ad claiming you could lose 45 pounds in three weeks through a combination of the Acai diet (as seen on Oprah!) and a colon cleanse product. When I clicked through to the site, a lot of the elements of the site really disturbed me. For example, the author of the site said she was from “Daly City, CA”. Amazing she lives near me! When I used a remote proxy server to come back to the site, she was suddenly from Houston, TX.

And then there were the ‘before and after’ pictures that showed dramatic improvement, but omitted the heads of the before and after models (gee, I wonder why?)

And at the end there were comments from ‘users’ of the product who had to rave about how great it was. Funny thing was, there was no place on the site to actually submit comments!

Though all of this may sound funny to you and me, this site and sites like it apparently make millions of dollars a month from these ‘fake blog’ ads! And if you subscribe to the “Fixing Broken Windows” theory – that not addressing small infractions create an environment where larger crimes are more likely to occur – every fake blog that scams consumers out of $50 helps foster an environment where even bigger scams can flourish.

Of course, online scams aren’t new – we’ve all received emails from Nigerian 419 scammers, the ‘verify your account’ phishing requests, and the promises that “you are the 1,000,000th visitor to this site, you’ve won.” For every new scam that pops up, the FTC or the DOJ springs into action (well, spring probably implies a speed that doesn’t actually exist) and tries to fight the scammers. Witness the FTC fines against “free iPod” advertisers, or the “Consumer Alert” on the 419 scams.

But identifying fraudulent advertising has little value if you can’t actually prevent this advertising from occurring. In the case of the Nigerian 419 scams, the FTC is powerless to arrest Nigerian nationals. And even if they arrested some of the offenders, these criminals would soon be replaced by new scammers (and they are no longer limited only to Nigeria). Assuming the government can stop an entire type of fraud from occurring, a new fraud quickly takes it’s place.

The problem, as I see it, is three fold. First, to directly steal from Thomas Friedman, “the world is flat.” By that I mean that the barriers to entry to create fraudulent advertising online have lowered to the point that anyone can quickly build a large, highly profitable, and potentially fraudulent advertising campaign online. Consider access to the media just 20 years ago – unless you had hundreds of thousands of dollars and a lot of knowledge of print or TV advertising, it was impossible to get your message in front of a large audience. Moreover, the media outlets were relatively small in number (there are only so many TV stations and newspapers), so it was fairly easy to keep track of major ad spenders and punish false advertisers.

Today, you can start a campaign online “for as little as $5.” You can be virtually anonymous, you can live anywhere in the world, and you really don’t even need computer skills to set up a reasonable looking Web site. There are hundreds of thousands of places to advertise and an ad can reach tens of millions of people in a matter of hours. As the number of advertisers and advertising locations has exploded, it’s become virtually impossible for any governmental or trade organization to actually regulate online advertising. Shut down one bad actor and that actor can simply get a new credit card and a new Web site and be back in business by the end of the day.

Second, technology has made it easy to defraud people without guilt. One of Stanley Milgram’s great observations in his incredible book, Obedience to Authority, was that people were more likely to commit acts of violence against other people as the distance between the two people grew greater. It is much easier to kill someone by pressing a button on a ship 100 miles out at sea and having a missile destroy an anonymous building 15 minutes later, than it is to put a gun to someone’s head and pull the trigger. The same is true for advertising. The ‘snake oil’ salesmen who travelled from county fair to county fair selling fake elixirs had to look their victims in the eye. Online marketers never see the person who falls for their ploys – at worst, they may get a few angry emails, if they even have a contact us page to begin with.

Third, there are no standards by which online advertisers are judged to be legitimate or fraudulent. Take the fake blog I noted above – how would Advertising.com or Google truly determine whether that site was a real blog or a fictional one? Google has attempted to do this with policies like Quality Score, but in truth these policies can never pick up all scammers, and only serve to create a cat and mouse game where Google’s new anti-scam policies are quickly circumvented by clever scammers.

Whenever it is impossible to differentiate the good eggs from the bad eggs, the good eggs usually suffer. It’s impossible to apply an ‘innocent until proven guilty” standard in such a case, because it basically gives the scammers carte blanche to abuse the system. So the end result is blanket punishment of all actors, be they good or bad.

And this is the path that Google has taken with Quality Score, and that many publishers have taken with respect to affiliates – set universal rules designed to weed out the scammers but that as a consequence also prevent a lot of legitimate businesses from thriving. In other words, if we as advertisers don’t attack this problem ourselves, we will eventually leave others to handle it, and they might handle it in ways we don’t like.

My feeling is that the online advertising industry needs to start self-regulating itself, and fast. I wrote about this at the end of last year:

We members of the advertising industry need to consider what happens to self-regulated industries when they fail to effectively regulate themselves. Just ask the financial industry after Enron, or the meat packing industry after “The Jungle.” For that matter, ask the “free iPod” advertisers what happened to them (Google and Yahoo banned them).

For Internet advertising, there’s a fine line between deceptive advertising and ‘mere puffery.’ Though I believe most Americans have developed the ability to understand the difference between the two, the window of opportunity for the online advertising community to define and regulate this line is closely quickly. I’d much rather have our industry make this determination, that the FTC in Washington or the American Trial Lawyers Association.

Ultimately, I envision this as something analogous to the “Fly Clear” program being promoted by the TSA. The idea is that you can get fast-tracked through airport security if you undergo a background screening and agree to follow some rules. Imagine if such a program existed for online advertisers. Members could agree to be audited by a policing element within the advertising community, and anyone who violated the defined ethical rules of the group would be removed.

Publishers like Google and Yahoo would give group members “pre-approval” to run on their networks. For example, an affiliate could run on AdWords without fear of Quality Score punishment, provided it was in good standard with the self-regulation team. By contract, advertisers who were not members (or had been kicked out) would be subject to extra scrutiny by publishers, and likely face penalties or outright bans.

Though it sounds somewhat Draconian and bureaucratic, the alternatives aren’t pretty. As many advertisers have found out the hard way, once you are labelled a bad player, there’s often no recourse and your entire business can be shut down virtually overnight. I’d much prefer a rigid system that protects the good than the wild, wild West in which the online ad world currently resides.

Postscript: To see a great summary of some of the current online ad scams, check out this PowerPoint presentation by Jay Weintraub!

You Give Leads A Bad Name – Get more Information Technology

 

Quality Score: The House Always Wins

When Google announced “improvements” to Quality Score last week, the news was met with skepticism from search marketers. Andy Beal at Marketing Pilgrim summed it up best when he wrote:

This is my translation:

“A more accurate Quality Score” – more revenue for Google.

“Keywords no longer marked ‘inactive for search” – more revenue for Google.

‘First page bid’ will replace ‘minimum bid’ – more revenue for Google.

My reaction was no different. The part that annoyed me the most was the continual reference to “user feedback” as rationale for the changes, to wit:

Along the way, we’ve also received much helpful feedback from both users and advertisers. . . . Today, we’d like to let you know of further improvements we’ll introduce in the coming weeks — based, in part, on this feedback. . . Based on your feedback, we learned that knowing your minimum bid wasn’t always helpful in getting the ad placement you wanted . . . we’ll release these Quality Score changes to a very small segment of advertisers within the next day or two, so that we can gather feedback before launching to all our advertisers

DMConfidential.com had a similar conclusion, noting “Unlike other companies, though, when Google discusses better performance, they do so leaving out how they might benefit, as though the impetus for the change came only out of their concern for the advertisers and the users.”

Somehow I suspect that Google is being a bit selective about which feedback they are listening to and which they are not (like from the overwhelming majority of AdWords users who think Quality Score is horrible).

Beyond the Facade

The real problem with Quality Score – regardless of what ‘improvements’ Google makes to it – is that it is completely one-sided and almost totally opaque. After every Quality Score update, advertisers hold their breath and hope that their accounts on Google won’t be either priced out of profitably or out-right canceled. The end result, however, is always the same: more money for Google.

It strikes me that the Google-Advertiser relationship at this point is not unlike the relationship a casino has to its gamblers. Casinos are experts at making you feel like a ‘winner’ the moment you walk in the door. From the pulsating lights, colorful patterns and bustle of people, to the free drinks, cheap buffet, comp rooms, beautiful cocktail waitresses, and glamorous shows, a normal person can feel like a VIP in a casino.

Google does the same thing. The free t-shirts (and refrigerators if you spend enough), the bubbly young AdWords reps, free Webinars on how to improve your business, free tools like Website Optimizer and Google Analytics, and even the ‘credit adjustments’ when Google finds click fraud – all are designed to make advertisers feel special. And yes, when they make changes to Quality Score, it’s ‘based on your feedback’ – see, the advertiser is in control here!

Of course, in our heart of hearts, we know that the casinos and Google don’t particularly care about us – they care about our money. The free drinks only flow if you are gambling, and once you’ve maxed out your ATM limit, all those perks suddenly disappear. And of course, the casinos have the right to kick anyone out at any time for any reason. If you’ve read Bringing Down the House, you know that if you make too much money in a casino – even if you do it legally – the casino can ban you for life without cause. To put it another way, casinos ultimately only want you if you are a loser (which in their world, is a winner).

Google is no different. Google can use Quality Score to kick any advertiser off the system at any time for any reason. As with the casinos, no explanation is required or given, other than a vague nod to ‘quality.’ And what’s interesting about Quality Score is that the advertisers most impacted by it are the ‘winners’ – the people who have figured out how to make loads and loads of money on AdWords, either through arbitrage, or lead gen, or something else. Google is really acting the same way a casino does – if you get too good at winning, Google kicks you out.

Why Google Out-Casinos a Casino

What’s really fascinating about the Google and casino comparison is that there are actually two significant advantages Google has over the casinos. First, Google has no competition. Anyone who wants to buy search engine advertisements really has no choice but to use Google (since Google controls around 70% of the market). Google can kick advertisers around as much as it wants, and the advertisers have no choice but to grin and bear it.

Compare that to a casino in Las Vegas. There are dozens of options for consumers – if The Mirage treats you poorly, you can just get up and go next door. You can even gamble online if you want to, excluding physical casinos entirely. Competition forces casinos to consider the interests of their customers, or at least to balance the drive for profit with customer retention. Google has no such limitation.

Secondly, casinos are heavily regulated. Casinos must post the average payout of their slot machines, there are strict gambling rules for every game in the house, and multiple commissions at a city, state, and federal level monitoring their behavior. Casinos can’t change the game midway through (imagine if you made a 5 to 1 bet on a horse and during the race the casino reduced the odds to 2 to 1 because your house was winning), and casinos can’t discriminate against customers (imagine a casino that put up a big sign in the entrance that said “No African Americans Allowed”).

Google is almost entirely unregulated. Google changes the game at will and whenever they want. They can discriminate against specific advertisers or entire classes of advertisers at their sole discretion.

2 + 2 = 5

In sum, Google has totalitarian-like control over their revenue. They control who advertises and how much they pay. If Google says that two plus two equals five, advertisers can only agree. Unlike other industries where dominant market share is regulated by anti-trust laws, Google has thus far escaped any scrutiny by federal agencies. Enjoy the free buffet friends while it’s open, Google might take your plate away at any time.

 

As the Economy Goes, So Goes Quality Score?

Back in 2006, when Google announced the “Quality Score” initiative, Google’s advertising revenue growth seemed unstoppable. Penalizing a few rogue advertisers (’rogue’ being mainly defined as affiliates, made for AdSense sites, or incentivized marketers) might lose Google a few dollars in the short term, but those dollars would quickly be replaced by the hordes of new advertisers rushing to give their marketing budgets to the Google juggernaut.

Since the initial Quality Score launch, Google has expanded the program further, adding comparison shopping engines and travel aggregators to the “most wanted” list in 2007 and factoring in page load time earlier this year (which some have suggested creates an incentive for publishers to run text-based AdSense ads at the expense of non-Google display advertising). Along the way, Google’s revenues have continued to explode. Now that even the most traditional mainstream marketers understand that Internet marketing is no longer just ‘experimental’ budget, advertising competition and CPCs have continued to increase on Google.

But unless you’ve been hiding under a rock for the last few months (or work in the Bush Administration), its clear that the Internet advertising boom is going to see some slowness in the near future. The implosion of the mortgage industry, skyrocketing gas prices, job losses and consumer uneasiness all point to a coming recession. Though I believe that Internet companies will be largely immune from a national economic downturn, Google’s recessionary fate – and the fate of Quality Score – may take a slightly different course.

You see, Google is now one of the world’s biggest corporations. As a result, macroeconomic forces have a much greater impact on them than they would on a smaller company. I remember when I worked at Thomson-West and I sat in on a meeting with the CEO. All I wanted to discuss was the Company’s SEM efforts, my boss wanted to talked about overall marketing efforts, and our division president wanted to talk about the Company’s strategies over the next few years. But the CEO was on a different plane all together. He was asking us how the war in Iraq would impact business, and whether globalization was a trend we should capitalize on. Basically, his world view was not unlike that of the leader of small country – my small world of SEM was the equivalent of some obscure farm subsidy bill – he understood that the overall health of the Company was decided by much broader factors.

Google is in a similar situation. There’s no doubt that they will feel the brunt of recessionary pressure much more acutely than smaller Silicon Valley companies, simply because their size by definition connects their health to the health of the nation. When you combine severe reductions in mortgage advertising, bank advertising, car advertising, airline advertising, consumer spending, and employment, you can see how Google might experience some slowness. Case in point: Google’s latest (and disappointing) earnings, which shows that – to some degree – as the overall economy goes, so goes Google (for the record, the majority of this article was written prior to the earnings report!).

So how does this relate to Quality Score, you ask? The revenue rationale behind Quality Score is that users will click on fewer ads over time if the ads that are being served are not relevant. This theory, however, is based on the assumption that ‘low quality’ ads can be replaced with ‘high quality’ ads without impacting Google’s monetization per click. That’s been a correct assumption over the last three years, with the economy strong and the heavy flow of new advertisers.

But what happens when you kick out the ‘bad’ advertisers and the ‘good’ advertisers suddenly curtail their advertising budgets? Suddenly the ‘out with the old, in with the new’ approach results in a lot fewer advertisers, resulting in diminishing CPCs (and potentially, diminishing ad relevancy). Google has been the darling of Wall Street for a few years now, but it will only take one or two quarters of disappointing results to dampen investor euphora, potentially forever.

Faced with an advertising slowdown and investor pressure, a loosening of Quality Score restrictions might be just the revenue boost Google needs to make it through tough times. At the end of the day, Google’s master is revenue, not relevancy. All the ‘holier than thou’ folks in Mountain View who have spent the last three years weeding out evil marketers from the Google results may suddenly be faced with a new directive – drive up our revenue, or think about applying for a job at Yahoo (the ultimate demotion!).

Think this sounds like a big conspiracy theory? Consider Sergey Brin’s comments last week during Google’s earnings conference call. “There is some evidence we have been a little more aggressive in decreasing coverage than we should have been . . .Clearly that is not the ideal strategy, because we don’t want to end up with no ads.” Funny how a recession can make Quality Score a little less popular around the Googleplex.

In a perfect world, it would be great to see Google get a little come-uppance here. All of those jilted advertisers who helped Google grow their revenue when Madison Avenue wasn’t interested, and then got pushed aside once Google didn’t need them anymore, would join together and collectively decide not to renew their advertising on Google. The adage ‘don’t forget the ones that helped you get to the top’ would be proven valid and Google would learn a valuable lesson about playing God when it comes to determining who shall and shall not be considered a legitimate advertiser.

Alas, knowing direct marketers as I do, you can be sure that any reductions in Quality Score rigor will be met with a renewed flood of ad dollars from advertisers given a second chance on Google. Google will gladly take their business (and the marketers will glad take the boost in revenue from being allowed to run on Google again), until such time that the national economy improves and the ‘good’ advertisers come back to the fold. Once Google no longer needs the vermants of the advertising world, you can be sure that the Quality Score fumigation service will be back in business.

 

The Google Affiliate Network: Hypocrisy or Honeypot?

Yesterday Google announced that the DoubleClick’s Performics affiliate program will renamed the Google Affiliate Network. While I have no doubt that Google will a) come up with some innovative way to improve affiliate marketing and b) integrate the affiliate program with AdWords, AdSense, and Google Analytics, I imagine that there are many affiliates who shudder at the thought of having their affiliate revenue tracked and managed through a Google-owned affiliate network.

Why? Primarily because Google has made it very clear over the last few years that they don’t like affiliates. Indeed, Google has specifically called out affiliate sites as ‘meriting low quality score’ and there are countless stories of affiliates getting ‘blacklisted’ by Google without any recourse. So if you are a successful affiliate who has (thus far) avoided a Quality Score smackdown or outright ban by Google, you would probably be pretty wary about joining the Google Affiliate Network. Talk about a wolf in sheep’s clothing!

Indeed, if Google really wanted to thin the AdWords ranks of affiliates, they could use the Google Affiliate Network as a massive honeypot; attract affiliates with incredible commissions or tools, and then wipe them all off the map. Yes I know it sounds like a conspiracy theory, but if you are one of the many affiliates already banned, you are probably nodding your head vigorously at the moment.

Of course, the other scenario – the one that I would argue is more likely to occur – is that Google basically draws a line between ‘their affiliates’ and ‘other affiliates.’ Affiliates who participate in the Google Affiliate Network (and who, ostensibly, adhere to the network’s standards) are given de facto approval by Google, while other affiliates are de facto denied. This benefits Google in many ways – it gives them more control over affiliates and more revenue, and it forces affiliates using other networks to migrate to their network, driving even more control and revenue.

Is this hypocritical? Of course it is! But there’s already plenty of hypocrisy in the Google ecosystem (for example, the fact that Google makes millions of dollars a year off parked domain cybersquatters via AdSense but decries ad relevancy elsewhere). So I expect Google to make some light efforts to create a Chinese Wall between AdWords and the Affiliate Network – but only to appease critics, not to really separate the two entities.

We’ll have to wait and see how affiliates react to the Google Affiliate Network. For now, however, my advice is to wait on the sidelines and see how it all unfolds.

 

Despite FTC Fines & Google’s Quality Score, Incentivized Advertising is Alive and Well on Google & Yahoo

Late last year the FTC fined Adteractive over $600,000 for deceptive advertising practices. At issue were advertisements for FreeGiftWorld.com that promised free Ipods and other hot products, but in reality required consumers to fill out offers from advertisers (many of which required paying money) before getting the product.

Long before the FTC settlement, Google aggressively purged such ads (known as “incentivized offers”) from the ranks of the AdWords search results. Adteractive, for example, went from spending hundreds of thousands of dollars a month on incentivized ads on Google to next to nothing. I know this first hand, as I was managing this spend at the time. If you read Google’s AdWords blog postings about Quality Score, the very first sites they list as having bad quality score are “Data collection sites that offer free gifts, subscription services etc., in order to collect private information.”

This decision by Google (and by Yahoo, who actually acted prior to Google) was no doubt based largely on legal liability issues. In a similar situation, both Google and Yahoo agreed to pay over $10 million each to settle claims arising from online gambling revenue (notice that a search for “poker” on Google today brings up zero AdWords results). A good rule of thumb in civil lawsuits is to always go after the “deep pockets” – the companies with lots of money. If the FTC has decided that incentivized advertising is deceptive, you would think then that relatively small companies like Adteractive would only be the tip of the iceberg. Companies like Google and Yahoo could be much more valuable targets. So by preemptively banning incentivized sites, Google could at least argue that it made a good faith effort to close down such deceptive advertising.

Surprisingly, though, a review of the Google ad network shows that – despite the Quality Score penalties established a few years ago – incentivized advertising is not only still on the network, but it appears to be thriving. A search for “free iPod” brought up 15 advertisers; “free Xbox” had 31. Each of the ads is almost identical. Here’s a typical offer for an iPhone:

iPhone 4 Free – No Catch. No Catch New iPhone Free Worth $597 Go Get it Now While Stocks Last. www-iPhone4Free.com

These are exactly the types of ads that the FTC is now fighting (and on top of the deceptive claim, the iPhone is now $399, not $597!). To give you an idea of the type of advertisement we’re talking about here, when you click on the ad, you are redirected to TopConsumerGifts.com. Read the find print and you’ll soon realize that you need to fill out eight offers – two silver, two gold and four platinum to get your free iPhone.

As with all of these programs, prior to getting to any offers, you need to go through a long “survey” which includes around 100 advertisements. Then you get to the silver, gold and platinum offers, which seem innocent enough – in the case of TopConsumerGifts, it’s things like a NetFlix or Columbia House DVD trial. So in theory you could fill out eight trial subscriptions to these various offers and then get your gift, right? Well, not so fast my friend. The small print in the terms and conditions note: “You will not be eligible to receive a Gift in this Promotion if, within 60 days of your Sponsor Offer Initial Transaction Date, you cancel your participation in more than two Sponsor Offers you have completed as a part of the Program Requirements.”

In other words, for at least six of eight offers, you need to get past the 30 day trial and actually pay for the offer. Assuming that the average offer costs about $30 a month, you are basically required to spend $180 ($30 times six) on things you don’t want to get your “free iPod.” If you don’t follow the terms and conditions to the letter, you don’t get your gift, and even if you do follow all the rules precisely, “Company may, at its sole discretion, terminate any account and deny any Gift without prior notice for . . . any other reason at the reasonable discretion of the Company.”

These ads are all over the Google Content (AdSense) Network. And a few days ago I was listening to a sports radio station and I heard an ad for “RadioFreeZone.com” offering a free Xbox. Judging from the timing of the ad (non-drive time, remnant), I wouldn’t be surprised to learn that this ad was served up via Google Audio Ads. I’ve also noticed that whenever I log on to my “My Yahoo” page, I get “targeted” with Free Xbox display ads.

Something is not right here. Either Yahoo and Google’s lawyers have decided that the legal risk of allowing incentivized advertisers is worth the revenue, or a major smackdown from the FTC is around the corner.

 

What if Google Declared War on Comparison Shopping Engines and No One Noticed?

With little fanfare, Google posted the following announcement on their Inside AdWords blog this week:

The following types of websites are likely to merit low landing page quality scores and may be difficult to advertise affordably. In addition, it’s important for advertisers of these types of websites to adhere to our landing page quality guidelines regarding unique content.

• eBook sites that show frequent ads
• ‘Get rich quick’ sites
• Comparison shopping sites
• Travel aggregators
• Affiliates that don’t comply with our affiliate guidelines

Sounds pretty innocuous at first, that is until you read the line “Comparison shopping sites.”

To me, this is huge news, for three reasons. First, comparison shopping engines (CSEs) drive a huge percentage of Google’s revenue. I don’t know the exact percentage, but it wouldn’t shock me if all the CSEs combined (Shopping.com, Shopzilla, Nextag, Smarter, Become, etc) made up 10% or more of Google’s AdWords revenue.

So to call out these sites as being ‘bad sites’ that Google will try to disallow is sort of like your local grocery store saying that they will no longer sell candy because it’s bad for you. As we all know, however, Google does not make decisions based on some sort of higher standard of ethics or consumer advocacy, so for Google to directly attack CSEs, there must be a darn good financial reason behind this.

And that brings me to reason number two: Google’s continued war against eBay and Microsoft. As I’ve discussed in the past, Google has developed a lot of products to directly compete against these two companies. And guess what? Each of them has a comparison shopping site – eBay owns Shopping.com and MSN has MSN Shopping (though I am not sure whether they actually advertise on Google or not). What better way to hurt your rivals than to prevent them from advertising on your site, which just so happens to be the biggest advertising medium online?

The real revenue impact, however, comes with reason #3: Google Base. Preventing other CSEs from advertising on Google will naturally inhibit their ability to grow their user base. At the same time, Google’s universal search initiative has increasingly emphasized Google Base results within Google natural search results.

Do you see a trend here? Less exposure for rival CSEs, more exposure for Google’s homegrown CSE. Granted Google Base is currently free, but to paraphrase Milton Friedman, ‘there ain’t no such thing as a free lunch.’ Is there any doubt that Google will eventually begin to monetize Google Base traffic, either through AdSense or through a classic ‘charge the merchant’ CSE model?

A lot of people yawned when Google yanked the “free iPod” or “Made for AdSense” sites from the AdWords mix. I’m shocked that this announcement seems to have resulted in the same sense of apathy. If I was working for a CSE at the moment, the only yawns I’d have would be coming after many sleepless nights.

 

How the Affiliate Marketing Industry Killed Itself

Affiliate marketers – most ecommerce businesses either love ’em or hate ’em. Admirers love the concept of having thousands of outsourced marketers working on your behalf and only get paid when they actually drive business to your company. Haters see affiliates as black-hat leaches who will use any underhanded technique to piggy-back on your good name and get revenue credit for traffic you could have driven without them in the first place.

Regardless of the camp you are currently in, my sense is that affiliate marketing as an industry is in decline. As I see it, there are three main factors that are driving this demise, and each of these factors are directly the result of affiliates being too aggressive, underhanded, or a combination of both. Sadly, the weakest link in the chain brings down everyone else.

1. Marketers Wised Up to Affiliate Tricks. A few years ago, it was relatively easy for an affiliate to game a merchant’s affiliate program with little chance of detection. Here’s three clear examples.

First, affiliates bought the merchant’s trademarked name on search engines. For example, there was a time when affiliates of the University of Phoenix could make a killing buying keywords like “university of phoenix” “u of p” and “phoenix degree.” Obviously, anyone typing in “university of phoenix” is highly inclined to fill out request for information form to learn more about the school (which would result in a payment for the affiliate that presented the form). Merchants soon recognized that the better solution was to ban affiliates from buying their trademarked keywords and to just buy them for themselves, avoiding an unnecessary middle-man fee.

Second, affiliates of ecommerce companies took this concept one step further by either buying paid search or optimizing organic search around “company name + coupons.” Thus, a user would come to a company Web site directly, select a product, and get to the checkout page and see a box that said “enter your coupon code here.”

Savvy consumers would then go back to Google and type in “company name + coupon” and be bombarded by affiliates offering the company’s most recent coupons. As soon as a user clicked on any of these sites, the affiliate would get commission for a purchase that they did nothing to drive. Translation: the merchant would have to pay the affiliate a commission, give the consumer a discount, and lose a lot of margin dollars they otherwise should have retained for themselves.

These days, merchants are catching on to this technique. The solution is either to severely restrict or ban coupons altogether, or to create terms and conditions that prevent affiliates for buying these coupon-related keywords.

Finally, there was a time when unsavory affiliates basically created spyware programs that would intercept a consumer prior to a purchase and insert the affiliate’s tracking code at the last moment. Thus, regardless of whether the consumer went directly to a merchant’s site or not, the affiliate still got a commission. While there are rumors that such link hijacking programs still exist, most major merchants now have systems in place to identify and ban any affiliates engaging in such practices.

In general, online merchants are just a lot more attuned to not just whether affiliates are driving revenue, but whether they are driving incremental and legitimate revenue that the merchant would not otherwise have gotten. Thus, the fact that your affiliate program is driving $300,000 of revenue a month is no longer necessarily a great thing. In fact, if that $300,000 could have been driven straight to your site anyways, and if you are paying a 10% rev share to affiliates, suddenly that $300,000 of revenue is actually a $30,000 profit loss.

Overall, I would say that the general attitude of merchants towards affiliates is one of caution and mistrust. Fewer and fewer merchants are willing to allocate a significant chunk of their marketing budget to affiliate marketing, precisely because the risk of bad players infiltrating your affiliate program is too high.

2. Search Engines Shunned Affiliates. I could make a pretty strong argument that Google AdWords was largely built on affiliate revenue. In the early days of AdWords (let’s say 2002 to 2005), affiliate marketers were a massive driver of AdWords profit. I know from experience that by 2005 there were dozens of affiliates spending close to $1 million a month on AdWords.

In the early days, Google was more than happy to take any money that came through the door. As Google’s business matured, however, Google realized that affiliate money came with a price. For starters, they felt that it decreased user relevancy. For example, if you typed in “University of Phoenix” and you clicked on an ad that took you to a landing page that required you to fill in personal information, and then you just got a “thank you” message afterwards, you might feel that you had a bad experience.

Having one affiliate in the Google search results would probably not be that terrible. But affiliates are aggressive at squeezing out every penny they can, and many affiliates began to create duplicate Web sites to show up multiple times on the same search query. Thus, if you did a search for “university of phoenix”, you were likely to see 9 out of 10 paid ads coming from affiliates, but in reality there were probably only two or three companies actually driving these 9 ads.

So now the user experience wasn’t just bad for one or two paid ads, but it was bad for almost every ad. It made Google a lot of money, but there was internal concern that these ‘scum marketers’ (an actual phrase that I am told was used at high levels inside Google) could jeopardize the Google brand of search relevancy.

By 2005, AdWords had moved beyond fringe arbitrage marketers and was approaching the mainstream. So much so that Google realized that there were plenty of ‘direct’ marketers who were willing to pay for spots held by aggressive affiliates. These direct marketers were no doubt not as savvy as the affiliates (who had been doing this for years, and who were benefiting from Google’s “keyword history boost”). The result was ‘good’ marketers being blocked by ‘bad’ advertisers.

Google’s solution was the infamous “quality score” algorithm, which was basically a way for Google to ban affiliates and “made for adsense” advertisers from the search results. Almost overnight, affiliates with 10 to 15 duplicate sites dominating top keywords were either reduced to one ad or eliminated altogether. Affiliates spending a million a month were reduced to maybe $100,000.

And this was the first of several quality score updates. Over time, affiliates saw their ‘keyword arbitrage‘ opportunities continue to shrink on Google. And, of course, whatever Google does is followed by their competitors. Yahoo and MSN have also introduced quality score factors (though they are still a little more willing to let affiliates in, as they have not hit the critical mass of advertisers that Google has).

Had the affiliate community adopted a self-policing system of ethics (no duplicate ads, no misleading landing pages, protection of consumer information), it’s possible that those inside Google battling on behalf of affiliates might have won out over those who sought to do anything possible – even at the expense of revenue – to distance Google from the affiliates. Again, the weakest link brought everyone else down.

3. Pay-Per-Performance Went Mainstream. I’ll admit that my final argument doesn’t really support the overall theory that affiliate malfeasance was largely the cause of the decline of affiliate marketing. That being said, I do think that the overall success of the affiliate model – pay for performance, not for impressions or clicks – led other distribution channels to conclude that they too should offer such a model.

These days, it is not at all uncommon to get pitched by agencies, display advertisement companies and now even search engines on a pay-per-performance model. And even if you still have to pay by the click or by the impression, the sales people selling you your spot now understand that their ability to get you to re-up for more spend is directly correlated to the ROI you achieve on your ad buy.

As a result, the appeal of having thousands of affiliates working on a pay-per-performance basis for your business is no longer as novel and exciting as it once was. Indeed, busy advertisers would much prefer to do one CPA deal with an Advertising.com than 1000 CPA deals with thousands of unknown affiliates.

Conclusion

As loyal readers of this blog know, I am often prone to hyperbole when making predictions (see my awesome post about the death of search engines from 2006). Before you write me too many angry comments, let me just state for the record that I know that there are plenty of totally legit and valuable affiliates out there. I also know that there are businesses that have combined technology with intensive management of their affiliates to produce a lot of incremental revenue from this channel.

But folks, the wild west days of 2005 are gone. Marketers are smarter, search engines are smarter, arbitrage opportunities are drying up, and pay-per-performance is no longer the sole domain of the affiliate. Affiliates filled several voids in the past, but – like the wild west – the amount of empty space just keeps getting smaller and smaller online.

 

Universal Search, Nextag, and Quality Score – Oh My!

1. Google Universal Search. Lots of hype, but really is it that different than what is already there? My friend Owen doesn’t think so. To me, it seems like both Google and Yahoo are acknowledging that “searches for Web sites” is just a piece of the puzzle – Google chooses to address it by incorporating books, news, videos, etc into search results. Yahoo focuses on social networking like delicio.us and Flickr as an alternative to traditional search altogether.

2. Nextag and the A word? Rumors are flying that Nextag has been acquired. Unclear by whom. My guesses: private equity company, Amazon, or Yahoo. More to come.

3. Quality Score Update. A few of my dormant AdWords accounts recently got oodles of clicks out of nowhere. Then the traffic stopped. I smell a Quality Score algorithm experiment.

4. Reactive or Predictive? Having talked to many bid management companies recently, I’m realizing that some companies are big into predictive modeling (“all your keywords that contain the word ‘red’ perform well, therefore, increase the bid on all ‘red’ keywords, regardless of history”) versus reactive management (“look at the last month of data and adjust bids for position, geography, demographics, day-parting, etc for all high-traffic keywords”). Seems like someone should invent a tool that combines the two approaches.

5. Speaking Circuit. I’m tired of looking at conference agendas with faux-expert SEM consultants as the main speakers. So I’m going to start making an effort of talking at some of these conferences for the good of humanity. I’m working on WebMasterWorld PubCon at the moment. If anyone has ideas (or invitations) to speak, let me know.

 

Google’s Sneaky Addition to Quality Score

Most Google advertisers have now become accustomed to messages at the top of their AdWords interface notifying them that one or more of their keywords is “inactive for search.” Sometimes, this is to be expected, such as when you are bidding under $.10 for almost any keyword. In other cases, though, it’s clearly the result of the dreaded and oft-baffling “quality score.”

Google has tweaked the quality score algorithm continually over the last year or so. This is not to be expected, since – as Google should know by now – SEO or SEM blackhats will work ’round the clock to come up with end-arounds to any algorithm.

I noticed a very slight change to the AdWords UI about two weeks ago that is clearly yet another attempt to thwart quality score optimizers. If you click on the “tools” tab at the top of the AdWords UI, then select “Advanced Search” and finally “Find and Edit Max CPCs” you’ll get to a nifty tool that allows you to make mass bid changes across your entire account.

In the olden days (read: March), you could use this tool and filter the results based on whether a keyword was active or inactive. In other words, you could find all your inactive keywords and – if you wanted – in one stroke increase all inactive bids to the minimum CPC.

As a white-hat SEM, I found this to be useful in identifying keywords that had slipped just below the inactive bid threshold. So I would increase all bids that were only a penny or two away from the minimum CPC.

Now, however, Google has changed the tool. Instead of being able to choose either or both inactive and active keywords, there is just one choice “active and inactive for search.” In addition to the strange grammar (I mean, outside of quantum physics, I didn’t think keywords could reside in two states at once), this basically means that you have no choice but to search all of your keywords at once.

The result? Clever SEMs can no longer use this tool to quickly combat quality score penalties at the lowest cost possible.

For the record, I haven’t dug into the AdWords Editor or the AdWords API to see whether the same rule applies. I would doubt that Google could prevent this in the API, as it is so customizable. That being the case, you can sort of look at this as a “regressive tax” against the small advertisers who don’t have the luxury of building their own API integration.

Alternatively, it may be the case that Google has concluded that most black-hats don’t have the resources (or the patience) to build API integration and so cutting off quality-score end-around tools in the UI will solve 99% of their problems.

Whatever the rationale, this move – albeit quite minor – is yet another salvo in Google’s all out war against black-hat SEMers (um, unless they are typo-squatting on the Google Domain Park . . .).

 

2007 Internet Marketing Predictions

Cleaning out my closet this weekend, I noticed a dust-covered orb in a dark corner, covered by some well-worn Google t-shirts. Upon further examination, I realized it was my trusty crystal ball! Moments after I picked it up, visions of the future of Internet marketing starting flying at me faster than a Viacom exec submitting his resume to Monster. Allow me to share a few with you now . . .

1. Panama Helps Yahoo . . . A Little: Yahoo’s new search platform makes it much easier for advertisers to actually, well, advertise, with Yahoo. And by copying the Google ‘yield management’ model, revenue per click also increases for Yahoo. The bad news, however, is that Yahoo is unable to fully confront its click fraud problem, which leads many advertisers to be cautious with their Yahoo investment.

2. Mobile Marketing Get Lots of Funding and Press, But Not So Much Revenue: The Apple iPhone launch creates a Sand Hill Road frenzy, with VCs push each other out of the way to invest in ad platforms that will take advantage of mobile phone usage. Big media sources like the Wall Street Journal devote front page coverage to the “mobile commerce” revolution. But after many months of hype, few companies are actually making much money with cellphones.

3. Yahoo and eBay Merge: Yahoo recognizes it can’t stop Google search, and eBay gets sick of fighting Google Checkout and Google Base, so the two giants take comfort in each other’s arms. Meg Whitman becomes CEO while Terry Semel gracefully exits and buys several islands in the Caribbean with his severance package.

4. Two or More Senior Google Execs Leave Google: Jonathan Rosenberg (SVP of Product) and Omid Kordestani (SVP of Sales and Biz Dev) separately decide that they are ready for new challenges. Rosenberg becomes CEO of a big competitor, while Kordestani starts a non-profit.

5. Google Gets Sued Over Quality Score: Several advertisers who watch their online marketing campaigns disappear overnight join together in a multibillion dollar class action against Google’s mysterious Quality Score. Google outwardly claims no wrong-doing but internally works on changes to Quality Score to satisfy the plaintiffs.

6. Mercantila.com Goes Public, Earns $225 Billion Valuation: My new company, Mercantila.com, becomes the toast of the town and quickly rivals Google as the sweetheart of online marketing.

7. Technorati is Acquired by Yahoo: Yahoo continues to love Web 2.0 and gobbles up Technorati for $350 million in stock.

8. Google Offers Free Broadband At Home: Google becomes an ad-supported ISP. Americans love the deal, but must wait six months after the announcement as Google does not hire enough resources to fulfill the service initially.

9. Online Lead Generation Consolidates: Quinstreet and Nextag merge, Oversee.net swallows up a major competitor, and AdChemy.com takes another round of funding, using the money to acquire some small SEO shops.

10. RFID Behavioral Marketing Begins: Companies offer colleges students thousands of dollars a year to have an RFID chip implanted in the skull. The businesses then use GPS to track the student’s every move, eventually developing an amazing accurate behavioral profile. Internet advertisers willing shell-out 200 to 300% more per impression to get in front of these targeted customers.

And with that, the crystal ball became cloudy again. For a brief moment, I thought I saw fellow blogger Jay Weintraub scaling Mt. Everest, but I really can’t be too sure. I guess we’ll have to wait until 2008 to find out.

Happy New Year!

 

More on Google Quality Score: The Law of Unintended Consequences?

As Google purges its advertiser list of “undesirables” (like MFAs, incentivized sites, affiliate marketers, or anyone who bids under $.20 a click), much discussion has been focused on the impact of this strategy to Google’s bottom line. As noted in prior columns, there’s no doubt in my mind that Google’s decision is driven purely by financials, and that this will only grow their revenue and margins.

One question that I haven’t seen discussed much, however, is how Quality Score will impact Google competitors – particularly Yahoo and MSN. After all, message boards like WebMasterWorld have been filled with angry advertisers promising to never advertise with Google again and shift their entire budgets elsewhere.

On one level, it seems like there will be two obvious consequences here. First, Yahoo and MSN will get more advertisers; after all, there’s lots of opportunity for business from these two publishers, but many advertisers don’t want to spend their time with the terrible user interfaces unless they absolutely have to.

Second, the relevancy of the paid results in Yahoo and MSN will likely decrease slightly. It’s sort of like when your neighbor fumigates their house and all the bugs flee . . . to your house. The “bottom of the barrel” advertisers like MFAs aren’t going to give up without a fight, and if Google won’t let them play, they’ll take their ball and play somewhere else.

In Google’s worldview, the end result would likely be a slight increase in revenue for MSN and Yahoo but a decrease in relevancy for these companies. And recall that Quality Score doesn’t hurt Google’s revenue at all, since any lost revenue is easily recouped by higher paying advertisers showing up through broad matching. So Quality score, in theory, is a win-win-win for Google.

Theory and reality, however, usually diverge, and Quality Score is no exception. I predict three unintended consequences:

1. Advertisers understand the importance of diversity: Many marketers have made millions of dollars buying AdWords and AdWords alone. Sure, you could experiment with MSN, Ask, or Looksmart, but why take the risk or spend the time?

That strategy may have worked – and may still work – but surely many advertisers are starting to worry about putting all of their eggs in one Google basket. I would think that any advertiser that relies on AdSense, affiliate links, lead generation, or for that matter anything that is not a major brand name should have at least 20% of their online budget dedicated to “non-Google” spending.

Sure, it will be hard work, and sure, some traffic sources you test will have low quality and click fraud, but the alternative is waiting until next November 6 – a month before Christmas – to have your entire online marketing budget yanked by Google.

2. Antitrust lawsuits: Google’s hidden pricing system which adversely impacts some advertisers without any means of recourse, combined with Google’s near monopoly of search marketing will be a legal problem for Google down the road. It is one thing to change an organic algorithm to improve the relevancy of free search listings, but quite another to charge different advertisers different prices for the same exact ads.

Imagine what would happen if your local electric company decided that they were going to charger customers differently but they refused to tell customers what factors went into the different prices (well, other than a vague list of ‘factors’ that could impact your price). From month to month, you would have no idea whether you would have to pay $100 to keep the lights on or $1000. And what if you noticed that prices seemed to only increase as a result of these changes, and that the electric company always seemed to hit their financial numbers each quarter?

Granted, Google only has a 60% market share, as compared to the 100% market share enjoyed by local utilities, but a 60% share is more than enough to be considered a monopoly. And monopolies cannot manipulate prices without transparency or any sense of fairness.

3. SEO Comes Back Into Vogue: In general, I believe that companies are going to invest more and more in SEO as SEM becomes more efficient and arbitrage opportunities slowly evaporate in paid search. Quality score will only speed the transition to SEO for many advertisers. After all, if you have the choice between trying to optimize for paid search (which, if successful, means you have the right to pay for exposure on Google), 0r 0rganic search (which, if successful,is basically free money), many marketers will elect to shoot for the free traffic over the paid traffic.

For Google, this means that they may have unintentionally created a whole new crop of SEO gurus. And since many of these people are the “scum” (read: MFAs) that will do whatever necessary to drive traffic to their sites, Google may have created an army of black-hat SEOs. Black-hats who, by the way, happened to be very angry at Google at the moment.

In this sense, maybe the fumigation analogy is appropriate here as well. Google “exterminated” the vermin from AdWords, only to send these folks into the ranks of black-hats trying to manipulate Google’s organic results.

Epilogue: Als Sie Mich Holten, Gab Es Keinen Mehr, Der Protestieren Konnte

Right now I read a lot of bi-polar discussions on WebMasterWorld about Quality Score – advertisers who have been impacted are angry and sometimes frightened about Google’s increasing willingness to use their market share for financial gain without any regard for who is hurt as a result.

Others, who have not been impacted, believe that if your site has been banned via Quality Score, you are a scum marketer and you deserved the harsh treatment. And it goes without saying that their site could never be impacted, since they are a “good” marketer.

These “good marketers” remind me of the “good Germans” who watched from the sidelines as their countrymen were (often arbitrarily) persecuted in the 1930s by Hitler’s henchmen.

A famous poem attributed to Pastor Martin Niemoller speaks of this sentiment:

“When the Nazis came for the communists, I remained silent; I was not a communist.

When they locked up the social democrats, I remained silent; I was not a social democrat.

When they came for the trade unionists, I did not speak out; I was not a trade unionist.

When they came for me, there was no one left to speak out.”

Obviously, Google and the National Socialist movement cannot really be compared. But as many advertisers happily drive big holiday sales on AdWords, it may be worthwhile watching your back – Big Google may be watching.

 

Timing Is Everything When it Comes to Quality Score

Earlier this week, Google announced an enhancement to their quality score initiative on their Inside AdWords blog. The changes were two fold: 1) quality score would now apply to the Google content network; and 2) Google would put an increased focus on landing page relevancy in this new and improved algorithm.

Folks who religiously read this blog will know that I am generally against Google’s quality score, mainly because of the lack of transparency and the opportunity for Google to make decisions about who shall and shall not show up for a particular ad, without any recourse for the advertiser. In Google’s defense, however, I must admit that this new Quality Score update does address one of my major critiques – that Google cared only about quality on their own site, and not on their content distribution partner sites.

But all of this is not the point of this post. Here’s what I find most interesting about this latest Quality Score improvement – the timing. The new Quality Score went into effect on November 6th. What’s so special about that date, you ask? No, the answer is not that it occurred a day before mid-term elections (though I wouldn’t put it past Google to try to influence the elections . . .).

November 6th just happens to occur almost exactly between two special events for Google – Google’s Q3 earnings announcement, and Thanksgiving, the start of the Christmas shopping season. Why is this such great timing? Let me explain.

First, announcing after the earnings report helps Google to bury this news. No pesky questions from analysts about why they are attacking “bad advertisers” instead of “click fraud”, or whether their lack of transparency in Quality Score could potentially create anti-trust problems for them down the road. By the time the next earning announcement comes around in January, this Quality Score enhancement will be old news.

Second, and more importantly, the fact that Google is launching this right before the holiday season is evidence that Quality Score did it’s job – it helped Google make more money! My guess is that a lot of the people being impacted by Quality Score are the “uber-professionals”, the folks who can figure out how to buy clicks for $.10 and turn around and make $.15 on that same click.

Note that while “Made for Adsense” sites fall into this category, that is not the only business this applies to. It also applies to smart advertisers who are really good at targeting, ad text, and conversion and who know how to drive a consumer through a conversion funnel at low costs. That includes arbitrageurs, lead generators, and affiliate marketers. Once Google’s bread and butter . . . once.

These are the types of advertisers Google doesn’t like so much anymore. They are far more demanding and clever than Fortune 500 advertisers, who care less about “ROI” and more about “Lift” and “Brand Perception.” And guess what? If you remove the smart advertisers through Quality Score, while simultaneously increasing your broad matching functionality, the result is a win-win for Google and big advertisers – higher CPCs on tail terms and more clicks for the big guys (though less ROI, but who cares, right?)

So with the holidays fast approaching, and Google now beholden to the almighty earnings call, what better way to drive a few more dollars of revenue than to cut the smart guys out of the content network and replace them with Ford, Procter and Gamble, and McDonald’s? (Google’s Lovin’ It!)

Long-term, I still don’t like Quality Score. It never seems like a good idea to me to alienate your smartest advertisers with a non-transparent system designed to benefit big dumb advertisers. Short-term, I guess I have to say that anyone shorting Google is in trouble. Expect a Quality Stock Score in January.

 

Google vs. eBay: All Out War!

I regularly read stories about how Yahoo and Microsoft are ganging up on Google. Whether its the recent announcement of instant messenger compatibility, or the simple fact that Yahoo and MSN are both spends tens of millions of dollars promoting and revamping their search engine marketing offers, there is a lot made of the increasingly bitter fight between these three giants.

My sense, however, is that the real struggle is between Google and eBay. Let’s face it, as much as Yahoo and MSN try, the battle for search (or search engine marketing) is over. Google owns something like a 56% market share, has smarter people, and has amazing brand recognition – such that irregardless of how bad Google’s search might become, consumers will still perceive it is the #1 search engine.

So I think that Google has (rightly) concluded that it is game over when it comes to online search. The focus now is on figuring out the next high margin online business to enter into. There are basically two choices – pure ecommerce a la Amazon, or the “online marketplace model” of eBay. Considering the impressively low (or nonexistent) margins for Amazon, there is actually only one choice – eBay.

How Google is Attacking eBay

Google hasn’t been too stealthy about how they intend to beat eBay. The strategy is quite simple: build competitive products, attract users by pricing the products well-below eBay rates (or even free), and leverage Google’s bully-pulpit – that is, the massive traffic and market share of the Google search empire – to virtually require people to use Google’s products at least as a complement to eBay’s rival products. Let’s look at a few examples of how Google has used this strategy to date:

1. Froogle – Competitor to eBay’s Shopping.com; Offered for free (compared to CPC pricing for Shopping.com); Promoted with one of only five links on the Google homepage. Clearly, if you are selling products online, you would be dumb not to use Froogle. Note that Google monetizes Froogle via its AdSense contextual marketing product (which, ironically, is also how Shopping.com generates a lot of its revenue). Suffice to say, with this monetization in place, Google can forever give Froogle away and forever cause Shopping.com’s margins to compress as a result.

2. Google Base – Competitor to Craigslist and eBay; Offered for free (compared to listing fee and sales commission on eBay and flat fees on certain categories on Craigslist); Promoted by requiring Froogle users to enter their products into Google Base first before they can show up on Froogle. Google Base is definitely a product that Google has yet to perfect and in its current iteration it is a blip on the radar compared to eBay or Craigslist (note: eBay has a 25% stake in Craigslist). That being said, the fact that Google rushed this product onto the market and is continuing to promote it via Froogle indicates that they have not yet given up on the dream of competing with eBay/Craigslist for the ‘classifieds/marketplace’ market online.

3. GTalk – Competitor to eBay’s Skype; Offered for free (Skype charges for some services); Promoted by integrating it into Gmail. Here’s an example of a product that will probably never make Google much money, but could be very effective in reducing eBay’s ability to monetize its $4 billion acquisition of Skype. After all, why pay for Skype when Google is free?

4. Google Checkout – Competitor to PayPal; Offer for free up to a user’s current AdWords spend with Google (PayPal charges a percentage of the sale price); Promoted by giving users a special “shopping cart” logo on all of their Google AdWords placements on Google. As I noted in my last column, the shopping cart logo on AdWords really gives eCommerce sites no choice but to use Google Checkout. And since it is free, there’s actually a strong incentive for advertisers to push purchasers toward Google Checkout as opposed to eBay’s PayPal.

5. Quality Score – Google’s recent update to its “Quality Score” algorithm was allegedly made to ferret out “made for AdSense” (or MFA) arbitrage sites participating on the AdWords network. It turns out that these MFA sites aren’t the only sites that were targeted by the Quality Score update. In fact, Google is directly attacking “incentive sites” like “FreeIpods.com” and removing these from AdWords (or more specifically, raising their minimum bids to $5 or $10, effectively making it impossible to advertise at all). The rational behind eliminating incentive sites is “bad user experience” and “frequent user complaints.” Of course, no one really knows if Google really received lots of complaints about incentive sites, we just have to trust Google’s word on this point.

But let’s play this scenario out a little further. Google has just removed sites that are either MFAs or have “bad user experience.” What other sites could possibly be included in one of those categories? Recall that Shopping.com has publicly stated in its SEC filings (prior to being acquired by eBay) that something like 40% of its revenue comes from AdSense ads on its site. In other words, Shopping.com could very easily be classified as an “MFA” and removed from AdWords by Google.

Similarly, eBay is famous for buying millions of seemingly irrelevant terms like “Nuclear Bomb” and “Belly Button Lint.” Surely there have been tons of user complaints about the poor user experience of clicking on an ad on Google, being sent to eBay, and not being able to purchase the aforementioned nuclear bomb the user had his heart set on. I don’t think it would be a reach for Google to conclude that many of eBay’s ads create a bad user experience and therefore should be banned from AdWords.

And since so much of the Internet’s traffic flows through Google (something like 56%), if Google did indeed prevent eBay and Shopping.com from advertising on AdWords, this would have a very meaningfully negative impact on these companies’ ability to drive new customers to their sites. Food for thought.

How eBay is Responding

eBay has some really nice businesses with high margins – in particular eBay itself and PayPal. Both of these businesses are near monopolies, and both have withstood attacks from strong competitors in the past (Yahoo Auctions, Overstock, and even eBay’s version of PayPal before they just acquired PayPal itself). So eBay is used to the attention and has successfully responded in the past.

As far as I can tell, eBay is responding to Google in three ways today, with a fourth that I predict will occur in the next 1-2 years:

1. Block Google products wherever possible: eBay has made it clear that Google Checkout is not welcome on eBay. This is clearly a defensive strategy. At the end of the day, the only impact it has on Google is that Google can’t make money off eBay transactions through Google Checkout. Of course, considering the fact that Google Checkout will be mostly free for the majority of its users (most of whom already use AdWords), this strategy is mostly a way to protect PayPal revenue than it is to impact Google Checkout revenue.

It should be noted that there are two ways that banning Google Checkout could seriously backfire for eBay. First, it could anger eBay users who would like to save money by using Google Checkout instead of PayPal. Second, it could be grounds for allegations of anti-competitive behavior (read: an anti-trust lawsuit). This point is particularly relevant to my point #4 below.

2. Introduce competitive products to AdWords: eBay recently announced that it is launching a competitor to AdWords called “eBay AdText”. eBay may try to leverage its existing relationships with tens of thousands of loyal eBay sellers to get these folks to replace AdSense on their Web sites with AdText. Perhaps taking a page out of Google’s checkout scheme, I wouldn’t be surprised to see eBay basically give sellers some sort of discount or free listings on eBay in exchange for using AdText instead of AdSense.

Ultimately, for this strategy to work, the overall package eBay proposes to its sellers has to result in more revenue or eCPM than AdSense. Initially, this will be difficult, since eBay’s optimization algorithm will probably be much weaker than AdSense’s right out of the gate. Nonetheless, I do think that attacking AdSense is a viable strategy. In the end, Web site owners only care about the bottom line – if eBay can combine discounts on eBay with an algorithm close to on par with AdSense, the results might be better economics than Google and a big blow to the Google Machine.

3. Gang Up on Google: eBay recently announced a wide-ranging deal with Yahoo to provide co-branded toolbars (competitive with Google Toolbar), combined advertising strategies (competitive with AdWords), and potentially click-to-call functionality (competitive with GTalk). The deal also made PayPal Yahoo’s exclusive payment provider (competitive with Google Checkout). There’s no doubt that this is a smart move by both Yahoo and eBay.

At one point in time, you could argue that Yahoo and eBay were largely fighting over the same space – in particular, eBay’s “buy it now” functionality and Yahoo’s “stores” seemed destined to clash over dominance in the small business “marketplace” space. I think both of these companies now realize that the “enemy of my enemy is my friend” and trading blows doesn’t make much sense now. There is a far greater menace out there.

And there’s no reason to think that this is the last partnership eBay is pursuing. You would think that similar negotiations must be in the works with Microsoft (MSN) and AskJeeves (or all of IAC, for that matter). The fact that Google has been rattling cages in Redmond with ominous announcements of Excel-killers, support of FireFox (Internet Explorer killer), and potential online operating systems has probably only accelerated discussions.

4. Anti-Trust? If Google simply dominated search, I’m not sure that this would be much of an issue. Google, however, has made it clear that they are using their dominance in search to force their way into other lucrative areas, like comparison shopping, online classifieds, and online payment processing. At some point, Google is going to piss enough big companies off that the Department of Justice (DOJ) is going to start getting pressure to curb Google’s growth.

Considering the fact that eBay’s business lines are all in Google’s sights, it wouldn’t surprise me at all if eBay has already started some discussions with the DOJ on this point. There is, however, one problem that needs to be mentioned; in many ways, eBay is a monopoly in its own right. And in many ways, eBay using their own monopoly power to their advantage, as seen in their blockage of Google Checkout on eBay. Imagine if instead of Google Checkout it was “Blogation Checkout” – a small Mom and Pop company trying to compete with PayPal. I think eBay might be in trouble.

The bottom line, though, is that eBay does need to be careful about throwing stones at glass houses here. It’s hard to complain about anti-competitive behavior when you are exhibiting that very behavior.

And the Winner is?

Right now, I have to say that Google is winning this battle. The way I see it, eBay’s moves to date have been entirely defensive and are mostly directed at preserving its own revenue instead of biting into Google’s (I am withholding judgement on eBay’s AdSense killer and partnership with Yahoo. These moves do suggest an offensive is being mounted, but it is too early to say whether these will have any success). Google, on the other hand, has only seen its market share increase in its core business (search) and has launched a slew of products that leverage search to gain traction in eBay’s businesses. Based on what I have seen to date, Google’s efforts will bear some fruit. Google Checkout will be a success, Froogle already has some market share, and Google Base will someday attract a loyal following. All of this adds to Google’s bottom line at eBay’s expense. Do I think Google will destroy eBay and PayPal? Of course not. But if this war continues along its current trajectory, my guess is that eBay will be the company in the end that will cry uncle first.

Tags: ebay versus google, ebay adtext, google checkout, paypal, gtalk, skype, craigslist, google base, froogle, shopping.com, antitrust

 

Google’s Mixed Messages: Eric Schmidt Says We Are Rational, But the AdWords Team Objects; or Eric Schmidt is a Liar and Google is Playing God!

In my constant effort to get the widest distribution possible for my blog, I figured a controversial headline might just help. Hope it got you interested.

Seriously though, the headline does have some relevance. Let me explain. First, Eric Schmidt gave a speech recently in which he poo-pooed the significance of click fraud. As reported in Search Engine Journal, Mr. Schmidt gave a speech at Stanford in which he noted: “Eventually, the price that the advertiser is willing to pay for the conversion will decline, because the advertiser will realize that these are bad clicks, in other words, the value of the ad declines, so over some amount of time, the system is in-fact, self-correcting. In fact, there is a perfect economic solution which is to let it happen.”

It sounds so mathematical and smart, doesn’t it. Eric (I’m on a first-name basis with him, since I once talked to him at a Google lunch for five minutes) is arguing that search is an efficient market – over time, rational actors will pay exactly what they can afford for a click – no more and no less (assuming there are other bidders below them). A similar analogy would be the stock market. A stock is priced at what the market thinks the stock is worth. Click fraud is to search what an SEC investigation is to a stock – marketers or investors simply bundle the negative impact into the value they are willing to pay.

Sadly for Eric’s theory, in this instance there is quite a chasm between theory and reality. You see, search engine marketing is currently practiced by a combination of rational and irrational actors. The rational actors are the folks that track their keywords, analyze ROI, and adjust bids accordingly. For these folks, the amount they are willing to pay for a click truly is an efficient value.

There are hundreds of thousands of irrational actors who don’t really know whether a click is converting or not. For these folks, many of their clicks may be fraudulent, but as long as the overall result seems to be profitability, ignorance is bliss.

And speaking of ignorance, should we assume that Eric is ignorant to this truth, or rather that he is doing a little political grandstanding? I think you know the answer. Incidentally, I wrote about this “inefficient market” several months ago. Here’s the link.

In other news, Google announced its new “Quality Score” algorithm, apparently designed to stop “MFA” or “Made for AdSense” arbitrage sites. As stated in the official release: “Following that change, advertisers who are not providing useful landing pages to our users will have lower Quality Scores that in turn result in higher minimum bid requirements for their keywords. We realize that some minimum bids may be too high to be cost-effective — indeed, these high minimum bids are our way of motivating advertisers to either improve their landing pages or to simply stop using AdWords for those pages.”

This is one of those things that you can definitely look at as glass half-full or half-empty. From the half-full perspective, you could argue that it makes sense that Google is trying to stop AdSense arbitrage. After all, sending someone to Google to a page full of Google ads certainly does not satisfy user expectations. And since Google’s entire brand is based on relevancy, poor ad relevancy can lead to some serious problems for Google.

The half-empty perspective argues that this is an example of Google playing God. In essence, Google can decide to adjust the algorithm to exclude whoever they want from their advertising network. Right now, they are using that power to exclude AdWords arbitrageurs. And for most SEMers, that’s not a big deal, because it doesn’t impact us.

But what if Google decided that lead generation sites weren’t providing good user experiences, or comparison shopping engines (which are often nothing more than AdWords arbitrage companies if you think about it), or eBay, famous for sending users to totally useless results?

Ultimately, the beauty of PPC marketing is – or rather was – the fact that it was a level playing field. If you could pay more per click, or had a better click-through-rate, or had a better combination of the two, you would show up ahead of your competitors. That could be changing. In Google’s new Quality Score world (which is incidentally being adopted by Yahoo as well), an advertiser that Google deems as ‘low quality’ has no chance of showing up at the top of the listings, irregardless of the amount he is willing to pay or even the frequency in which users click on his ads!

And here’s the most ironic part: a model based on CPC and CTR is – guess what – an efficient model. It assumes that bidders are rational actors and that over time the bid someone is willing to pay will be directly correlated to the ROI that bidder receives from his ad. You would think that an advertisement with “low quality score” would result in low CTR and low conversions, and thus low ROI. In other words, if I am marketing my “blue widgets” on the keyword “red widgets,” few people should click on my ad and even fewer should buy blue widgets from me. This means that over time, I will simply run out of money and stop bidding on the keyword.

In a rational market with rational actors, this is exactly what happens. Thus, if the #1 bidder for a keyword happens to be an AdSense Arbitrage company, this simply means that this company is better able to monetize a keyword than any other company (or is losing a lot of money). Similarly, when you see eBay advertising on “Buy Nuclear Weapons”, you have to conclude that even though that is an irrelevant ad, enough people must be clicking and buying as a result of the ad to make it worth eBay’s while to buy gazillions of keywords.

Quality score doesn’t enable a truly efficient market, and it puts too much power in Google’s hands. And with Eric Schmidt arguing that click fraud isn’t a problem because the market is efficient and rational, to me this seems like Google having its cake and eating it too.

Tags: click fraud, mfa, adwords arbitrage, eric schmidt, quality score

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Google Quality Score – It Could Be a Bad Thing . . .

As reported in Search Engine Roundtable, Google recently announced that they are ready to start spidering AdWords landing pages to assess “quality score.” In Google’s own words: “If a landing page has informative content related to its AdWords ads and keywords, these keywords will receive higher Quality Scores and potentially lower minimum cost-per-click bid (CPC bid) requirements. Poor quality landing pages or those that restrict visits by our system are likely to experience a decrease in quality scores (and a potential increase in CPC bid requirements).” This is actually something Google announced about six months ago. Apparently they are now ready to actually start implementing this system.

My sense is that this is potentially innocuous, or potentially very dangerous, depending on the path Google is taking with this.

The “Do No Evil” Path

Path one can basically be described as the “stop AdWords arbitrage” path. In this scenario, Google is trying to crack down on companies that buy low-priced CPC ads on Google, only to send users to an AdSense page with higher priced ads on them, effectively playing the margins between high and low-priced keywords. Google doesn’t like this for two reasons: first, it’s bad user experience. If a user clicks on an ad, the user expects to be sent to a relevant Web site. If users repeatedly have bad experiences clicking on ads, they will eventually stop clicking on ads altogether, thereby reducing Google’s revenue.

Second, AdWords arbitrage is also bad advertiser experience. Oftentimes, companies that engage in this practice do everything they can to conceal the fact that links are advertisements to the end user. Since the model can’t work without a high clickthrough-rate after the initial click, the company needs to make sure that almost everyone who comes in the door clicks on an ad. As a result, I’m pretty confident that the actual quality of clicks on these AdSense keywords is very low. Over time, this will reduce the amount that advertisers are willing to pay for AdSense keywords.

When you combine blatantly bad user experience with equally awful advertiser experience, it’s hard to fault Google for cracking down on AdWords arbitrage. And if this is the point of quality score, I support the initiative.

The “Do Evil” Path

There is, however, a scarier – Big Brother – scenario. In “path two”, Google decides to play God. The focus is no longer AdWords arbitrage sites, but any site that Google concludes may not be relevant (defined exclusively by Google). Consider this scenario: you have created a site dedicated to comparing online flower vendors (ProFlowers, 1800Flowers, etc). Every time someone buys flowers from a vendor on your site, you get a revenue share – a classic affiliate model. Moreover, you are also providing a valuable service to users, in that they can compare prices from multiple vendors on one page.

Google, however, disagrees. In Google’s eyes, you are a leech on the system – an unnecessary step for consumers who just want to order some flowers. Surely it can’t be good user experience to send someone to a comparison shopping site to buy from 1800Flowers if you could just send them directly to the vendor? As you and your ‘cronies’ continually optimize your user experiences and conversion rates, Google’s ad space is increasingly flooded with ‘middlemen’ while the ProFlowers of the world are pushed lower and lower in the AdWords rankings.

Internally, Google is getting a lot of pressure to clamp down on your flower comparison site. The sales force – empowered with the task of going after the “G1000” – the top 1000 brands in the US – is having a hard time meeting their quotas, because ProFlowers can’t bid high enough to get a lot of clicks. Wall Street is also concerned – after all, if GM, AT&T, and Coke aren’t among Google’s top advertisers, can Google really be a viable play long-term?

So, over time, the Google “quality score algorithm” slowly optimizes Google based on Google’s preferences. No more AdWords arbitrage, no more lead generation companies, perhaps even no more comparison shopping engines (Shopping.com, Nextag, etc). In the new model, you type in “order flowers online” and 1800Flowers and ProFlowers compete for first position, while your little comparison site has to struggle for anything on the first page of results (where it matters).

A Logical Step for Paid Search?

When you look at the history of PPC advertising, “path two” seems like a logical – if dismal – path. When GoTo (now YSM) first launched in 1998, the model was close to a pure pay-per-click model. Barring editorial guidelines (i.e., a flower shop couldn’t buy the word “Sony Playstation”), every advertiser on a particular keyword had the same opportunity to show up #1; whoever paid the highest cost per click (CPC) was the winner. I have always liked this model – both from a fairness model and from a user experience perspective (after all, an advertiser with a totally irrelevant product won’t be able to afford to stay at #1 for very long, since they won’t get any conversions).

Google iterated on the GoTo model with their “yield management” system, which combines CPC with clickthrough rate (CTR). In a yield management model, an advertiser is also rewarded for the quality of their ad text. This is a reasonable change to the system, since it was fairly easy in the GoTo system to create ultra-restrictive ad text as a way of bidding #1 but reducing errant click-throughs. Moreover, yield management is fair because it gives all advertisers the same opportunity to be #1 – if you have bad ad text, you can change it and eventually move to the top.

You could argue that “quality score” adds a third element to the equation – landing page relevance. Now, to show up #1, you need a combination of high CPCs, high CTR, and high landing page relevance.

The Dangerous Path Ahead?

The problem with the quality score model is this: it is not fair. In a quality score system, your ads can be irrevocably downgraded simply because Google says so. No amount of bid adjustments and ad text changes can change your fate. In many ways, it is similar to organic search (SEO). Google decides which site is the most relevant and that’s final (it also follows that this sort of system could create an entirely new industry – SEMO – search engine marketing optimization!).

Think of SEO and SEM like two parts of your evening newscast – SEO is the journalistic content, and SEM is the commerical breaks. Ultimately, the decision to broadcast a particular news story is up to the television station. For example, if Fox News wants to only cover stories that paint conservative politicians in a positive light, they can do that. Fox’s decision to run some stories and not others will determine their viewership and financial success.

But what if Fox decided it only wanted to run advertisements from certain advertisers? Well, on its face, that’s OK – it basically means that Fox is leaving money on the table at their own peril. Let’s make this scenario a bit more relevant though; what if 56% percent of all television ads ran through Fox? If Fox decided that they simply didn’t want to do business with some advertisers, and set up rules that basically made it impossible for these businesses to advertise with Fox, could they? At some point, if a company wields dominant control over a form of media distribution, a different set of rules apply.

Much Ado About Nothing?

At the end of the day, this post may be totally irrelevant (it wouldn’t be the first). If Google is just cracking down on AdWords arbitrage, I don’t have too many complaints. But when you combine an internal focus on brand advertisers, Google’s increasing requests for more and more data about advertisers’ businesses, and an overwhelmingly dominant market share that enables Google to do whatever it wants, a press release about “quality score” can sound downright scary. Here’s to hoping I’m wrong!

Tags: quality score, arbitrage, adwords, adsense, google, ysm, goto, overture, search engine market share