Chapter 14 Google in Three Parts: Search, Online Advertising, and Beyond

14.1 Introduction

Google has been called a one-trick pony,C. Li, “Why Google’s One-Trick Pony Struggles to Learn New Tricks,” Harvard Business Publishing, May 2009. but as tricks go, it’s got an exquisite one. Google’s “trick” is matchmaking—pairing Internet surfers with advertisers and taking a cut along the way. This cut is substantial—about $29 billion in 2010. In fact, as Wired’s Steve Levy puts it, Google’s matchmaking capabilities may represent “the most successful business idea in history.”S. Levy, “The Secrets of Googlenomics,” Wired, June 2009. For perspective, consider that as a ten-year-old firm, and one that had been public for less than five years, Google had already grown to earn more annual advertising dollars than any U.S. media company. No television network, no magazine group, no newspaper chain brings in more ad bucks than Google. And none is more profitable. While Google’s stated mission is “to organize the world’s information and make it universally accessible and useful,” advertising drives profits and lets the firm offer most of its services for free.

Figure 14.1 U.S. Advertising Spending (by selected media)

Online advertising represents the only advertising category trending with positive growth. Figures for 2011 and beyond are estimates.

Source: Data retrieved via eMarketer.com.

Figure 14.2 U.S. Online Ad Spending (by format)

Search captures the most online ad dollars, and Google dominates search advertising. Figures for 2011 and beyond are estimates.

Source: Data retrieved via eMarketer.com.

As more people spend more time online, advertisers are shifting spending away from old channels to the Internet; and Google is swallowing the lion’s share of this funds transfer.J. Pontin, “But Who’s Counting?” Technology Review, March/April 2009. By some estimates Google has 76 percent of the search advertising business.C. Sherman, “Report: Google Leads U.S. Search Advertising Market With 76% Market Share,” Search Engine Land, January 20, 2009. Add to that Google’s lucrative AdSense network that serves ads to sites ranging from small time bloggers to the New York Times, plus markets served by Google’s acquisition of display ad leader DoubleClick, and the firm controls the majority of all online advertising dollars.L. Baker, “Google Now Controls 69% of Online Advertising Market,” Search Engine Journal, March 31, 2008. Another study says in 2011 Google controlled 54 percent—significant given the rise of Facebook and other online ad outlets. See J. Edwards, “How Google Takes 54 Cents of Every Dollar Spent on Web Advertising,” BNET, May 27, 2011. Facebook, Bing, Yahoo, AOL, all the ads sold directly by media sites—add up all their advertising and together they’re still less than Google’s take. Google has one of the world’s strongest brandsL. Rao, “Guess Which Brand Is Now Worth $100 Billion?” TechCrunch, April 30, 2009. (its name is a verb—just Google it). It is regularly voted among the best firms to work for in America (twice topping Fortune’s list). While rivals continue to innovate (see the box “Search: Google Rules, but It Ain’t Over” in Section 10), Google continues to dominate the search market.

Figure 14.3 U.S. Search Market Share (Volume of Searches, May 2011)Adapted from Experian Hitwise, “Top Search Engine Volume, All Categories, 4 Weeks Ending May 28, 2011.”

Wall Street has rewarded this success. The firm’s market capitalization (market cap)The value of a firm calculated by multiplying its share price by the number of shares., the value of the firm calculated by multiplying its share price by the number of shares, makes Google the most valuable media company on the planet. By early 2009, Google’s market cap was greater than that of News Corp (which includes Fox, MySpace, and the Wall Street Journal), Disney (including ABC, ESPN, theme parks, and Pixar), Time Warner (Fortune, Time, Sports Illustrated, CNN, and Warner Bros.), Viacom (MTV, VH1, and Nickelodeon), CBS, and the New York Times—combined! Not bad for a business started by two twenty-something computer science graduate students. By 2007 that duo, Sergey Brin and Larry Page, were billionaires, tying for fifth on the Forbes 400 list of wealthiest Americans. And by 2010 Google had become one of the twenty most profitable firms in the United States, the youngest firm by far on the list.

While the bulk of the firm’s revenues come from advertising, the firm is now clearly engaged in a wide-ranging multi-front war that includes mobile, browsers, cloud infrastructure, email, office apps, social media, maps, tablets, television, video, and more. And while the firm’s performance in each space varies, the success of its existing businesses provides a massive cash horde that allows the firm to fuel experimentation, constantly innovate, tolerate failure, acquire aggressively, and patiently build new markets.

Studying Google gives us an idea of how quickly technology-fueled market disruptions can happen, and how deeply these disruptions penetrate various industries. You can consider this chapter as consisting of three extended sections. The first part (Section 14.2 "Understanding Search") covers Google Search, the firm’s core product. The second part (Section 14.3 "Understanding the Increase in Online Ad Spending" through Section 14.9 "Search Engines, Ad Networks, and Fraud") covers how the firm makes most of its money—advertising. By reading this section you’ll get a solid introduction to various types of online advertising, how customer profiling works, and issues of online privacy and fraud. The last section (Section 14.10 "The Battle Unfolds") covers the firm’s evolving strategy, its competition with disparate rivals, and the opportunities and challenges the firm faces going forward.

14.2 Understanding Search

Before diving into how the firm makes money, let’s first understand how Google’s core service, search, works.

Perform a search (or querySearch.) on Google or another search engine, and the results you’ll see are referred to by industry professionals as organic or natural searchSearch engine results returned and ranked according to relevance.. Search engines use different algorithms for determining the order of organic search results, but at Google the method is called PageRankAlgorithm developed by Google cofounder Larry Page to rank Web sites. (a bit of a play on words, it ranks Web pages, and was initially developed by Google cofounder Larry Page). Google does not accept money for placement of links in organic search results. Instead, PageRank results are a kind of popularity contest. Web pages that have more pages linking to them are ranked higher.

Figure 14.4

The query for “Toyota Prius” triggers organic search results, flanked top and right by advertisements.

The process of improving a page’s organic search results is often referred to as search engine optimization (SEO)The process of improving a page’s organic search results.. SEO has become a critical function for many marketing organizations since if a firm’s pages aren’t near the top of search results, customers may never discover its site.

Google is a bit vague about the specifics of precisely how PageRank has been refined, in part because many have tried to game the system. In addition to in-bound links, Google’s organic search results also consider some two hundred other signals, and the firm’s search quality team is relentlessly analyzing user behavior for clues on how to tweak the system to improve accuracy.S. Levy, “Inside the Box,” Wired, March 2010. The less scrupulous have tried creating a series of bogus Web sites, all linking back to the pages they’re trying to promote (this is called link fraudAlso called “spamdexing” or “link farming.” The process of creating a series of bogus Web sites, all linking back to the pages one is trying to promote., and Google actively works to uncover and shut down such efforts—see the “Link Fraudsters” sidebar).

While Google doesn’t divulge specifics on the weighting of inbound links from a given Web site, we do know that links from some Web sites carry more weight than others. For example, links from Web sites that Google deems “influential” have greater weight in PageRank calculations than links from run-of-the-mill sites.

What’s It Take to Run This Thing?

Sergey Brin and Larry Page started Google with just four scavenged computers.M. Liedtke, “Google Reigns as World’s Most Powerful 10-Year-Old,” Associated Press, September 5, 2008. But in a decade, the infrastructure used to power the search sovereign has ballooned to the point where it is now the largest of its kind in the world.David F. Carr, “How Google Works,” Baseline, July 6, 2006. Google doesn’t disclose the number of servers it uses, but by some estimates, it runs over 1.4 million servers in over a dozen so-called server farmsA massive network of computer servers running software to coordinate their collective use. Server farms provide the infrastructure backbone to SaaS and hardware cloud efforts, as well as many large-scale Internet services. worldwide.R. Katz, “Tech Titans Building Boom,” IEEE Spectrum 46, no. 2 (February 1, 2009). In the first three months of 2011 alone, the firm spent $890 million on data centers.R. Miller, “Google Invests $890 Million in Data Centers,” Data Center Knowledge, April 15, 2011. Building massive server farms to index the ever-growing Web is now the cost of admission for any firm wanting to compete in the search market. This is clearly no longer a game for two graduate students working out of a garage.

Google’s Container Data Center

(click to see video)

Take a virtual tour of one of Google’s data centers.

The size of this investment not only creates a barrier to entry, it influences industry profitability, with market-leader Google enjoying huge economies of scale. Firms may spend the same amount to build server farms, but if Google has roughly two-thirds of this market while Microsoft’s search draws just a fraction of this traffic, which do you think enjoys the better return on investment?

The hardware components that power Google aren’t particularly special. In most cases the firm uses the kind of Intel or AMD processors, low-end hard drives, and RAM chips that you’d find in a desktop PC. These components are housed in rack-mounted servers about 3.5 inches thick, with each server containing two processors, eight memory slots, and two hard drives.

In some cases, Google mounts racks of these servers inside standard-sized shipping containers, each with as many as 1,160 servers per box.S. Shankland, “Google Unlocks Once-Secret Server,” CNET, April 1, 2009. A given data center may have dozens of these server-filled containers all linked together. Redundancy is the name of the game. Google assumes individual components will regularly fail, but no single failure should interrupt the firm’s operations (making the setup what geeks call fault-tolerantCapable of continuing operation even if a component fails.). If something breaks, a technician can easily swap it out with a replacement.

Each server farm layout has also been carefully designed with an emphasis on lowering power consumption and cooling requirements. And the firm’s custom software (much of it built upon open source products) allows all this equipment to operate as the world’s largest grid computer.

Web search is a task particularly well suited for the massively parallel architecture used by Google and its rivals. For an analogy of how this works, imagine that working alone, you need try to find a particular phrase in a hundred-page document (that’s a one server effort). Next, imagine that you can distribute the task across five thousand people, giving each of them a separate sentence to scan (that’s the multi-server grid). This difference gives you a sense of how search firms use massive numbers of servers and the divide-and-conquer approach of grid computing to quickly find the needles you’re searching for within the Web’s haystack. (For more on grid computing, see Chapter 5 "Moore’s Law: Fast, Cheap Computing and What It Means for the Manager", and for more on server farms, see Chapter 10 "Software in Flux: Partly Cloudy and Sometimes Free".)

Figure 14.5

The Google Search Appliance is a hardware product that firms can purchase in order to run Google search technology within the privacy and security of an organization’s firewall.

Google will even sell you a bit of its technology so that you can run your own little Google in-house without sharing documents with the rest of the world. Google’s line of search appliances are rack-mounted servers that can index documents within the servers on a corporation’s own network, even managing user password and security access on a per-document basis. Selling hardware isn’t a large business for Google, and other vendors offer similar solutions, but search appliances can be vital tools for law firms, investment banks, and other document-rich organizations.

Trendspotting with Google

Google not only gives you search results, it lets you see aggregate trends in what its users are searching for, and this can yield powerful insights. For example, by tracking search trends for flu symptoms, Google’s Flu Trends Web site can pinpoint outbreaks one to two weeks faster than the Centers for Disease Control and Prevention.S. Bruce, “Google Says User Data Aids Flu Detection,” eHealthInsider, May 25, 2009. Want to go beyond the flu? Google’s Trends, and Insights for Search services allow anyone to explore search trends, breaking out the analysis by region, category (image, news, product), date, and other criteria. Savvy managers can leverage these and similar tools for competitive analysis, comparing a firm, its brands, and its rivals.

Figure 14.6

Google Insights for Search can be a useful tool for competitive analysis and trend discovery. This chart shows a comparison (over a twelve-month period, and geographically) of search interest in the terms Wii, Playstation, and Xbox.

14.3 Understanding the Increase in Online Ad Spending

For several years, Internet advertising has been the only major media ad category to show significant growth. There are three factors driving online ad growth trends: (1) increased user time online, (2) improved measurement and accountability, and (3) targeting.

American teenagers (as well as the average British, Australian, and New Zealander Web surfer) now spend more time on the Internet than watching television.“American Teenagers Spend More Time Online Than Watching Television,” MediaWeek, June 19, 2008; A. Hendry, “Connected Aussies Spend More Time Online Than Watching TV,” Computerworld Australia, May 21, 2008; and “Brits Spend More Time Online Than Watching TV,” BigMouthMedia, July 12, 2007. They’re reading fewer print publications, and radio listening among the iPod generation is down 30 percent.M. Tobias, “Newspapers under Siege,” Philstar, May 18, 2009. So advertisers are simply following the market. Online channels also provide advertisers with a way to reach consumers at work—something that was previously much more difficult to do.

Many advertisers have also been frustrated by how difficult it’s been to gauge the effectiveness of traditional ad channels such as TV, print, and radio. This frustration is reflected in the old industry saying, “I know that half of my advertising is working—I just don’t know which half.” Well, with the Internet, now you know. While measurement technologies aren’t perfect, advertisers can now count ad impressionsEach time an ad is served to a user for viewing. (the number of times an ad is shown on a Web site), whether a user clicks on an ad, and the product purchases or other Web site activity that comes from those clicks.For a more detailed overview of the limitations in online ad measurement, see L. Rao, “Guess Which Brand Is Now Worth $100 Billion?” TechCrunch, April 30, 2009. And as we’ll see, many online ad payment schemes are directly linked to ad performance.

Various technologies and techniques also make it easier for firms to target users based on how likely a person is to respond to an ad. In theory a firm can use targeting to spend marketing dollars only on those users deemed to be its best prospects. Let’s look at a few of these approaches in action.

14.4 Search Advertising

The practice of running and optimizing search engine ad campaigns is referred to as search engine marketing (SEM)The practice of designing, running and optimizing search engine ad campaigns..S. Elliott, “More Agencies Investing in Marketing with a Click,” New York Times, March 14, 2006. SEM is a hot topic in an increasingly influential field, so it’s worth spending some time learning how search advertising works on the Internet’s largest search engine.

Over two-thirds of Google’s revenues come from ads served on its own sites, and the vast majority of this revenue comes from search engine ads.Google, “Google Announces Fourth Quarter and Fiscal Year 2008 Results,” press release, January 22, 2009.  During Google’s early years, the firm actually resisted making money through ads. In fact, while at Stanford, Brin and Page even coauthored a paper titled “The Evils of Advertising.”D. Vise, “Google’s Decade,” Technology Review, September 12, 2008.  But when Yahoo! and others balked at buying Google’s search technology (offered for as little as $500,000), Google needed to explore additional revenue streams. It wasn’t until two years after incorporation that Google ran ads alongside organic search results. That first ad, one for “Live Mail Order Lobsters,” appeared just minutes after the firm posted a link reading “See Your Ad Here”.S. Levy, “The Secrets of Googlenomics,” Wired, June 2009. 

Google has only recently experimented with incorporating video and image ads into search, but for the most part, the ads you’ll see to the right (and sometimes top) of Google’s organic search results are text ads. These ads are keyword advertisingAdvertisements that are targeted based on a user’s query., meaning they’re targeted based on the words in a user’s search query. Advertisers bid on the keywords and phrases that they’d like to use to trigger the display of their ad. Linking ads to search was a brilliant move, since the user’s search term indicates an overt interest in a given topic. Want to sell hotel stays in Tahiti? Link your ads to the search term “Tahiti Vacation.”

Not only are search ads highly targeted, advertisers only pay for results. Text ads appearing on Google search pages are billed on a pay-per-click (PPC)A concept where advertisers don’t pay unless someone clicks on their ad. basis, meaning that advertisers don’t spend a penny unless someone actually clicks on their ad. Note that the term pay-per-click is sometimes used interchangeably with the term cost-per-click (CPC)The maximum amount of money an advertiser is willing to pay for each click on their ad..

If an advertiser wants to display an ad on Google search, they can set up a Google AdWords advertising account in minutes, specifying just a single ad, or multiple ad campaigns that trigger different ads for different keywords. Advertisers also specify what they’re willing to pay each time an ad is clicked, how much their overall ad budget is, and they can control additional parameters, such as the timing and duration of an ad campaign.

If no one clicks on an ad, Google doesn’t make money, advertisers don’t attract customers, and searchers aren’t seeing ads they’re interested in. So in order to create a winning scenario for everyone, Google has developed a precise ad ranking formula that rewards top performing ads by considering two metrics: the maximum CPC that an advertiser is willing to pay, and the advertisement’s quality score—a broad measure of ad performance. Create high quality ads and your advertisements might appear ahead of competition, even if your competitors bid more than you. But if ads perform poorly they’ll fall in rankings or even drop from display consideration.

Below is the formula used by Google to determine the rank order of sponsored links appearing on search results pages.

One factor that goes into determining an ad’s quality score is the click-through rate (CTR)The number of users who clicked an ad divided by the number of times the ad was delivered (the impressions). The CTR measures the percentage of people who clicked on an ad to arrive at a destination-site. for the ad, the number of users who clicked an ad divided by the number of times the ad was delivered (the impressions). The CTR measures the percentage of people who clicked on an ad to arrive at a destination-site. Also included in a quality score are the overall history of click performance for the keywords linked to the ad, the relevance of an ad’s text to the user’s query, and Google’s automated assessment of the user experience on the landing pageThe Web page displayed when a user clicks on an advertisement.—the Web page displayed when a user clicks on the ad. Ads that don’t get many clicks, ad descriptions that have nothing to do with query terms, and ads that direct users to generic pages that load slowly or aren’t strongly related to the keywords and descriptions used in an ad will all lower an ad’s chance of being displayed.Google, Marketing and Advertising Using Google: Targeting Your Advertising to the Right Audience (Boston: Cengage Learning, 2007). 

When an ad is clicked, advertisers don’t actually pay their maximum CPC; Google discounts ads to just one cent more than the minimum necessary to maintain an ad’s position on the page. So if you bid one dollar per click, but the ad ranked below you bids ninety cents, you’ll pay just ninety-one cents if the ad is clicked. Discounting was a brilliant move. No one wants to get caught excessively overbidding rivals, so discounting helps reduce the possibility of this so-called bidder’s remorse. And with this risk minimized, the system actually encouraged higher bids!S. Levy, “The Secrets of Googlenomics,” Wired, June 2009.

Ad ranking and cost-per-click calculations take place as part of an automated auction that occurs every time a user conducts a search. Advertisers get a running total of ad performance statistics so that they can monitor the return on their investment and tweak promotional efforts for better results. And this whole system is automated for self-service—all it takes is a credit card, an ad idea, and you’re ready to go.

IP Addresses and Geotargeting

GeotargetingIdentifying a user’s physical location (sometimes called geolocation) for the purpose of delivering tailored ads or other content. occurs when computer systems identify a user’s physical location (sometimes called the geolocation) for the purpose of delivering tailored ads or other content. On Google AdWords, for example, advertisers can specify that their ads only appear for Web surfers located in a particular country, state, metropolitan region, or a given distance around a precise locale. They can even draw a custom ad-targeting region on a map and tell Google to only show ads to users detected inside that space.

Ads in Google Search are geotargeted based on IP addressA value used to identify a device that is connected to the Internet. IP addresses are usually expressed as four numbers (from 0 to 255), separated by periods.. Every device connected to the Internet has a unique IP address assigned by the organization connecting the device to the network. Normally you don’t see your IP address (a set of four numbers, from 0 to 255, separated by periods; e.g., 136.167.2.220). But the range of IP addresses “owned” by major organizations and Internet service providers (ISPs) is public knowledge. In many cases it’s possible to make an accurate guess as to where a computer, laptop, or mobile phone is located simply by cross-referencing a device’s current IP address with this public list.

For example, it’s known that all devices connected to the Boston College network contain IP addresses starting with the numbers 136.167. If a search engine detects a query coming from an IP address that begins with those two numbers, it can be fairly certain that the person using that device is in the greater Boston area.

Figure 14.7

Figure 14.8

In this geotargeting example, the same search term is used at roughly the same time on separate computers located in Silicon Valley area (first image) and Boston (second image). Note how geotargeting impacts the search results and that the Boston-based search includes a geotargeted ad that does not show up in the Palo Alto search.

IP addresses will change depending on how and where you connect to the Internet. Connect your laptop to a hotel’s Wi-Fi when visiting a new city, and you’re likely to see ads specific to that location. That’s because your Internet service provider has changed, and the firm serving your ads has detected that you are using an IP address known to be associated with your new location.

Geotargeting via IP address is fairly accurate, but it’s not perfect. For example, some Internet service providers may provide imprecise or inaccurate information on the location of their networks. Others might be so vague that it’s difficult to make a best guess at the geography behind a set of numbers (values assigned by a multinational corporation with many locations, for example). And there are other ways locations are hidden, such as when Internet users connect to proxy serversA third-party computer that passes traffic to and from a specific address without revealing the address of the connected user., third-party computers that pass traffic to and from a specific address without revealing the address of the connected users.

What’s My IP Address?

While every operating system has a control panel or command that you can use to find your current IP address, there are also several Web sites that will quickly return this value (and a best guess at your current location). One such site is http://ip-adress.com (note the spelling has only one “d”). Visit this or a similar site with a desktop, laptop, and mobile phone. Do the results differ and are they accurate? Why?

Geotargeting Evolves Beyond the IP Address

There are several other methods of geotargeting. Firms like Skyhook Wireless, Apple, and Google can identify a location based on mapping Wi-FiA term used to brand wireless local-area networking devices. Devices typically connect to an antenna-equipped base station or hotspot, which is then connected to the Internet. Wi-Fi devices use standards known as IEEE 802.11, and various version of this standard (e.g., b, g, n) may operate in different frequency bands and have access ranges. hotspots and nearby cell towers. Many mobile devices come equipped with global positioning system (GPS)A network of satellites and supporting technologies used to identify a device’s physical location. chips (identifying location via the GPS satellite network). And if a user provides location values such as a home address or zip code to a Web site, then that value might be stored and used again to make a future guess at a user’s location.

Many firms build and maintain accurate location databases by regularly collecting location information from smartphones and using this data to refine maps. Phones submit data anonymously; however, this process can be controversial. An earlier flaw in the iOS caused Apple to store months’ worth of location data unencrypted on the iPhone—potentially revealing a detailed trail of a user’s movements to anyone with access to the phone (subpoenaing lawyers, thieves, etc.). While Apple quickly issued an update to its software that plugged the hole, Apple, Google, and a host of other firms were subsequently called to testify before the U.S. Congress and provide further details on user monitoring practices.G. Keizer, “Senate Slates Second Round with Apple, Google over Mobile Privacy,“ Computerworld, May 17, 2011.

Key Takeaways

• More than two-thirds of Google’s revenues come from ads served on its own sites, and the vast majority of this revenue comes from search engine ads.
• Advertisers choose and bid on the keywords and phrases that they’d like to use to trigger the display of their ad.
• Advertisers pay for cost-per-click advertising only if an ad is clicked on. Google makes no money on CPC ads that are displayed but not clicked.
• Google determines ad rank by multiplying CPC by Quality Score. Ads with low ranks might not display at all.
• Advertisers usually don’t pay their maximum CPC. Instead, Google discounts ads to just one cent more than the minimum necessary to maintain an ad’s position on the page—a practice that encourages higher bids.
• Geotargeting occurs when computer systems identify a user’s physical location (sometimes called geolocation) for the purpose of delivering tailored ads or other content.
• Google uses IP addresses to target ads.
• Geotargeting can also be enabled by the satellite-based global positioning system (GPS) or based on estimating location from cell phone towers or Wi-Fi hotspots.

Questions and Exercises

1. Which firm invented pay-per-click advertising? Why does Google dominate today and not this firm?
2. How are ads sold via Google search superior to conventional advertising media such as TV, radio, billboard, print, and yellow pages? Consider factors like the available inventory of space to run ads, the cost to run ads, the cost to acquire new advertisers, and the appeal among advertisers.
3. Are there certain kinds of advertising campaigns and goals where search advertising wouldn’t be a good fit? Give examples and explain why.
4. Can a firm buy a top ad ranking? Why or why not?
5. List the four factors that determine an ad’s quality score.
6. How much do firms typically pay for a single click?
7. Sites like SpyFu.com and KeywordSpy.com provide a list of the keywords with the highest cost per click. Visit the Top Lists page at SpyFu, KeywordSpy, or a comparable site, to find estimates of the current highest paying cost per click. Which keywords pay the most? Why do you think firms are willing to spend so much?
8. What is bidder’s remorse? How does Google’s ad discounting impact this phenomenon?
9. Visit http://www.ip-adress.com/ using a desktop, laptop, and mobile phone (work with a classmate or friend if you don’t have access to one of these devices). How do results differ? Why? Are they accurate? What factors go into determining the accuracy of IP-based geolocation?
10. List and briefly describe other methods of geotargeting besides IP address, and indicate the situations and devices where these methods would be more and less effective.
11. The field of search engine marketing (SEM) is relatively new and rising in importance. And since the field is so new and constantly changing, there are plenty of opportunities for young, knowledgeable professionals. Which organizations, professional certification, and other resources are available to SEM professionals? Spend some time searching for these resources online and be prepared to share your findings with your class.

14.5 Ad Networks—Distribution beyond Search

Google runs ads not just in search, but also across a host of Google-owned sites like Gmail, Google News, and Blogger. It will even tailor ads for its map products and for mobile devices. But about 30 percent of Google’s revenues come from running ads on Web sites that the firm doesn’t even own.Google, “Google Announces Fourth Quarter and Fiscal Year 2008 Results,” press release, January 22, 2009.

Next time you’re surfing online, look around the different Web sites that you visit and see how many sport boxes labeled “Ads by Google.” Those Web sites are participating in Google’s AdSense ad network, which means they’re running ads for Google in exchange for a cut of the take. Participants range from small-time bloggers to some of the world’s most highly trafficked sites. Google lines up the advertisers, provides the targeting technology, serves the ads, and handles advertiser payment collection. To participate, content providers just sign up online, put a bit of Google-supplied HTML code on their pages, and wait for Google to send them cash (Web sites typically get about seventy to eighty cents for every AdSense dollar that Google collects).B. Tedeschi, “Google’s Shadow Payroll Is Not Such a Secret Anymore,” New York Times, January 16, 2006.

Google originally developed AdSense to target ads based on keywords automatically detected inside the content of a Web site. A blog post on your favorite sports team, for example, might be accompanied by ads from ticket sellers or sports memorabilia vendors. AdSense and similar online ad networks provide advertisers with access to the long tail of niche Web sites by offering both increased opportunities for ad exposure as well as more-refined targeting opportunities.

Figure 14.9

The images show advertising embedded around a story on the New York Times Web site. The page runs several ads provided by different ad networks. For example, the WebEx banner ad above the article’s headline was served by the AOL Advertising network. The “Ads by Google” box appeared at the end of the article. Note how the Google ads are related to the content of the Times article.

Running ads on your Web site is by no means a guaranteed path to profits. The Internet graveyard is full of firms that thought they’d be able to sustain their businesses on ads alone. But for many Web sites, ad networks can be like oxygen, sustaining them with revenue opportunities they’d never be able to achieve on their own.

For example, AdSense provided early revenue for the multimillion-dollar TechCrunch media empire. It supports Disaboom, a site run by physician and quadriplegic Dr. Glen House. And it continues to be the primary revenue generator for AskTheBuilder.com. That site’s founder, former builder Tim Carter, had been writing a handyman’s column syndicated to some thirty newspapers. The newspaper columns didn’t bring in enough to pay the bills, but with AdSense he hit pay dirt, pulling in over $350,000 in ad revenue in just his first year!R. Rothenberg, “The Internet Runs on Ad Billions,” BusinessWeek, April 10, 2008.

Figure 14.10

Tim Carter’s Ask the Builder Web site runs ads from Google and other ad networks. Note different ad formats surrounding the content. Video ads are also integrated into many of the site’s video tutorials.

Google launched AdSense in 2003, but Google is by no means the only company to run an ad network nor was it the first to come up with the idea. Rivals include the Yahoo! Publisher Network, Microsoft’s adCenter, AdBrite, and AOL Advertising. Advertisers also aren’t limited to choosing just one ad network. In fact, many content provider Web sites will serve ads from several ad networks (as well as exclusive space sold by their own sales force), oftentimes mixing several different offerings on the same page.

14.6 More Ad Formats and Payment Schemes

Online ads aren’t just about text ads billed in CPC. Ads running through Google AdSense, through its DoubleClick subsidiary, or on most competitor networks can be displayed in several formats and media types, and can be billed in different ways. The specific ad formats supported depend on the ad network but can include the following: image (or display) adsGraphical advertising (as opposed to text ads). (such as horizontally oriented banners, smaller rectangular buttons, and vertically oriented “skyscraper” ads); rich media adsOnline ads that include animation, audio, or video. (which can include animation or video); and interstitialsAds that run before a user arrives at a Web site’s contents. (ads that run before a user arrives at a Web site’s contents). The industry trade group, the Internet Advertising Bureau (IAB)A nonprofit industry trade group for the interactive advertising industry. The IAB evaluates and recommends interactive advertising standards and practices and also conducts research, education, and legislative lobbying. sets common standards for display ads so that a single creative (the design and content of the advertisement) can run unmodified across multiple ad networks and Web sites.See Interactive Advertising Bureau Ad Unit Guidelines for details at http://www.iab.net/iab_products_and_industry_services/1421/1443/1452.

And there are lots of other ways ads are sold besides cost-per-click. Most graphical display ads are sold according to the number of times the ad appears (the impressionEach time an advertisement is displayed.). Ad rates are quoted in CPMCost per thousand impressions (the M representing the roman numeral for one thousand)., meaning cost per thousand impressions (the M representing the roman numeral for one thousand). Display ads sold on a CPM basis are often used as part of branding campaigns targeted more at creating awareness than generating click-throughs. Such techniques often work best for promoting products like soft drinks, toothpaste, or movies.

Cost-per-action (CPA)A method of charging for advertising whenever a user performs a specified action such as signing up for a service, requesting material, or making a purchase. ads pay whenever a user clicks through and performs a specified action such as signing up for a service, requesting material, or making a purchase. Affiliate programsA cost-per-action program, where program sponsors (e.g., Amazon.com, iTunes) pay referring Web sites a percentage of revenue earned from the referral. are a form of cost-per-action, where vendors share a percentage of revenue with Web sites that direct purchasing customers to their online storefronts. Amazon runs the world’s largest affiliate program, and referring sites can earn 4 percent to 15 percent of sales generated from these click-throughs. Purists might not consider affiliate programs as advertising (rather than text or banner ads, Amazon’s affiliates offer links and product descriptions that point back to Amazon’s Web site), but these programs can be important tools in a firm’s promotional arsenal.

And rather than buying targeted ads, a firm might sometimes opt to become an exclusive advertiser on a site. For example, a firm could buy access to all ads served on a site’s main page; it could secure exclusive access to a region of the page (such as the topmost banner ad); or it may pay to sponsor a particular portion or activity on a Web site (say a parenting forum, or a “click-to-print” button). Such deals can be billed based on a flat rate, CPM, CPC, or any combination of metrics.

Ads in Games?

As consumers spend more time in video games, it’s only natural that these products become ad channels, too. Finding a way to introduce ads without eroding the game experience can be a challenge. Advertising can work in racing or other sports games (in 2008 the Obama campaign famously ran virtual billboards in EA’s Burnout Paradise), but ads make less sense for games set in the past, future, or on other worlds. Branding ads often work best since click-throughs are typically not something you want disrupting your gaming experience.

Advertisers have also explored sponsorships of Web-based and mobile games. Sponsorships often work best with casual games, such as those offered on Yahoo! Games or EA’s Pogo. Firms have also created online mini games (so-called advergames) for longer term, immersive brand engagement (e.g., Mini Cooper’s Slide Parking and Stride Gum’s Chew Challenge). Others have tried a sort of virtual product placement integrated into experiences. A version of The Sims, for example, included virtual replicas of real-world inventory from IKEA and H&M. And Zynga has done a variety of in-game promotions that include work with Lady Gaga in Farmville and CityVille promotions of Kung Fu Panda 2.

Figure 14.11 Obama Campaign’s Virtual Billboard in EA’s Burnout Paradise

Source: Barack Obama U.S. Presidential Campaign Team, 2008.

In-game ad-serving technology also lacks the widely accepted standards of Web-based ads, so it’s unlikely that ads designed for a Wii sports game could translate into a PS3 first-person shooter.

In-game advertising shows promise, but the medium is considerably more complicated than conventional Web site ads. That complexity lowers relative ROI and will likely continue to constrain growth. As a sign of the difficulty in the space, consider that in 2010 Microsoft shuttered its in-game advertising unit, Massive, just four years after acquiring the firm for an estimated $200 million to $400 million.M. Shields, “Exclusive: Microsoft to Shutter Massive,” AdWeek, October 8, 2010.

14.7 Customer Profiling and Behavioral Targeting

Advertisers are willing to pay more for ads that have a greater chance of reaching their target audience, and online firms have a number of targeting tools at their disposal. Much of this targeting occurs whenever you visit a Web site, where a behind-the-scenes software dialogue takes place between Web browser and Web server that can reveal a number of pieces of information, including IP address, the type of browser used, the computer type, its operating system, and unique identifiers, called cookiesA line of identifying text, assigned and retrieved by a given Web server and stored by your browser..

And remember, any server that serves you content can leverage these profiling technologies. You might be profiled not just by the Web site that you’re visiting (e.g., nytimes.com), but also by any ad networks that serve ads on that site (e.g., Platform-A, DoubleClick, Google AdSense, Microsoft adCenter).

IP addresses are leveraged extensively in customer profiling. An IP address not only helps with geolocation, it can also indicate a browser’s employer or university, which can be further matched with information such as firm size or industry. IBM has used IP targeting to tailor its college recruiting banner ads to specific schools, for example, “There Is Life After Boston College, Click Here to See Why.” That campaign garnered click-through rates ranging from 5 to 30 percentM. Moss, “These Web Sites Know Who You Are,” ZDNet UK, October 13, 1999. compared to average rates that are currently well below 1 percent for untargeted banner ads. DoubleClick once even served a banner that included a personal message for an executive at then-client Modem Media. The ad, reading “Congratulations on the twins, John Nardone,” was served across hundreds of sites, but was only visible from computers that accessed the Internet from the Modem Media corporate network.M. Moss, “These Web Sites Know Who You Are,” ZDNet UK, October 13, 1999.

The ability to identify a surfer’s computer, browser, or operating system can also be used to target tech ads. For example, Google might pitch its Chrome browser to users detected running Internet Explorer, Firefox, or Safari; while Apple could target Mac ads just to Windows users.

But perhaps the greatest degree of personalization and targeting comes from cookies. Visit a Web site for the first time, and in most cases, a dialogue between server and browser takes place that goes something like this:

Server: Have I seen you before?

Browser: No.

Server: Then take this unique string of numbers and letters (called a cookie). I’ll use it to recognize you from now on.

The cookie is just a line of identifying text assigned and retrieved by a given Web server and stored on your computer by your browser. Upon accepting this cookie your browser has been tagged, like an animal. As you surf around the firm’s Web site, that cookie can be used to build a profile associated with your activities. If you’re on a portal like Yahoo! you might type in your zip code, enter stocks that you’d like to track, and identify the sports teams you’d like to see scores for. The next time you return to the Web site, your browser responds to the server’s “Have I see you before?” question with the equivalent of “Yes, you know me;,” and it presents the cookie that the site gave you earlier. The site can then match this cookie against your browsing profile, showing you the weather, stock quotes, sports scores, and other info that it thinks you’re interested in.

Cookies are used for lots of purposes. Retail Web sites like Amazon use cookies to pay attention to what you’ve shopped for and bought, tailoring Web sites to display products that the firm suspects you’ll be most interested in. Sites also use cookies to keep track of what you put in an online “shopping cart,” so if you quit browsing before making a purchase, these items will reappear the next time you visit. And many Web sites also use cookies as part of a “remember me” feature, storing user IDs and passwords. Beware this last one! If you check the “remember me” box on a public Web browser, the next person who uses that browser is potentially using your cookie, and can log in as you!

An organization can’t read cookies that it did not give you. So businessweek.com can’t tell if you’ve also got cookies from forbes.com. But you can see all of the cookies in your browser. Take a look and you’ll almost certainly see cookies from dozens of Web sites that you’ve never visited before. These are third-party cookiesSometimes called “tracking cookies” and are served by ad networks or other customer profiling firms. Tracking cookies are used to identify users and record behavior across multiple Web sites. (sometimes called tracking cookies), and they are usually served by ad networks or other customer profiling firms.

Figure 14.12

The Preferences setting in most Web browsers allows you to see its cookies. This browser has received cookies from several ad networks, media sites, and the University of Minnesota Carlson School of Management.

By serving and tracking cookies in ads shown across partner sites, ad networks can build detailed browsing profiles that include sites visited, specific pages viewed, duration of visit, and the types of ads you’ve seen and responded to. And that surfing might give an advertising network a better guess at demographics like gender, age, marital status, and more. Visit a new parent site and expect to see diaper ads in the future, even when you’re surfing for news or sports scores!

While the Internet offers targeting technologies that go way beyond traditional television, print, and radio offerings, none of these techniques is perfect. Since users are regularly assigned different IP addresses as they connect and disconnect from various physical and Wi-Fi networks, IP targeting can’t reliably identify individual users. Cookies also have their weaknesses. They’re assigned by browsers and associated with a given user’s account on that computer. That means that if several people use the same browser on the same computer without logging on to that machine as separate users, then all their Web surfing activity may be mixed into the same cookie profile. (One solution is to create different log-in accounts on that computer. Your PC will then keep separate cookies for each account.) Some users might also use different browsers on the same machine or use different computers. Unless a firm has a way to match up these different cookies assigned across browsers (say by linking cookies on separate machines to a single log-in used at multiple locations), then a site may be working with multiple, incomplete profiles.

14.8 Profiling and Privacy

While AdSense has been wildly successful, contextual advertising has its limits. For example, what kind of useful targeting can firms really do based on the text of a news item on North Korean nuclear testing?R. Singel, “Online Behavioral Targeting Targeted by Feds, Critics,” Wired News, June 3, 2009. So in March 2009, Google announced what it calls “interest-based ads.” Google AdSense would now issue a third-party cookie and would track browsing activity across AdSense partner sites, and Google-owned YouTube (the firm had not previously used tracking cookies on its AdSense network). AdSense would build a profile, initially identifying users within thirty broad categories and six hundred subcategories. Says one Google project manager, “We’re looking to make ads even more interesting.”R. Hof, “Behavioral Targeting: Google Pulls Out the Stops,” BusinessWeek, March 11, 2009.

Of course, there’s a financial incentive to do this too. Ads deemed more interesting should garner more clicks, meaning more potential customer leads for advertisers, more revenue for Web sites that run AdSense, and more money for Google.

But while targeting can benefit Web surfers, users will resist if they feel that they are being mistreated, exploited, or put at risk. Negative backlash might also result in a change in legislation. The U.S. Federal Trade Commission has already called for more transparency and user control in online advertising and for requesting user consent (opt-inProgram (typically a marketing effort) that requires customer consent. This program is contrasted with opt-out programs, which enroll all customers by default.) when collecting sensitive data.R. Singel, “Online Behavioral Targeting Targeted by Feds, Critics,” Wired News, June 3, 2009. Mishandled user privacy could curtail targeting opportunities, limiting growth across the online advertising field. And with less ad support, many of the Internet’s free services could suffer.

Google’s roll-out of interest-based ads shows the firm’s sensitivity to these issues. First, while major rivals have all linked query history to ad targeting, Google steadfastly refuses to do this. Other sites often link registration data (including user-submitted demographics such as gender and age) with tracking cookies, but Google avoids this practice as well.

Figure 14.13

Here’s an example of one user’s interests, as tracked by Google’s “Interest-based Ads” and displayed in the firm’s “Ad Preferences Manager.”

Google has also placed significant control in the hands of users, with options at program launch that were notably more robust than those of its competitors.S. Hansell, “A Guide to Google’s New Privacy Controls,” New York Times, March 12, 2009. Each interest-based ad is accompanied by an “Ads by Google” link that will bring users to a page describing Google advertising and which provides access to the company’s “Ads Preferences Manager.” This tool allows surfers to see any of the hundreds of potential categorizations that Google has assigned to that browser’s tracking cookie. Users can remove categorizations, and even add interests if they want to improve ad targeting. Some topics are too sensitive to track, and the technology avoids profiling race, religion, sexual orientation, health, political or trade union affiliation, and certain financial categories.R. Mitchell, “What Google Knows about You,” Computerworld, May 11, 2009.

Google also allows users to install a cookie that opts them out of interest-based tracking. And since browser cookies can expire or be deleted, the firm has gone a step further, offering a browser plug-inA small computer program that extends the feature set or capabilities of another application. that will remain permanent, even if a user’s opt-outPrograms that enroll all customers by default, but that allow consumers to discontinue participation if they want to. cookie is purged.

14.9 Search Engines, Ad Networks, and Fraud

There’s a lot of money to be made online, and this has drawn the attention of criminals and the nefarious. Online fraudsters may attempt to steal from advertisers, harm rivals, or otherwise dishonestly game the system. But bad guys beware—such attempts violate terms-of-service agreements and may lead to prosecution and jail time.

Studying ad-related fraud helps marketers, managers, and technologists understand potential vulnerabilities, as well as the methods used to combat them. This process also builds tech-centric critical thinking, valuation, and risk assessment skills.

Some of the more common types of fraud that are attempted in online advertising include the following:

• Enriching click fraudGenerating bogus clicks, either for financial gain (enriching fraud), or to attack rivals by draining their online ad budget (depleting fraud).—when site operators generate bogus ad clicks to earn PPC income.
• Enriching impression fraud—when site operators generate false page views (and hence ad impressions) in order to boost their site’s CPM earnings.
• Depleting click fraud—clicking a rival’s ads to exhaust their PPC advertising budget.
• Depleting impression fraud—generating bogus impressions to exhaust a rival’s CPM ad budget.
• Rank-based impression fraud—on-sites where ad rank is based on click performance, fraudsters repeatedly search keywords linked to rival ads or access pages where rival ads appear. The goal is to generate impressions without clicks. This process lowers the performance rank (quality score) of a rival’s ads, possibly dropping ads from rank results, and allowing fraudsters to subsequently bid less for the advertising slots previously occupied by rivals.
• Disbarring fraud—attempting to frame a rival by generating bogus clicks or impressions that appear to be associated with the rival, in hopes that this rival will be banned from an ad network or punished in search engine listings.
• Link fraud (also known as spamdexing or link farming)—creating a series of bogus Web sites, all linking back to a page, in hopes of increasing that page’s results in organic search.
• Keyword stuffing—packing a Web site with unrelated keywords (sometimes hidden in fonts that are the same color as a Web site’s background) in hopes of either luring users who wouldn’t normally visit a Web site, or attracting higher-value contextual ads.

Disturbing stuff, but firms are after the bad guys and they’ve put their best geeks on the case. Widespread fraud would tank advertiser ROI and crater the online advertising market, so Google and rivals are diligently working to uncover and prosecute the crooks.

14.10 The Battle Unfolds

Google has been growing like gangbusters, but the firm’s twin engines of revenue growth—ads served on search and through its ad networks—will inevitably mature. And it will likely be difficult for Google to find new growth markets that are as lucrative as these. Emerging advertising outlets such as social networks have lower click-through rates than conventional advertising, and Google has struggled to develop a presence in social media—trends suggesting that Google will have to work harder for less money.

To understand what can happen when maturity hits, look at Microsoft. The House that Gates Built is more profitable than Google, and continues to dominate the incredibly lucrative markets served by Windows and Office. But these markets haven’t grown much for over a decade. In industrialized nations, most Windows and Office purchases come not from growth, but when existing users upgrade or buy new machines. And without substantial year-on-year growth, the stock price doesn’t move.

Figure 14.14 A Comparison of Stock Price Change—Google (GOOG) versus Microsoft (MSFT)

For big firms like Microsoft and Google, pushing stock price north requires not just new markets, but billion-dollar ones. Adding even $100 million in new revenues doesn’t do much for firms bringing in $62 billion and $29 billion a year, respectively. That’s why you see Microsoft swinging for the fences, investing in the uncertain but potentially gargantuan markets of video games, mobile phone software, cloud computing (see Chapter 10 "Software in Flux: Partly Cloudy and Sometimes Free"), music and video, and of course, search and everything else that fuels online ad revenue. Finding new billion-dollar markets is wonderful, but rare. Apple seems to have done it with the iPad. But trying to unseat a dominant leader possessing strategic resources can be ferociously expensive, with unclear prospects for success. Microsoft’s Bing group lost over $2 billion over just nine months, winning almost no share from Google despite the lavish spend.D. Goldman, “Microsoft Profits Soars 31% on Strong Office and Kinect Sales,” CNNMoney, April 28, 2011.

Search: Google Rules, but It Ain’t Over

PageRank is by no means the last word in search, and offerings from Google and its rivals continue to evolve. Google supplements PageRank results with news, photos, video, and other categorizations. Yahoo! is continually refining its search algorithms and presentation. And Microsoft’s third entry into the search market, the “decision engine” Bing, sports nifty tweaks for specific kinds of queries. Restaurant searches in Bing are bundled with ratings stars, product searches show up with reviews and price comparisons, and airline flight searches not only list flight schedules and fares, but also a projection on whether those fares are likely go up or down. Bing also comes with a one-hundred-million-dollar marketing budget, showing that Microsoft is serious about search. And in the weeks following Bing’s mid-2009 introduction, the search engine did deliver Microsoft’s first substantive search engine market share gain in years.

New tools like the Wolfram Alpha “knowledge engine” (and to a lesser extent, Google’s experimental Google Squared service) move beyond Web page rankings and instead aggregate data for comparison, formatting findings in tables and graphs. Web sites are also starting to wrap data in invisible tags that can be recognized by search engines, analysis tools, and other services. If a search engine can tell that a number on a restaurant’s Web site is, for example, either a street address, an average entrée price, or the seating capacity, it will be much easier for computer programs to accurately categorize, compare, and present this information. This is what geeks are talking about when they refer to the semantic WebSites that wrap data in invisible tags that can be recognized by search engines, analysis tools, and other services to make it easier for computer programs to accurately categorize, compare, and present this information..

Figure 14.15 Google Goggles returns search results by photographing objects. It can even translate foreign language text.

Source: Google.

And who says you need to use words to conduct a search? Google Goggles uses the camera in your mobile phone to “enter” search criteria. Snap a picture of a landmark, book, or piece of artwork, for example, and Google will use that image to retrieve search results. The product can even return translations of foreign text. All signs point to more innovation, more competition, and an increasingly more useful Internet!

Both Google and Microsoft are on a collision course. But there’s also an impressive roster of additional firms circling this space, each with the potential to be competitors, collaborators, merger partners, or all of the above. While wounded and shrinking, Yahoo! is still a powerhouse, ranking ahead of Google in some overall traffic statistics. Google’s competition with Apple in the mobile phone business prompted Google’s then CEO Eric Schmidt to resign from Apple’s board of directors. Meanwhile, Google’s three-quarters-of-a-billion-dollar purchase of the leading mobile advertiser AdMob was quickly followed by Apple snapping up number two mobile ad firm Quattro Wireless for $275 million. Add in Amazon, Facebook, eBay, Twitter, Salesforce.com, Netflix, the video game industry, telecom and mobile carriers, cable firms, and the major media companies and the next few years have the makings of a big, brutal fight.

Google Wallet

Google Wallet is another example of how the search giant is looking to deliver value through mobile devices. Announced in the spring of 2011, Google Wallet allows phones to replace much of the “stuff” inside your wallet. It can be used to pay for goods, store gift cards, collect and redeem coupons and special offers, and manage loyalty programs. To use the service, users simply wave phones at an NFCNear field communication; a short-range, wireless communication standard. NFC is being used to support contactless payment and transactions over NFC-equipped mobile devices. (near field communication)-equipped payment terminal (with transaction confirmed and secured by typing in a PIN). Fifteen retailers (including Macy’s, Subway, Walgreens, Toys “R” Us, Peet’s Coffee and Tea, and Footlocker) were announced as payment-accepting partners, and Wallet has the capability to work with some 300,000 retail registers that are already using MasterCard’s PayPass contactless payment terminals.D. Melanson, “Google Wallet Mobile Payment Service, Google Offers Announced,” Engadget, May 26, 2011; E. Hamburger, “Google Introduces Wallet, Google Wallet Works at Over 300,000 MasterCard PayPass Merchants,” BusinessInsider, May 26, 2011. Phones will have to be equipped with an NFC chip, and only one model from one carrier was available at announcement, although a limited version of Wallet will be available by using an NFC sticker that can be attached to the back of non-NFC mobile devices. Google also envisions billboards and storefronts that can communicate with Wallet and distribute offers, Web links, and more—just wave your phone at a sign to get a deal. The product is less about becoming the “Bank of Google”—Wallet links to existing credit cards (although Google offers a prepaid card, too), and at rollout Google said there would be no payment fees for the service. But Google hopes payment and other services will be a way to promote new revenue channels, such as growing its Google Offers coupon service, allowing it to compete with daily deal sites like Groupon and LivingSocial.H. Tsukayama, “Google Wallet: Search Giant Introduces Automatic Cellphone Payment System,” The Washington Past, May 26, 2011.. Google could sell advertisers couponing services distributed via search, online ads, NFC-equipped signs, and geolocation; have the deals and promotions delivered to a Google Wallet account; and allow deals to be quickly redeemed via NFC swipe at a retailer. Could this grow to be a billion-dollar market, too? Emerging technologies like NFC are sure to attract competitors and innovation.

Figure 14.16 Google Wallet

Source: Google.