Google, Disintermediation and Agencies

Google probably wants to disintermediate advertising agencies. That is, it probably should offer services directly to the advertiser, allowing the advertiser and the channel to interact directly. Disintermediation was the big buzz of the dot.boom-and-bust era of the late 90’s.

For years, my secret guide to Google has been Evans and Wurster’s Blown To Bits. Any time I don’t understand what Google is doing, I start dipping and skip reading… until I find the reasons. The main topics of the book, apropos this article, are disintermediation, richness:reach and navigation - the uses of brand, search, directories and so on.

Google grows its business by offering the best organic search results, the main body of its’ appeal. It needs to be an honest broker, striving for great organic results, stamping on the link and blog spammers and identifying the web site techniques that lead to poor search results. That’s Matt Cutts‘ job. It makes Google essentially honest and trustworthy. It guarantees a large number of users for its navigation services, some of whom need products and services. I think of this part as “Google Information Services”. It covers the maps, calendar, notebooks, desktop, mail and so on. Google Info Services customers are free users - free as in no payment required. Google will accept and organise their data and make it searchable.

The other part of Google is what I think of as “Google Commercial Services”. This is the bit that makes money. Huge amounts of money. Mostly, it offers advertising. Once you have a large number of users doing search, you know what information they want. A chunk of that information is about purchasing decisions. So you can offer advertisers access to that pool. For a while at least, you can trade on the integrity of the name you develop in search. For a while, you can run an opaque bidding system without oversight, and offer clicks from any source that you want. Advertisers will sign up in droves and if you annoy one, there’s a dozen ready to replace them.

A disintermediating Google’s broad strategy should be that if a client has $1,000/month to spend, Google would rather collect the $1,000 than take what is left when an agency has subtracted a fee. This means that Google needs to develop products that replace the activities of agencies. Take a look at this list of AdWords oriented activity:

• Google AdWords Training with Certification - free to any user, and vetted by professionals
• Google AdWords Budget Optimiser - to make sure your budget is exhausted each month
• Google AdWords API - featuring fees only for third party users
• Google Analytics - free at any page volume if you use AdWords
• Google AdWords Starter Edition - simplified interface
• Google AdWords Starter Edition with Home Page - simplified interface with captive home page
• Google AdWords Website Optimizer - who needs insight?
• Google AdWords Free Account Optimisation - keywords, adverts, landing page choices
• Google AdWords Bulksheet Support Removed - used by agencies, mostly
• Google explains the obfuscated Quality Score - no need for interpretation by that professionally qualified agency
• Google Bid Management Systems - CPA, position preference and price preference. Doesn’t matter whether they work well, merely having them dents competitive products by making them justify the price.

All these activities are replacements for functions in an agency, remove support mechanisms that agencies use, or require additional payments if an agency is involved.

Do you see a pattern of disintermediation by Google, especially targeting SME’s? I do. I don’t think I’m paranoid, but I may be sipping too much of the nectar in Blown to Bits.

Trouble is, this disintermediation depends on a crucial factor.

Trust.

It depends on Google being able to say, with a straight face:

You trust our organic search results, so you have to trust us when we tell you that we spend your advertising money carefully. We’re Google and we do no evil.

At some point, most advertisers will see a decrease in ROI. When they see a poor ROI, they tend to look for causes. An easy cause to cite is click fraud. Google has a definition of click fraud. It’s a technical definition about other people intending to steal money from Google. Google’s own description doesn’t include distribution fraud, unfair auctions, etc. An advertiser can tell Google that they think the account is suffering from click fraud and Google, with honesty and integrity intact, can turn round and say that there is no problem.

See the pattern of disintermediation? I see a threat, too…

When Disintermediation Fails

There is a basic flaw in the approach and it has been biting Google, and provoking their response. Disintermediation works when the disintermediated parties have nothing to offer the value chain. Agencies have one vital role in the value chain. They protect the client from the rapacity of the advertising channels. Centralised cross-client experience potentially allows an agency to identify odd patterns that end users can’t find.

Google’s goal is maximisation of its’ own revenue. It has no direct interest in the profitability of the advertiser, unless other channels rival the ROI (which means matching the performance of the search system). Agencies on the other hand, can be compensated on performance. My goal, when hired, is to find a clients’ best profitability. That means that I can choose to direct budget to places other than Google. I can use techniques that decrease spend with Google but maintain or improve results - techniques that Google is unlikely to develop or offer, because it would decrease revenue projections, resulting in loss of investor confidence and closer questions about what Google is doing and why. That’s another Blown to Bits story - destroy your business before a competitor does.

Because I study AdWords (and Yahoo and MSN and Mirago and Kanoodle and Search123 and LookSmart and…) I get to compare the systems and raise questions that an advertiser, concerned with running a business, may not think about.

Here’s a few of the nasty bits that I’ve been thinking about.

• Google runs the PPC auction in US Dollars. That is, when you buy clicks in GBP, you use an unrevealed exchange rate to purchase position. Are you sure that Google is using the best exchange rate? Can this currency exchange rate mechanism be used to give one country a competitive advantage. For example, could Google affect the GBP (at least 17% of UK advertising budget is online - that’s a lot of money) by offering preferential advertising position to US and European countries? If it is easier for a French or German or American company to top a British bid, isn’t that something that needs regulation? A GBP account needs to bid £0.01 to beat a competitor. A European company needs only to bid €0.01 (about £0.008) to beat the British bid. An American company needs only bid $0.01 (about £0.005) to beat UK or European companies in the auction - an unfair advantage, I’d say. It costs an American company as little as 50% of the cost increase that would be required for a British company to compete. Built in competitive disadvantage which can be exacerbated depending on the unrevealed exchange rate that Google uses. If the unrevealed exchange rate is poor, then the GBP based bidder may have to pay more than $0.02 increments - all making for extra income for Google, but sucking more cash from the UK economy. Trust has a limit…
• Content Match is a real money spinner for Google. Google does what it can to keep Content Match running. For example, Google offers dayparting. You’d expect that Ad Scheduling would schedule all the adverts… It doesn’t. There’s a one line sentence in the AdWords Help system that says that Content Match runs 24×7, whatever you do with the keywords. If you don’t spot this, then you may find that a disproportionate amount of your budget is spent at times that you weren’t expecting any traffic.
• If Google increases the AdWords Minimum Cost Per Click because a landing page contains affiliate advertising from Yahoo!Publisher Network or other affiliate networks, is that a restraint on free trade? What happens when the page contains both AdWords and Y!PN adverts and Commission Junction links? Just because Google wants to stop AdWords Arbitrage, can it restrain Yahoo and CJ’s business? Could Yahoo or CJ force Google to open up the Quality Score factors, if Google disadvantages Yahoo advert arbitrage and disincentivises CJ affiliates?

Agencies ought to think about this stuff. It’s our job to maximise the revenue for the client, the advertiser. We don’t have to care about Google. Much as Google would like to remove the need for agencies, there are advertisers for whom the maximum count of clicks or exhausting the advertising budget is not a useful business metric. I can’t ever recall seeing, at least, not since the dot.com boom, a company report that focused on clicks rather than profit…

Google is now describing how it identifies and handles Click Defrauding BotNets. This is undoubtedly a response to the pressure that they’ve been under, for suspected click fraud. While Google clearly doesn’t enjoy being cast in the role of the bad guy, it is inevitable. When your income exceeds that of many countries, and the way in which that income is generated includes a large number of opaque points at which Google could put a thumb on the scales, to tip the balance in their favour, well, it will generate some criticism. Google will increasingly have to provide information about the ways in which these potentially unfair components work, and possibly start to suffer from regulatory oversight in some countries.

In the interim, the role of the agency will become diminished - but it retains a vital role that Google can’t disintermediate. Oversight - keeping Google honest.

Updates

18th April 2007

Seems like I’m not alone. Although I’ve not mentioned this to Richard Ball, his blog contains a recent article on a similar theme. As he points out, a deeper relationship with [Google]’s partners is really pointing to a deeply changed relationship.

20th April 2007

Added the note about bid management systems.

6th May 2007

Lijit showed up some slow burning questioning over the effect of AdWords API fees on VentureBeat’s blog that I’d not clocked - it was in the period when my ADSL was barely functioning at all. It didn’t pick up on our much older article about why AdWords API fees are just a bad idea, bad even for Google.

11th May 2007

Even the big agencies perceive the threat, according to Sir Martin Sorrell.