Google as the Invisible Hand of the Online Economy

Apr 6th

So I just got approved for Google's pay per action advertising account. It was exceptionally easy to sign up, perhaps frighteningly so. Currently there is little risk to using Google cost per action ads, but long-term I think the risk proposition is much uglier than most people appreciate.

Google Controls the Perception of Trusted Advertisers:

I recently did link building for a site where I tried to build links in a stale industry. Many of the people who had top ranked sites did not want to sell links because they were afraid that the links would eventually decay, and they did not want their site to promote garbage.

Many of these same sites published Google AdSense ads in the content area. These ads promoted garbitrage, sleazy offers that bombard you with email spam, generic surveys, off topic crap, etc etc etc. And yet these publishers didn't think anything was wrong with it, either because they were unaware of what they were marketing, or because they were not directly connected to it.

Google Will Find You:

If you want to do anything online you eventually run into Google, or the effects they have on the web.

Google started off with search, which allows them to directly connects with consumers. Their branding, distribution deals, relevancy, and market position have created the fundamental standard of relevancy that all other systems are compared against. It is hard to beat them on relevancy because they have more data than any other company in the world (toolbars, browsing history associated with user accounts, Gmail, AdWords, AdSense, Google analytics, free website optimizer, Google Checkout, cost per action ads, the most popular feed reader, etc etc etc). Even if you did find a way to match Google's relevancy, nobody would notice unless you could match their brand, and overcome the self fulfilling prophecy bias / skew Google's personalization features give searchers.

Spam Will Find You:

Google makes it easy to publish content and monetize even the worst content in the world. By placing their ads on Warez sites and sites they have identified as spam, they pay people to pollute competing search engines. You can't look at a competitive term in Microsoft's search results without tripping over a .blogspot spam page.

Quality is a Relative Term:

Google uses their market position and market knowledge to selectively display the most profitable ads. Consumers are advertised to without the perception of being advertised to. Quality scores support related businesses and trusted allies. Mid-market players make Google's ad relevancy matching engine more relevant. Outlier players do keyword research for trusted businesses until they concede those terms to margin squeeze and quality scores.

Due to the ease of implementation and depth of their advertising base, it is easy for new competitors to become an ally, publishing Google AdSense ads, and thus giving Google their usage data. This distributed ad network keeps Google abreast to market trends, allowing them to duplicate innovation, and buy competitors they can't beat.

We Are Not Flawed:

Google cloaks their own content, then sets up quality guidelines for others to follow, which they themselves do not follow. They outsource their flaws on marketers, and tell marketers to clearly identify paid links, all while teaching publishers to blend AdSense ads in content.

As Google changes their ranking criterias publishers addicted to the traffic source have no choice but to give Google even more control and authority.

Back to the Invisible Hand:

Google currently offers the following for free

Their newest ad unit is an unmarked text link ad, which only displays any ad notification AFTER people hover over the link. Publishers who refuse to sell links directly will publish the ads, and if they spread anything like AdSense does, what happens to links to commercial sites? What happens when virtually nobody is willing to link to a commercial site unless it is through Google? What happens when their affiliate payouts are not high enough to solicit a review? And what happens to those businesses when Googlers decide they want that market for themselves, like real estate?

More background here and here.

Adam Smith would be proud.

Published: April 6, 2007

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Comments

April 6, 2007 - 11:57am

Another excellent piece this week, Aaron.

April 6, 2007 - 4:06pm

You've excellently summarized some of the results of Google's competency in their core industry, and how capitalistic it is.

The more I view excellent articles like this one linking Google's core competency with their capitalistic juggernaut, the more interesting it becomes to watch for Google's forays out of their core market, keeping their competency but applying it elsewhere.

I wrote a piece (which I won't link to here) about how core competencies drive the long-term business growth of the best players in any industry, leading them into often unexpected new areas.

It seems somewhat inevitable to me that Google will eventually move into something like financial markets, intelligently gathering and automatically analyzing data to arbitrage and invest. (GE, GE Capital is a classic example of a company who followed a model of using a core competency to expand into new areas, with excellent long-term growth and financial success.)

Google's success and competency are BOTH things I think we haven't really seen before, and in that sense I think they represent a global disruptive technology both for business and government.

Information doesn't discriminate in what it can disrupt, and Google's competency (and market lead) with information itself I think therefore bears VERY close watching.

Thanks your as usual great analysis, and summarizing it so clearly for us! Your commentary I think will be a key signal in watching Google's moves and effects on other competitors over the coming decades.

April 6, 2007 - 5:38pm

So what you're saying is that its still a good time to buy shares on Google? ;)

April 6, 2007 - 6:30pm

You described Google direction pretty well. My impression from your post that Google may reach a God status on the Internet. They have good chances to reach this target. (1) They obtain a huge information about online users and websites. (2) They have resources to bind all information together and get money out of that. “What happens when virtually nobody is willing to link to a commercial site unless it is through Google?” If it happened, Google might be hated as Microsoft now. Who likes a company, which controls everything? The alternatives will come and will be used, just because some people do not like the mainstream (like Linux and Mac on the OS market now). Therefore I do not really believe in this future.

Greg
April 6, 2007 - 6:45pm

may reach? aren't we there already?

April 6, 2007 - 8:16pm

Thanks a lot Danny. It means a lot coming from you. :)

April 6, 2007 - 8:27pm

My question, what happens when Google knows exactly how much money your website makes and where the traffic comes from?

With Google Analytics, Google Checkout, and now Google Pay per action I think they are sitting on one of the largest goldmines in human history, and it grows larger every day.

April 7, 2007 - 4:29am

I always told my close friends behind closed doors, that I believed Google was the public front end for the NSA. It's goals are very similar and well aligned - and both want to control information on the web. Then you think.... hmmm how many Silicon Valley startups were funded by the NSA? Well I bet there are a LOT. For example, Oracle was founded on CIA seed money.

Cheers,

M

April 7, 2007 - 9:47am

Do you think this Google PPA program wil kill off the other affiliate networks like CJ and linkshare?

April 7, 2007 - 12:05pm

I think google will be hated as much as Microsoft ever has been.

The problem with the MSFT::GOOG comparison and noting Linux and Mac OS as competition is that the internet is a different animal. There will always be niche markets, it's true, but how do we decide what's antitrust behavior on the net?

One of the reasons Microsoft invested in Corel and Apple in the 90s was to keep competitors alive and kicking. It was an olive branch designed to keep the government regulators at bay. Regulators had a heck of a time understanding PC dynamics; how much tougher will it be to understand the internet, where new products and services can be rolled out in a matter of weeks?

Furthermore, with PC operating systems, we're talking about a tool that a great many people use for very specific tasks. Apple has historically had its core customers in education and visual media; Linux usage and expertise is touted by geeks as an official badge of honor and is a damn good server OS. Both of these things were areas where MS may have done the job, but not perfectly, because Windows is sold to the masses as a general purpose tool.

Which leads to the question: How do you have a niche ad network?

Google has successfully monetized the long tail of internet advertising. MS didn't nail the long tail. In my opinion, The long tail of operating systems is still being fleshed out, actually, in the mobile telephone market. Every single computing device is "the OS market", from watches to supercomputers.

Since google has already nailed the long tail, what is left? The secondary ad networks (MS and Yahoo are still first tier in my opinion, so I'm talking about the AdBrites of the world) cater to the grey hat marketers, gamblers, and pornographers already -- how much worse will it get when, as Aaron posits, "virtually nobody is willing to link to a commercial site unless it is through Google"?

We're a long way off, now, so I'm not about to go out and refinance my house to buy Google stock, but this is really scary stuff.

Heather Paquinas
April 9, 2007 - 5:17pm

All those ads on warez and spam sites were removed.

Heather Paquinas
April 9, 2007 - 5:22pm

Johhny, start using hittail if you want to save money on adsense. It will change your whole strategy.

Malaiac
April 12, 2007 - 9:00am

Great post ! I translated it in french at
http://www.malaiac.net/net-news/221-google-main-invisible-de-leconomie-d...
(TRADUCTION FRANCAISE)

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