mark nottingham

The Market for AdWords

Thursday, 1 April 2004

Google’s AdWords program allows advertisers to target their dollars at specific words; for example, I can say that I want to buy advertising on search results when the terms are “ elephant cookie.”

This is cool, because it creates a market for Web advertising that’s very liquid, because of Google’s size, the low barrier of entry to the service, and its ease of use.

However, it isn’t a transparent market, because buyers and sellers can’t see each others’ offers; instead, Google takes an undefined cut off the top. It would be interesting to see if transparency — e.g., Google allowing you to see the spread, and taking a straight transaction fee — would encourage growth in this market.

It also isn’t a particularly efficient market, because AFAIK Google doesn’t allow the creation of secondary markets (e.g., reselling). Again, you have to wonder what’s in their long-term interests; I wonder if they talked to an economist when they were setting it up?

All of that aside, the original reason I started writing was to point out that it also isn’t transparent because of the introduction of AdSense. Before, when the ads were only placed on Google’s search results, you could see the ads that came up for a given search easily, and also see when your ads were placed. Now that Google’s ads can be on any site, it’s not so easy to get the feedback to be able to target them.

To fix this and encourage growth in their market, I think that Google needs to allow people to target their ads not only at specific words and phrases, but also at specific pages; i.e., URIs. That way, you can have competition not on a word-by-word basis, but a page-by-page basis; if there’s a high-value Web site that uses AdSense, advertisers can put their ads on that site, and pay for the privilege.

Everybody wins; if you only want your ad to be on elephant-cookies.com, it’ll be there any nowhere else, and you get higher value for your dollar. If someone else wants it too, the person who wins will be paying a true market price, not one that’s mixed in with other peoples’ animal cracker or zoo supply firm ads. Google will win because they’ll make a lot of money on a few sites, and a little money on a lot of sites (maybe a power law distribution? Hmm).

eBay has been called a perfect market for miscellaneous goods on the Internet; it would be interesting if Google were able to replicate that feat for advertising.