Google AdWords: soon over-priced with poor ROI

Google’s “one trick stallion

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Google’s “one trick stallion” AdWords auction money making machine is inherently flawed, long-term.

Search engine guru Danny Sullivan, blogger extraordinaire Robert Scoble and the “Om” believe otherwise. All three analyze Yahoo’s advertising “weakness” as a signal of the economic power of search advertising which serves to reaffirm Google’s long-term prospects.

Danny Sullivan:

I think search will be just fine given its history. Search was booming during the ad downturn of 1999-2001. It was booming because of its highly measurable, highly converting nature. Born from a downturn, I expect it will continue to ride out any future ones, if not benefit from them.

Robet Scoble:

Google is the new Yellow Pages. If a business stops doing Google advertising it might as well just fire everyone and send them home. That’s the difference between the advertising world today and the advertising world back in 1999…

In a recession I think Google will even see MORE advertising as businesses get more desperate to find buyers.

Om Malik:

GigaTeam was visiting GooglePlex today, meeting with a few executives. If there was anyone at Google who was worrying about an online advertising slowdown, we did not run into them!”

Of note, all three echo none other than Google CEO Eric Schmidt. In “Google CEO Eric Schmidt on recession, competition: Google makes more money,” I cite Schmidt on his confidence that Google wins when the economy loses.

Google was asked at a July conference call: “With the economy potentially slowing down, how do you think that will affect search spending?”

Schmidt:

when organizations are under stress, they focus on the best economics, because they don't have as many opportunities, they have to be much more careful. We continue to believe that the Google advertising system is literally the best place to put your sales dollars. In a theoretical global recession such as what you were asking about, I'm sure that we would benefit by the fact that our performance is simply better than the other alternatives.

What are Schmidt, Sullivan, Scoble and Malik missing?

Google’s unprecedented gross margins and a seemingly unstoppable bid price inflation are derived from the Google-centric auction system which is economically dependent upon price inelasticity of demand.

To date, Google AdWords customers have in fact been overwhelmingly insensitive to rising bid prices. At the Search Engine Strategies conference last month I pointed out to Schmidt, however, that such a scenario is unlikely to continue indefinitely.

I report on my exchange with Schmidt in “Google CEO Eric Schmidt on recession, competition: Google makes more money”:

I suggested to Schmidt that his belief in advertisers’ willingness to continuously bid up the prices they pay for participation in AdWords might soon be tested.

I pointed out to Schmidt that the Google auction model is contrary to the manner by which advertisers traditionally purchase advertising. I indicated that typical advertiser behavior is to negotiate a rate card down. Google’s opaque advertising purchase system, however, results in advertisers willingly raising their own cost of advertising.

I asked Schmidt if he was concerned that there might not come a day when advertisers object that Google’s out-sized gross margins are achieved at the advertisers’ expense and, subsequently, decide to revert to advertising purchase behavior more aligned with their own interests, that is to bid down prices to achieve higher ROI.

Schmidt’s response: NO.

ALSO SEE: “Google's Achilles' Heel: click fraud + PPC inflation” and "Google QuickBooks 2007: Death of Yellow Pages, local newspapers?