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Why a Lack of Openness Sullies the Integrity of Google’s Ad Auctions

Today I was surprised to check my email and actually find something interesting (I get spammed a lot) that caught my attention with the subject title, “Questioning the Integrity of Google’s Ad Auction Process.” It was an email sent to me by Scott Cleland which found me by reading a post I wrote in SEJ titled, “Google Adwords Quality Score: Affiliates Worst Nightmare?

Scott sent me a post he wrote which I find incredibly interesting and thought it was well worth sharing with SEJ readers as it pertains very much to us search marketers. Scott was an original expert witness explaining the problems with the conflicts and unaccountability that led to the Enron and WorldCom debacles.

I invite all of you to read this and encourage our community to look at this issue closer and have an open dialogue. I will have a podcast with Scott and would love to talk about SEJ readers view points, opinions, comments, etc.

Here is Scotts’ article:

Does Google warrant the current exceptional leap-of-faith in the integrity of its dominant ad auction model, given its near total lack of openness, transparency, independent auditability, or third party oversight? There is a growing body of evidence that Google does not.

  • The New York Times article today by Miguel Helft: “The Human Hands behind the Google Money Machine” is a must read for anyone following Google or concerned about the openness and transparency of public markets. It is also a little treasure trove of fresh information on Google.

Why a lack of openness sullies the integrity of Google’s ad auctions.

First, it is widely accepted that public markets operate best when open and transparent.

Google’s ad auction model has become one of the world’s most important public markets. Google is increasingly becoming the world’s primary public information broker. Google brokers: 

  • Information for over 700 million search users worldwide, over three to six times their nearest rivals;
  • Advertisement placement for over a million advertisers several times more than their nearest competitors;
  • Monetization for over a million websites several times more than their nearest competitors.

Google is also not open or transparent.

  • Per the New York Times article: 
    • Even on Wall Street, many experts describe Google as a giant black box that they struggle to comprehend.” [bold added]

o        “Not all advertisers like Google’s approach. Many say that despite efforts by Google to be more transparent, they remain in the dark about what goes on inside the company’s ad machine. “To the extent that Google is a black box, it is not a good thing for advertisers,” said Anil Kamath, co-founder and chief technology officer of Efficient Frontier, which runs search ad campaigns for marketers.” [bold added]

Second, there is minimal external accountability to ensure the integrity of Google’s ad auction model. 

  • Google has no independent auditor or third party to vouch for the integrity, fairness or nondiscrimination of their auctions.
    • There is obviously plenty of available auditable information:
      • Mr. Fox said Google’s ability to constantly fine-tune its operations was intricately linked with its obsession with measuring just about everything that happened on its system.” — per the NYT article. [bold added]
  • Google is subject to limited competitive pressure.
    • Google has over 61% share of the search market per Comscore, over 80% share of search advertising revenues and is steadily increasing its share per ComScore, Nielsen and Hitwise.
    • The “average price advertisers were paying for clicks” is “growing rapidly” per the New York Times article.
    • The FTC majority in approving the Google-DoubleClick merger concluded:
      • “…search engines provide a unique opportunity for advertisers to reach potential customers.” 
      • “Google, through its AdWords business, is the dominant provider of sponsored search advertising…”
    • In that same review, Democratic FTC Commissioner Liebowitz effectively concluded that Google has  market power — “…given Google’s existing market power…”  
  • Google appears to have fallen between the cracks of oversight by the FTC, DOJ, SEC and the CFTC – all of which have some responsibility to protect market users and the public from fraud, manipulation, and abusive market practices by dominant providers/market makers, and to foster open, transparent and competitive markets.
  • Moreover, advertisers and website publishers are acutely aware that they do not have a viable competitive alternative to Google to reach the audience they need to reach, so they are reticent to complain much publicly for fear of retribution by Google.

Third, serious harm can occur from Google’s lack of openness and accountability.

The most serious problem with non-transparent auctions is where buyers and sellers cannot discern what is necessary to win an auction, so that the auction is run for the benefit of the auctioneer not the market participants. 

  • Google is unabashed that it runs its ad auctions for Google’s benefit first. Unlike Yahoo or others’ auctions where the highest bidder logically wins, Google has a opaque algorithm that awards the winner to the bidder that earns the most money for Google.
    • Per the New York Times article:

§         As Google’s engineers developed their own search advertising system, they understood early on that giving top billing to the highest bidder would have little benefit for Google if that ad did not attract clicks. That is because advertisers typically pay Google only when a user clicks on their ads. So Google decided to rank ads based on a combination of bid price and “click-through rate,” the frequency with which users click on a given ad.”[bold added]

·         It is stunning that given Google’s recognized market dominance and market power, folks have not connected the dots of how problematic it is to have the world’s largest market maker in the critical market segment of information brokerage, be a market maker with no third-party accountability or regulatory oversight to ensure that the dominant provider does not anti-competitively “self-deal” or “front-run” bidders.

o        Google has admitted to self-dealing in that its algorithm does not reward the highest bidder in an auction, but in a nontransparent process algorithmically determines how to optimize revenues for Google, the market maker/auctioneer, and not the market participants!

§         If Google did not have market power this would not be as big of an issue, but Google has extraordinary market power in a critical bottleneck control position of the World’s Information Economy.

§         The SEC and CFTC have long regulated market makers in public auctions to avoid the destructive anti-competitive effect of “self-dealing.”

o        Google is also engaged in anti-competitive “front-running” in that Google also bids on key words in Google’s supposedly open and fair keyword “auctions” to promote its own Google products/services like Google Earth, Streetview, Docs, etc.

§         How can any market bidder or provider ever hope to compete with or outbid Google, “the House”, in its own Google-run auctions?

§         First, Google has near perfect information about supply, demand, and pricing that others and its competitors are blind to. Not only can Google outbid them, they can simply say they did because there is no independent audit or review of the process to keep Google honest or accountable. In other words, Google can wait and see what others value most and then take it for themselves if they want to!

§         Second, Google can always afford to outbid anyone for key words to discriminate in favor of Google’s vertically owned competitive businesses, because the money Google bids is money that it will get back in revenues — its just an intra-company transfer — funny money – that no one can competitively match.  

§         All of this is done in a dominant closed system that has no disclosure, openness or market transparency.  

·          All this puts Google’s mission into better context.

o        Google’s mission is to organize the world’s information and make it universally accessible and useful”  – to Google.

o        As much as Google claims to first serve its three primary constituencies — it does not do so forthrightly.

§         Google claims to work for users first, but users don’t pay Google, advertisers and website publishers do. This is a serious undisclosed conflict of interest.

§         Google claims to look out for the interests of advertisers, but Google does not publicly disclose that as a market maker, Google optimizes the auction not for its advertising clients, but for Google, and that Google may choose to discriminate against their advertiser customers by front-running their interests by awarding key words to Google affiliates. These are profound undisclosed conflicts of interests.

§         Google claims to work for websites, but Google does not publicly disclose that it will discriminate against it’s website clients so ads and users will be directed to Google-owned sites over their own. These are profound undisclosed conflicts of interests.

·         A very public stain on Google, caused in part by Google’s lack of openness and transparency, is how rampant click-fraud is. Click Forensics’ Click Fraud Index, indicates 27.8% of the clicks industry-wide are fraudulent.

o        The open question is whether better openness, transparency, accountability, auditability or oversight — could reduce this exceptionally high rate of fraud?

Bottom line: Google’s exceptional lack of openness sullies the integrity of Google’s ad auctions.

  • Given that Google proactively and vociferously promotes an Open Internet, OpenSocial, Open Handsets, Open Source etc. — why doesn’t Google also support “Open” ad auctions?
  • Given that Google represents that it is a leader in openness and that they measure just about everything… it shouldn’t be hard at all for them to bring openness to their own ad auction process — if they wanted to. 
  • What will be most interesting to learn over time is if those entities responsible for ensuring open and competitive markets care about their responsibilities or if they continue to give Google an open field to anti-competitively take advantage of others…   

For those who want to further explore the problems with Google’s lack of accountability see: 

 Why a Lack of Openness Sullies the Integrity of Googles Ad Auctions
Pablo Palatnik is the author of the blog PalatnikFactor, focusing on all things Online Marketing and Search Engine Optimization specialist for Fortune3, a shopping cart software company by online retailers, for online retailers.

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