PPC Advertising Takes Its Toll on Google

Recently, Google (NASDAQ: GOOG) has seen analysts put price targets as high as $1,000+ per share. For the investors that watched Google clamor up from $100 to $700 and then jumped in, you are likely feeling the pain. Google is off nearly 40% from its all-time highs and while everyone is simply blaming the poor performance of the stock market, there are some very specific reasons why Google's upward trend has not continued.

1. Bidding Restrictions

When Google first launched AdWords, its pay-per-click [PPC] solution for advertisers, the landscape was blank. That is, you could sign up to bid on a term and only pay $0.10 per click. As more advertisers signed up and competed for a particular piece of Internet search real estate, the price per click went up. It's simply supply and demand. Specifically, companies would bid up the term higher to maintain placement. As more advertisers appeared, advertisers would spend more to show up with greater frequency and to achieve more prominent placement.

Granted, Google argues that its PPC engine is not a 'whoever pays the most wins' model, but I know for a fact that ads we were paying $0.50 for a year ago are now at $2.00 - just to maintain pace. Simply said, as more people have jumped on the AdWords bandwagon, the price has gone up.

With that being said, companies have begun to protect their 'brand identity' online as well as their wallets. People do search for terms like satellite television or cable Internet, but in the same light, people also search for terms like "DirecTV" (DTV) or "Comcast" (CMCSA). Both of these are brand names and are trademarked by their respective owners. Many companies have started policies that: (1) prevent other advertisers/marketers for placing bids or ads using the trademarked name; (2) have begun direct PPC efforts of their own; (3) have disallowed partners or affiliates from outbidding the parent corporation's efforts.

In (1), other advertisers cannot even post ads for these very expensive, highly trafficked corporate brand and product names. In many cases, the Google interface does not even allow it without some form of authorization from the trademark owner. This practice effectively reduces the supply and demand effect. Fewer people able to advertise under certain search terms means less competition and therefore lower PPC charges and less clicks for each search. That is, people will often click 3 or 4 listings. So, Google has not only seen PPC costs flat line for these terms, but is also generating less clicks.

In (2), many companies have actually begun doing their own PPC campaigns. Companies have often had third parties manage their own PPC campaigns either for a fee or on a commission/affiliate basis. With the company direct getting in the mix (in some case disallowing 3rd parties to even do PPC), these 3rd party marketers are now competing with the 'manufacturer direct' and are unable to keep pace and then filter out. The end result is the same as (1) - less people buying clicks to continue to prop the PPC cost up.

In (3), which is akin to (2), the company has disallowed any of its 3rd party affiliates, partners, or agents from outbidding the corporate efforts for any term. That is, the parent company is saying "we are always going to be #1 and we are going to stop outbidding each other." The loser is Google as it puts a ceiling on the per click charge in a growing number of Internet search term spaces.

2. Better Fraudulent Click Detection

Click fraud has always been an issue. Competitors will click on your ad to falsely charge you. Google has pretty strong measures in place preventing blatant fraud. For instance, you cannot just click on the same ad 1000 times in a day from the same computer. However, you may be able to click on it once or twice a week. For an advertiser, maybe that is $4 or $5 of fake charges, but multiply that over an entire year and thousand and thousands of advertisers, and the detriment to Google can easily be in the millions of dollars.

Fraudulent clicks are a problem and 3rd party statistic and metrics programs are getting better at tracking and identifying these as they justify the ROI from saved click costs to their customers. As these tracking programs only get better, the amount of fraudulent clicks will continue to be revealed and be refunded by Google. It certainly is not the majority of clicks, but some say that even with Google's protections in place, anywhere from 3%-15% of clicks are fraudulent. Ultimately, you can count on at least half of these to be identified by the increasingly powerful tracking programs. Those few percentage points in terms of top line revenue will hurt Google.

3. Transition to CPA vs CPC

Just as banner advertising on a CPM has seen its results deteriorate, CPC seems to be somewhat at a plateau in the short term. Advertisers just cannot keep throwing more dollars at the problem to drive more sales. Look for Google to embrace more CPA (cost per acquisition, such as a sale or completed application) advertising programs going forward. In the long term, Google can likely do better than charging on a CPC basis, but in the short-term, the CPC charges may flat line and revenue recognition will slow.

Disclosure: none

Comments

[Rodders]

I think there are about 5 claims made in this article and all 5 are questionable or incorrect: 1) trademarks - these have been protected for years and the number of clicks to competitors on trademark-related searches is a tiny fraction, where it happens at all. any SEM would agree. 2) if this were true everyone would quickly in-house their search and net net there would be no difference - except +20% more spend available for Google. there's no movement away from SEM's, just a movement towards in-housing some search skills to keep them on the game 3) affiliates are increasingly dominant... this is totally incorrect "Google... puts a ceiling on the per click charge in a growing number of Internet search term spaces" 4) compare an adwords credit with these software estimates, one group has been detecting things first hand for 5 years and the other is a third party with an interest in talking up the numbers 5) cpa is good for advertisers who are seeking web-based leads or sales, which leaves out 80% of advertisers that aren't

[tchannon]

Your thoughts are well received and thank you. I do not think Google is in trouble, but their growth will slow and those are some factors contributing to the arena.

For instance, one company I reviewed used to pay $0.50 CPC for the trademarked term; others got in the game, drove the price to $2.50 CPC over a course of a couple of years. That is 5x for the same real estate. The cap has been now been put on at $2, reducing any more exponential income growth from that piece of real estate. At 300 clicks per day for 1 ad (and we know that customers click on multiple ads), Google will be losing at least $50k over the course of the year for that term (assuming 1 person bid $2.50 and nobody bid between $2-$2.49) - and there will be no more upside. It used to be at $0.50, $55k was generated a year; at $2.50, it became $274k/yr. So, $50k/yr. lost on 1 term. If there are 1,000 terms (and a trademark term could be dozens of terms), that is $50M lost (which is a tiny piece of Google revenue). It's a simplistic assumption, but it is lost revenue and there will be no more growth along the lines they have seen it grow.

Google does not impose the PPC limits, but if you are an affiliate marketer, and the advertiser/merchant says 'no affiliate can bid over $2 CPC' then the affiliate has to oblige or be terminated from the program. This practice, too, is becoming increasingly common. Again, there will be ceilings to PPC revenue growth in thousands of the little crevices where Google succeeds.

SEM, as you are likely familiar, takes a lot of work. Companies that outsource will do so for expertise. If they bring in house and have an extra 20% to spend on Google, people are hired and it costs the company money to do so.

Yes, there are many advertisers that want CPM or eyeballs, but if you are paying CPC, you likely need sales, inquiries. Even if only 20% of CPC want CPA, it is still 20% and significant.

More and more companies are enforcing trademark bidding restrictions -yes, some have had them forever; some are just getting into the game. Granted, it's not the majority of search volume, but take thousands and thousands of trademarks, it has an incremental effect. Google has always claimed success because it could efficiently take $1 from 10,000,000 people a day - tiny transactions adding up to a big pie. If you start to limit the growth on a segment of these tiny transactions, even 10%-20%, it will have an impact on Google's growth.

Again, thank you for your comments and they are well received. In the end, nobody really knows what is going on or what is going to happen and I always appreciate lively discussion.

[John Egan]

A nicely different approach to why Google dropped. I can't qualify any of the opinions, but have to say that although Google comes across and is considered a tech stock... Clearly it is an advertising engine. Having said that, I also believe that a lot of the sell-off is related to Funds and investors cashing out resulting in a spooked market.

Thx jegan

[blah-blah]

For a long time I've thought GOOG had another year or two before slowing growth would end the 'honeymoon' that Bill Gates put so well.

It's drop has even astounded me(not a bull on it) - it's still a great grower but maybe it's days of accelerated growth are over - time will tell.

A 15 PE like mature tech stocks get would cut it in half - it's not there yet but it will end up there albeit at a higher price in a few years.

[CPCcurmudgeon]

Had Google done more to provide advertisers with optional programs that are less susceptible to fraud earlier on, perhaps they would not be in the situation they are in now. Also, while it's good for advertisers that Google is "discounting"... presumably fraudulent clicks, they are losing money by doing so because it costs money to do the extra processing.

[Heiways]

what a disappiontment

i think the PPC is a plamtop just like a Palm to receive news in hand,but...

[iThinkBig]

Bottom line: It's the economy stupid. Economists at big corporations do two things in an approaching recession. 1) Shed jobs. Did anyone else notice the 10's of thousands of layoffs at big company in every sector except for food and energy in 2007?

2) Next comes the announcement that recession is already here. Advertising practically grinds to a halt.

I am in two sectors of advertising, consumer health and higher education with the product being qualitative sales leads and targeted prospect lists.

I lost most deals in the last two years for 'price' despite the fact I demonstrated solid financials of a qualitative sales lead model over a quantitative one.

Google CPC to me is a quantitative model where the bidding costs for mainstream terms does not equate to fiscal return. Not even close! So all of those companies using Google CPC for a combo of branding and some return have dropped off the earth.

Even in my recession resistant sectors, February was the worst month in sales in company history, but the prospects are now lining up in droves to purchase the qualitative CPA sales lead model I built. It was oh so difficult to hang on and save a little cash while my friends got rich doing practically nothing. Companies are pulling the trigger in their ad spending in Q2 & Q3 and in our companies sectors and for the qualitative model. To the victor goes the spoils and every one of my friends now begging me for a job or a loan can go and kiss my *ss.

[User 154984]

Well, I realize that google fraud is prevalent, but the whole time I'm reading about I'm thinking...what about me! I use google adwords at .10 per click and I'm wondering what effect this is having on the guys like me paying the bill!

[Google Fan]

As you can see from my handle, I like Google so take this with a grain of salt. However, from the simplest point of view, anytime that people make a verb out of a company ie:" Lets Google this person" or tv ads stating to "google" their keyword - that tells me this company is as Warren Buffet would say "A company with a mote around it". They have 70% of the market in a market that is growing by 50% a year. I find it difficult to believe that Yahoo and M$ combining are going to be much of threat to Google in the short term, and in the long term there is so much advertising moving from print to online media that both can share and still make money. Besides, Google is deversifying itself in so many ways that I doubt in a few years the bulk of their revenue will be from ad clicks anyway. It all depends on your time horizon. I am 33 and will not need to touch that money for a long long time so I don't care much what it does now. Since I bought it at about the middle 400's I think I am safe even in short term drops. I think it all boils down to time horizon. Maybe it won't go up at the clip that it did in the past, but hey I still think it will beat the S&P average handily in the long run.

[win]

Hi,
Thanks for the very informative discussion, guys. I see nothing about click rates and revenue in South America, Europe, and India, where Google also has a dominant market share, where economies are growing, and where currencies are appreciating fast (against the dollar at least). Thoughts?

[Google]

Just come across this article while searching for Google stopping Agency discounts in Europe. Probably they may be trying to recover the lost money by playing it safe and showing fairness to other agencies. Personally I don't feel Google's share price comes down until people stop spending on digital advertising.

[celestmark]

The fact is that the romance is over!

Come on... $700 a share and you believed that was going to last!
Fact is that when a spooked economy drives up Gas and Gold, along with the US dollar dropping like a lead balloon, you're goind to see tech stocks drop... unless they are DOD based for security and support of defense!

Just me 1/2 cent here, but Google, as well as it's share holder, is going to have to start thinking about playing in the "real world!"