Some Google advertisers cutting spending

Keyword inflation, low conversion rates sending merchants elsewhere

By Ben Charny, MarketWatch

Last Update: 10:58 PM ET Jan 3, 2007

SAN FRANCISCO (MarketWatch) -- A growing number of online advertisers are bidding a partial goodbye to Google Inc.

Frustrated by the soaring price of Internet-search advertising and diminishing returns from the ads they buy, mid-sized advertisers say they plan to reduce how much business they do with Google this year -- in some cases, significantly.

Last year, for example, eBags.com co-founder Peter Cobb spent between $5 million and $8 million to peddle suitcases, handbags and other carrying cases online. Google got 75% of that amount.

But this year it will get "significantly less," Cobb said. "The Google percentage has got to go down," he said.

In many cases, the cost of an eBags.com ad placed on either Google's own Web site or one of its affiliates now equals 45% of the price of the product it promotes. That's crimping the company's own profit margins and forcing it to look elsewhere to market its bags.

"We're testing print ads right now," said Cobb, whose company will spend up to $8 million on ads in 2007.

Cobb was among a half-dozen Google customers -- all of whom spent between $4 million and $10 million on search ads in 2006 -- who told MarketWatch they plan to spend less this year to have their ads placed alongside Google's search results.

While losing a few million here or there may not be enough to impact Google's business -- which generated more than $7 billion in sales last year -- those interviewed for this story say their sentiment is not unusual among Google advertisers of their size.

If enough of those companies curtail their Google spending, it could begin to depress the company's annual revenue growth rate, which is already expected to slow to 47% this year from 80% in 2006.

That growth rate is one of the primary reasons that Wall Street analysts cite to justify their price targets on Google shares.

Google is aware that advertisers are closely measuring the return on investment and "adjusting their budget and pending patterns according," Google spokesman Michael Mayzel said in an e-mail.

"As with any advertising medium, some advertisers are going to perform better than others," he added. "The majority of our customers continue to see strong return and value in our ad program."

New bidders driving up prices

To a large degree, the dissatisfaction with Google's advertising is due to the phenomenal success the company has had in persuading other firms to advertise their products and services using Internet search keywords.

In search advertising, companies bid on the right to have their text-based ads placed next to search results generated by specific words and phrases, such as "ski boots" or "diamond earrings," that Internet users type into Google's search engine.

The low cost of keyword search advertising relative to older media like television, radio or even local yellow pages has lured many traditional retailers into advertising online. That's created more competitive bidding for popular Internet search terms, inflating their cost.

While that's helped Google post phenomenal profit growth -- analysts expect that its net income rose 80% in 2006 -- it's made things tougher on many of its advertisers.

Keyword search prices on many terms rose between 40% and 60% last year, according to advertisers like Dan Sackrowitz, chief executive of Bare Necessities, which sells lingerie online. He saw his Google ad budget soar 50% last year.

Jack Keifer, chief executive of baby goods provider Babyage.com, said his search ad costs more than doubled in 2006. As a result, he's refining his online advertising strategy, spending less on Google and more on comparison shopping engines or niche search engines that focus on his product categories.

The experience of Sackrowitz and Keifer has come to the attention of Wall Street analysts, even those who are bullish on Google.

"What has been good for Google has not been good for the companies that buy advertising from them," said Mark Mahaney, Internet analyst at Citigroup who rates Google shares as a buy. "Going forward, we see no convincing reason why online advertising costs shouldn't continue to rise."

Trouble turning shoppers into buyers

Meanwhile, there's also growing dissatisfaction with the return on investment provided by Google ads.

Advertisers pay Google every time someone clicks on their online ad, yet they benefit only if a consumer buys something after being transferred to their Web site.

Most online advertisers are happy if their so-called conversion rate is about 5%.

Yet Shmuel Gniwisch, founder of online jeweler Ice.com, got a conversion rate of less than half a percent for the $750,000 worth of ads he placed through Google during November and December, a key selling season for retailers.

For every 300 people who clicked on an Ice.com ad, only one actually purchased something, Gniwisch said.

"You couldn't get a worse performance," he said.

As a result, he's planning to cut his Google ad spending by 40% or more.

The low yield is a reminder of how many clicks are not legitimate but rather the result of so-called click fraud. While Google officials have inferred that the fraud rate is in the low-to-mid single digits, some critics say it can be as high as 50% for some online ad campaigns.

Still, many Google advertisers say they've accepted click fraud as part of the cost of online advertising. See previous story on Google's click fraud problem.

Changing tactics

Likewise, not all Google advertisers who've seen their costs surge are cutting spending.

Google's expansive advertising network and its No. 1 Internet search engine still make it a necessary part of any online campaign. Saying goodbye to Google and its huge audience is a risky move for advertisers.

Yet even those who will spend at least as much money on Google this year as they did in 2006 say their decision has more to do with improvements they've made on their own, rather than any increased satisfaction with Google's ad service.

Sackrowitz of Bare Necessities said he won't cut Google spending, but only because his company has developed expertise in converting clicks into sales.

"We're getting healthy enough returns, but it's a testament to how we've done a better job of converting shoppers to buyers than our competition," he said. "We'll stay the course, but I wish (keyword) prices were lower."

Ben Charny is a MarketWatch reporter based in San Francisco.

Source: http://www.marketwatch.com/news/story/google-advertisers-cutting-spending-keyword/story.aspx?guid=%7BE9B9CEA8%2DEA47%2D48C6%2DA91F%2D69F53F018AE2%7D

Tip: Trust is hard to gain, easy to lose.

Call me naive: I think you can make a lot of money, go public, even monopolize a market, and still retain a moral compass that points in the direction of Google’s stated top priority—users.

But Google lost me today:

Google is now displaying “tips” that point searchers to Google Calendar, Blogger and Picasa for any search phrase that includes “calendar” (e.g. Yahoo calendar), “blog” and “photo sharing,” respectively. This is clearly bad for competitors, and it’s also a bad sign for Google. But I generally support anything that benefits users, even if it’s controversial. I believe, for instance, that shipping Internet Explorer with Windows was a good move. So why are tips bad for users?

First, some notes. One, Yahoo and Ask already do this, but they didn’t build their businesses on the promise of being unconventionally trustworthy. I care that Google is doing it because the company’s integrity over the years has impressed me and earned my loyalty. And two, Google has been doing similar things for awhile. Search The Holiday and you’ll get a special box pointing to reviews of and tickets for the movie. The difference is that this is still a filter on the Web; the reviews link to their sources and the tickets link to Fandango. Google may share the Fandango revenue and certainly shuts out competitors, but as a user, I get better service than I would without the box.

The tips are different—and bad for users—because the services they recommend are not the best in their class. If Google wants to make it faster and easier for users to manage events, create a blog or share photos, it could do what it does when you search GOOG: link to the best services. To prevent Google from being the gatekeeper, the company could identify the services algorithmically.

But if that sounds familiar, perhaps that’s because Google already works that way. After all, Google is predicated on the idea that the democratic structure of the Web will push the cream to the top. Search for “photo sharing” and you should already get the highest quality services. According to Google, Picasa is not one of them. These “tips,” then, can only be a tacit admission of failure: either the company does not believe in its own search technology, or it does not believe its products are good enough to rise to the top organically. I’d guess the latter. And if I were on the Calendar, Blogger or Picasa teams, I wouldn’t be celebrating the news that my employer has lost faith in me.

Implications for advertisers

Google has been advertising its own products through AdWords for some time, and I see nothing wrong with that. The protest that unjustifiably erupted three weeks ago questioned the positioning of these ads. As advertisers began making antitrust overtures, Walter H. from Google Marketing stepped in to sooth nerves (emphasis mine):

It’s important to note, however, that our ads are created and managed under the exact same guidelines, principles, practices and algorithms as the ads of any other advertiser…There are no algorithm changes to ’smooth the way’ for Google’s ads.

We’re quite proud of the advertising platform we’ve built and it simply makes sense for us to use it. At the same time, the trust of both our users and our advertisers is of paramount importance. We honor that responsibility, and work hard to earn and keep that trust.

What changed in three weeks?

While advertisers compete to be first in a string of lookalike ads that are often shunted to the side, Google now determines the precise position and appearance of ads tips that are not subject to any of the same rules. Its ads get icons while others don’t, and if you think that’s small potatoes, you are not an advertiser: images boost clickthrough. Google can make a Picasa ad say “Easier to use than Kodak,” but Kodak cannot create an ad that reads “Easier to use than Picasa.”¹ And the kicker: neither the highest quality ads nor the highest quality search results can replace these tips.

In the end, would you rather be Blogger or TypePad on my screen?

A new kind of bundling

Google’s new age “bundling” is less threatening than Microsoft’s because changing operating systems is hard, while changing search engines is easy—so easy that every engine out there is desperately trying to stay in your face. And choosing an alternative to Microsoft’s bundled software used to be prohibitively complicated for the average person, not to mention time consuming—you had to go to a store and buy a boxed copy or spend the evening downloading it. Eventually everyone will be experienced enough to procure applications, and then word of mouth alone will bury the distribution advantages Google and Microsoft now enjoy.

But we’re not there yet, and in many ways, Google’s bundling is worse than anything Microsoft did or even could do. Microsoft threw spaghetti at the wall and hoped it stuck, and likewise there’s nothing wrong with Google’s arbitrary front page ads. The difference here is that Google knows what users want and can discreetly recommend its products at the right time. Microsoft can’t easily hide a program packaged with Windows (and doing so would defeat the purpose), but competitors can only discover Google’s bundling, which might be transient or limited to certain regions, through trial and error searching.

Now let’s put away the tin foil hat and consider this: According to Nielsen NetRatings, the top ten search queries of 2006 were specific services like “Hotmail” (another view). So significant amounts of people, typically novices, use search engines as address bars. Three of the top ten were actual addresses like MySpace.com. If Google decided to show tips for “mail” or “space,” they would appear in these circumstances even though the user is usually en route to a particular destination (working example)².

Would Google complain if Microsoft informed users about Live Search when they typed Google.com into Internet Explorer’s address bar? Don’t roll your eyes: it would just be another innocuous tip presented to a user en route to a destination. Google owns one of the Web’s command lines, and Microsoft owns the other.

Perhaps the most nefarious aspect of this feature is how it operates within our collective blind spots. Advertisers are happy that Google no longer invades the canonical Ad Results. Technology purists continue to see untainted Search Results. But does my mother make that distinction? How much does a result have to look like a Result to cross the line?

Google promised not to be the type of company that needs to ask.

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Update: Matt Cutts, a well-known Google employee who works on web search, has posted his views.

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Update #2: This post is not a sign that I think Google has turned “evil” as some have suggested. I wrote it because Google has impressed me enough over the years that the slightest deviation catches my eye. You’re welcome to disagree that these tips constitute any “deviation,” but please read what I actually wrote (in the comments as well) before jumping to conclusions. I don’t “hate” Google, nor do I find this the apocalypse. The world is not black and white.

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¹ If you’re still not convinced, go to AdWords now and try to create a U.S. ad containing “Picasa”. Google forbids it on the basis of trademark infringement.

² I realize this is already possible with AdWords, but again, Google is no longer subject to the same trademark or style policies as other advertisers.

Source: http://www.blakeross.com/2006/12/25/google-tips/