AdWords (from Google)

Google.com earns most of its revenue by allowing other website owners to advertise on their search result pages. All this is managed through a program they call Adwords.

If we make some assumptions we can guess the traffic generated by Google. For example, if we assume the average cost per click is a quarter (25 cents) then Google received about 24 billion ad clicks. That works out to about 60 million paid clicks per day, which means Google earns about $15 million per day on paid advertising!

The ads you see on Google are not only on Google. Google also has a program called �AdSense� which allows individual webmasters and site owners to place Google ads on their sites and earn a percentage on every click. From these types of ads there are reports that site owners have earned more than $1 million per year on Google ad clicks.

In addition to this Google also has partnerships with other large sites such as AOL which also display Google ads and take a percentage of every click. But in every case where Google ads appear on other sites, you can pretty much be guaranteed that Google earns the lions share of those clicks.

If you go to www.google.com, the left side of the screen displays the top 10 Web sites Google found related to your search. Appearing on the right side are what Google calls sponsored links. This is where the money comes from. When someone clicks on a sponsored link, say in this case it's an ad for FTD flowers, the company pays Google. It’s a revolutionary idea: advertising to an audience of one (person), and one who’s already looking for what you want to sell.

The rates are so low - typically between 5 cents and 50 cents per click - that almost anyone can afford to advertise.

Eric Schmidt, Google’s 49-year-old CEO who was hired in 2001 to be the resident grown-up, says that the pool of potential advertisers is almost limitless: "There’s a lot of evidence that the companies of which Google is a member are enabling a new kind of commerce, between very small communities, people who can find each other, for whom the traditional advertising mechanisms, whether it’s television advertising or radio, do not serve.

"An example: a friend of mine named Peter puts his credit card in and he give us $50 (for a sponsored link). And his wife knits a particular kind of rug. I said, 'Call me back, give me an update.' So Peter calls back and says, 'We’re ecstatic. For $50, we got all these customers.' And I said, 'Well, how many did you get?' And he said 100. And I thought, 'Wow, you know, that’s great. What a wonderful outcome.' And he said, 'There’s a problem...my wife does one rug per year.' So that’s all the revenue we’re ever gonna get from Peter."

But there are millions of Peters out there, and billions in potential ad revenue. The business world is just beginning to grasp the potential.

targetted advertising. Why and how does it work?

What do you use Google for? Search. Let’s look at search. Say the user searches for “mountain bike San Diego”. Chances are he’s looking for a place to go mountain biking. Or, perhaps he’s looking to buy a mountain bike. Google will go and find the most relevant Web pages on that topic.

Now imagine you own a mountain bike store. If somebody told you they would let you show your advertisement to this specific user exactly at the moment he’s expressed interest in mountain bikes, while it’s foremost in his mind, would you be interested? Sure you would. That’s what Yahoo and Google do: not only do they find the most relevant Web pages, they also find the most relevant ads and show them to the user in the form of Sponsored Links.

The sponsored links are actually relevant, so some percentage of the people that see them click on them. Note that this is very different from Banner Ads - those are generic ads targetted at a demographic (or sometimes not targetted at all).

Each time a user clicks on your ad, Google or Yahoo has effectively sent you a lead, someone who’s likely to buy something from your mountain bike store.

This lead is valuable to you and you’re willing to pay for it. But how much?

Turns out you’re not the only mountain bike store in San Diego. I own a store too, and I want that same lead. I’m willing to pay for it too.

So how do we determine the price? Very approximately speaking, by bidding on it. It’s sort of an auction.

I want to advertiser my mountain bikes. I go to Yahoo or Google and tell them: every time somebody searches on “mountain bike”, show my ad. I do this by specifying a bunch of terms related to mountain bikes, and I provide the text for my ad, and a link to my Web page. Something like:

keyword: mountain bike, offroad bike, offroad bicycle

advertisement: buy my wonderful mountain bikes, they’re the best

url: www.mywonderfulmountainbikes. com

You own a mountain bike store too, so you do a similar thing.

Along with my advertisement, I specify how much I’m willing to pay for each lead. What is a lead? It’s defined as a click on my ad. So my bid says I’m willing to pay X each time someone clicks on my ad.

Note that I pay for clicks, not for my ad being shown (aka impressions). It’s a good deal - I only pay if the user is interested enough in what I offer to click on it.

I specify a bid. You specify a bid too. Approximately speaking, the higher the bid, the more prominently/more frequently the ad is shown. Other factors go into picking the actual ordering of the ads, but bids play a big part.

So there you have it. Lots of advertisers bidding on many millions of keywords, and hundreds of millions of users doing billions of searches, a small charge each time somebody clicks on an ad, and you get a big business.

Background info

source: http://en.wikipedia.org/wiki/Adwords

AdWords is Google's flagship advertising product, and main source of revenue. AdWords offers pay-per-click (PPC) advertising, and site-targeted advertising for both text and banner ads. The AdWords program includes local, national, and international distribution. Google's text advertisements are short, consisting of one title line and two content text lines. Image ads can be one of several different Interactive Advertising Bureau (IAB) standard sizes.

Pay-Per-Click advertisements (PPC)

Advertisers specify the words that should trigger their ads and the maximum amount they are willing to pay per click. When a user searches Google's search engine on www.google.com, ads for relevant words are shown as "sponsored link" on the right side of the screen, and sometimes above the main search results.

The ordering of the paid listings depends on other advertisers' bids (thus the system is classified as P4P) and the "quality score" of all ads shown for a given search. The quality score is calculated by historical click-through rates and the relevance of an advertiser's ad text, keyword, and landing page to the search, as determined by Google. The quality score is also used by Google to set the minimum bids for an advertiser's keywords.1

The auction mechanism that determines the order of the ads has been called a "generalized second price" auction. It is a variation of the Vickrey auction.

Site targeted advertisements

In 2003 Google introduced site-targeted advertising. Using the AdWords control panel, advertisers can enter keywords of interest, and Google will recommend relevant sites within their content network. Advertisers then bid on a cost per mille (CPM) basis for placement.

AdWords distribution

All AdWords ads are eligible to be shown on www.google.com. Advertisers also have the option of enabling their ads to show on Google's partner networks. The "search network" includes AOL search, Ask.com, and Netscape. Like www.google.com, these search engines show AdWords ads in response to user searches.

The "content network" shows AdWords ads on sites that are not search engines. Google automatically determines the subject of the pages and displays ads for which the advertiser has specified an interest in that subject. The ads show in boxes resembling banner ads, with the designation "Ads By Gooooooooooogle." These content network sites are those that use AdSense, the other side of the Google advertising model. Click through rates on the content network are typically much lower than those on the search network and are therefore ignored when calculating an advertiser's quality score.

AdWords is used by publishers who wish to bring traffic to their websites. The biggest competitors are Yahoo! Search Marketing (following Yahoo!'s acquisition of Overture Services, Inc.) and Microsoft adCenter.

Click-to-Call

Google Click-to-Call1 is a service provided by Google which allows users to call advertisers from Google search results pages.

All calls are free at Google's expense. However, if the call is made to a mobile phone, the caller may incur airtime fees depending on the mobile phone plan and the location of the caller and the advertiser (if they are in different countries at the time of the call, the call will probably cost more).

Abuse of the service is easily achieved, making it questionable about how long it will continue to exist. As some individuals have pointed out in technology blogs, you can easily connect two different numbers who have no intention of talking to each other. This is easily accomplished by typing in the phone number of a company or other individual, which will then connect them to the directory listing selected.

History

The AdWords product was launched in 2000.2 At first advertisers would pay a monthly amount, and Google would set up and manage their campaign. To accommodate small businesses and those who wanted to manage their own campaigns, Google soon introduced the AdWords self-service portal. As of 2005, Google provides a campaign management service called Jumpstart 3 to assist advertisers in setting up their campaigns.

In 2005, Google launched a program to certify individuals and companies who have completed AdWords training and passed an exam. Due to the complexity of AdWords and the amount of money at stake, many advertisers choose to hire a consultant to manage their campaigns.

Legal context

AdWords has generated lawsuits in the area of trademark law and click fraud. Google recently settled a click fraud lawsuit for US$90 million. 4

Overture Services, Inc. sued Google for patent infringement in April 2002 in relation to the AdWords service. Following Yahoo!'s acquisition of Overture, the suit was settled in 2004 with Google agreeing to issue 2.7 million shares of common stock to Yahoo! in exchange for a perpetual license under the patent. 5

Ad blocking and Adwords

Search

The ads are displayed on the top or right hand side of the natural search results. The ads are pure text, and thus difficult to block for normal ad-blocking software. However, the Mozilla Firefox extension CustomizeGoogle can remove them.

Content network

Advertisements on content websites are displayed via javascript-generated iframes and can be easily blocked, either by turning off javascript or using ad-blocking software such as adblock.

Proxies

The search proxy Scroogle allows users to perform Google searches without receiving Google advertisements.

Technology

The AdWords system was initially implemented on top of the MySQL database engine. After the system had been launched, management decided to use a commercial database (Oracle) instead. As is typical of applications simultaneously written and tuned for one database, and ported to another, the system became much slower, so eventually it was returned to MySQL (2)