The Google-Yahoo partnership has theoretical implications for the search market and, by consequence, for the whole advertising market.
It’s reasonable to speculate that a successful test will lead to a growing role for Google in delivering advertising in response to Yahoo search queries. In the event this transpires, there will be a de facto consolidation in U.S. search.
Conventional wisdom asserts that there is an inherent commercial democracy in paid search. The party who bids highest and who achieves the highest quality score, comprised of price, relevance and likelihood to click, wins. And in a competitive market the price is capped by the incremental cost of the click to the advertiser in search engine A vs. search engines B, C or D and the total volume of clicks that the advertiser wants, needs or can afford.
In the world that existed before search engines, the “cost per” world was dominated by direct-response print, TV, mail and telesales channels, which offered abundant competitive choice and price/volume equations generated by that choice.
For many advertisers search is the best value in the market and made relatively better as audiences, and attention to other channels, fragment and the use of do-not-call and other commercial blockers rise. This explains the rise of search and the re-allocation of budgets from other channels.
Inevitably, the per-click price of search will continue to rise if other channels deliver less volume and efficiency, and, if not capped by internal competition in the market, they will rise to a fraction below the costs of non-search channels.
|ABOUT THE AUTHOR|
Rob Norman is CEO Group M Interaction Worldwide. His interest is in the effect technology has on changing consumer media behavior and its implications for the biggest companies in the world. His blog is On Demand.
Ultimately, the cost will rise to that marginal point at which the channel is no longer profitable for advertisers, in turn reducing the available cash for paying staff throughout the supply chain and reducing budgets for innovation and new demand-generating goods and services.
In a de facto monopoly situation, this sequence of events happens more quickly. A monopolist can rapidly test the price elasticity of the market and arrive at a moving “one penny less” price pretty quickly. An auction monopoly is no different from any other monopoly in this regard. Simply moving the reserve price for the lot in question reduces the number of bidders until only one man is standing.
Somewhere a line needs to be drawn to protect the market. We are seeing already the impact of rising commodity prices around the world and the impact oil prices have on the general economy when supply is controlled by a narrow group of producers. While it may seem trivial in comparison with oil, grain and rice, the price of advertising response is firmly embedded in the cost of goods sold on a manufacturer’s balance sheet and any such rise affects factory-gate pricing and the ultimate well-being of consumers.
This comment has nothing to do with the role of agencies in the value chain but everything to do with the costs of goods on which we all depend. Google is, of course, the potential monopolist, and it would be utterly churlish not to applaud the innovation and commercial acumen that has driven its success as a business, as a partner to other businesses and as a service from which consumers derive value. However, a monopoly is a monopoly — even if arrived at by totally fair means — and all monopolies require regulation to protect wider economic and social interests.