[Search-l] 'Introduce a free version of AdSense.'

[Nathan Braun]

This new post essentially serves to underscore and expand upon the point I
was trying to make in my last 2 emails.  This article is much more eloquent
and elaborate than my stumbling attempts, however; so I urge you to read it
closely.  This is what we should be doing. It seems like a very good idea to
me!  (The author is primarily pitching the idea to Microsoft, but I think it
would work equally well/better for Wikia Search..)

MRE (Most Relevant Excerpt):

"

So here's what a Yahoo or a Microsoft or any other competitor could do:
Introduce a free version of AdSense. By free, I mean that you tell
publishers that if they run your ads on their sites, they get to keep all
the advertising revenues. 100 percent. You won't take any cut. Immediately,
you put a lot of pricing pressure on an important source of revenues and
profits for Google.

Now, practically speaking, this would be a tough strategy for a Yahoo to
undertake, given its own dependence on advertising. But it would not be a
tough strategy for a Microsoft to launch, because this is (at the moment) a
fairly trivial business for Microsoft. And it would bring two potentially
large benefits to the company:
"

Source: http://www.roughtype.com/archives/2007/05/free_adsense.php
via: http://news.ycombinator.com/comments?id=24035

Free AdSense May 21, 2007

To competitors like Microsoft and Yahoo, Google must seem like a greased
pig. You can see the damned thing running amok in your garden, but you can't
figure out a good way to get hold of it. The grease that Google has
slathered on itself is mainly, I think, pricing, particularly the use of
AdWords and other auctions to set the price of advertisements. In a rare but
little noticed moment of extreme candor during a November 2005
interview<http://blog.wired.com/business/2007/04/my_other_interv.html>with
Fred Vogelstein (which was only recently published), Google CEO Eric
Schmidt noted the great competitive importance of the company's auction
pricing:

*Schmidt:* Another example of Sergey [Brin]'s observations is that our
advertising network is very powerful because it's quite resistant to certain
competitive attacks.

*Vogelstein:* Such as?

*Schmidt:* Because it's an auction market you cannot under-price it. This
point is lost on many, many people.

The barrier that an auction presents to a price war is, as Schmidt implies,
crucial to Google's strategy - and doubtless a big source of frustration to
rivals, particularly Microsoft. Through superior technology, superior
foresight, and a generous helping of luck, Google has built up a dominant
position in the extremely lucrative market for serving search, or
contextual, ads - and that's providing the beachhead and the cash for its
aggressive expansion. One of the best ways to attack a competitor,
particularly in a market like automated ad serving where the marginal costs
of executing a transaction are basically zero, is by undercutting the
competitor's price. That strategy can be particularly effective if the
competitor is much more dependent on the line of business in question than
you are - the precise situation that currently obtains between Google and
Microsoft in ad-serving. (Slash the price of ads, and Google suffers
greatly, whereas Microsoft suffers hardly any immediate material damage.)
Needless to say, Microsoft has used precisely this strategy with devastating
effectiveness in the past.

But the auction model effectively removes this option because there are no
fixed prices to undercut. Every price is set dynamically by the market and
is hence outside the supplier's control. You could subsidize customers'
purchases, by, for instance, providing them with credits to use in an
auction, but that would simply distort the auction market, artificially
inflate prices, and drive buyers away. The inability to cut prices makes it
very hard - not impossible, but very hard - to unseat a dominant rival like
Google. You have to fight with one arm, probably your best arm, tied behind
your back.

But if Google isn't vulnerable to a direct pricing attack on its core
AdWords service, it is vulnerable to a pricing attack on its AdSense
service. AdSense's customers aren't the buyers of ads but rather the sellers
of ads - publishers and other site owners (including, in its own trivial
way, this blog). Google doesn't directly charge publishers a price for
running ads on their sites, but it does take a price, in the form of a
percentage of the revenues that the ads it serves generate. Except when it
negotiates a special deal with big publishers, Google doesn't tell its
AdSense customers what cut it's taking, but it's a substantial one, probably
running somewhere around 30 or 40 percent.

So here's what a Yahoo or a Microsoft or any other competitor could do:
Introduce a free version of AdSense. By free, I mean that you tell
publishers that if they run your ads on their sites, they get to keep all
the advertising revenues. 100 percent. You won't take any cut. Immediately,
you put a lot of pricing pressure on an important source of revenues and
profits for Google.

Now, practically speaking, this would be a tough strategy for a Yahoo to
undertake, given its own dependence on advertising. But it would not be a
tough strategy for a Microsoft to launch, because this is (at the moment) a
fairly trivial business for Microsoft. And it would bring two potentially
large benefits to the company:

*1. It would hurt its competitor a lot more than it would hurt itself.* Even
allowing for the fact that a chunk of Google's AdSense revenues come through
negotiated arrangements with big publishers (through which Google may
already be giving the publishers close to 100 percent of ad revenues),
turning the delivery of contextual ads into a free service for publishers
would put Google under financial pressure. (Google's revenue from ads on
third-party sites amounted to $1.3 billion in the last quarter, well over a
third of its total revenues.) But it wouldn't cause any harm, of a material
nature, to Microsoft.

*2. It would help promote Microsoft's own ad-serving business.* In essence
what Microsoft would be doing in giving away its product to ad sellers is
redefining that product (for itself and its competitors) not as a
profit-making business in itself but as a complement to the core ad-serving
product that it offers to ad buyers. Expand the presence of your ads on
third-party sites, and you make your core ad-serving business more
attractive to ad buyers. So Microsoft wouldn't simply be sacrificing
potential revenues; it would be promoting revenues in a complementary (and
more important) area of its business.

Now, I've made this simpler than it really is, because publishers also have
to take into account the productivity of the ads being served, and by all
accounts Google continues to maintain a productivity edge. Nevertheless,
turning the AdSense market into a free market would help neutralize that
edge and generally redefine the competitive dynamic to Microsoft's benefit.
And, anyway, what does it have to lose?
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