Can you imagine processing 6.9 billion queries a day? I certainly could not, nor would any human-being be able to handle that. But then, Google does it every day. It started back in 1996, with a ranking system that rewarded links that came from sources that were relevant and penalized those that were not (Battelle, 2005). Nowadays, it is one of the leading internet search engines, and only the term ‘Google’ already generates 7.2% of the worldwide search traffic (Mohsin, 2020). But how does this search engine work?
Google Ads
Two years after the launch of Google.com, Google Adwords was created, which has been rebranded to Google Ads in 2018. This platform offers pay-per-click (PPC) online advertising that allows advertisers to display their ads on the search engine results page (SERP). Below is an example of a SERP, which displays two sections of Google ads. The red box represents ads of paid search accounts and are usually recognizable due to the little yellow box next to their link. Companies have paid to appear at the top of the search results (Sukhraj, 2019). This process of advertising directly on Google, is better know as Search Engine Advertising (SEA). The green box represents organic search results, which refer to unpaid listing on a SERP (Randolph, 2020). Google ranks these results according to their quality, relevance to the search words and other factors (Randolph, 2020). SEO includes all activities you engage in to ensure your website scores higher in the organic results (Poorthuis, 2019). Both SEO and SEA rank advertisements using auction mechanisms.
How does Google Ads work?
Google Ads work with a PPC model that determines which ads should appear with a lightning-fast ad auction. These auctions take place every time a user enters a search query into Google. To ‘win’ the auction, you will have to optimize your quality score and bid amount. The bids represent the maximum you are willing to pay for your ad to be displayed on the top of the page. In addition, it is possible to set a maximum daily budget for your ad and you will never exceed that amount. Google takes the bid amount and pairs it to your quality score (i.e., assessment of your ad) (Tran, 2020). So, even if your competitor places a higher bid than you did, you can still win a higher position if you have a higher quality score (by using relevant keywords, ads, extension, etc.) (Google Ads Help, n.d.).
Transition of Auction mechanisms
In 2019, Google Ads transitioned from a second-price auction to a first-price auction model (Setupad, 2021). Initially, with a second-price auction, the winner did not have to pay their own bid, but just 0.01$ more than the rate of the second-highest bidder (Setupad, 2021). In the past years, there were several programmatic developments that contributed to the complexity and operational inefficiency in the second-price auction:
- Header bidding, which is an advanced method of programmatic ad buying that allows multiple advertisers to participate simultaneously in the auction to win ad space (Tenney, n.d.).
- The real-time-bidding (RTB) protocol that enabled buyers to build their own system called a ‘real-time bidder’, which connects to Google servers and generates a constant stream of available ad inventory.
RTB and header bidding made it possible for publishers to allow multiple ad exchanges (SSPs) to bid on their ad inventory at the same time. Thus, creating complexity and operational inefficiencies. Subsequently, there were often hidden intermediary fees taken by SSPs (Setupad, 2021).
Therefore, Google adopted the first-price auction model, where bidders participate simultaneously in the auction and the highest bidder wins. The main difference between these two auctions, is that publishers earn more revenue in the first-price auction model. Also, the model offers more transparency and works better with the developments that were mentioned above.
What impact do you think that the transition from second-price auction model to a first-price auction model will have on Google? Was this a smart decision?
References
Battelle, J. (2005, January 8). The Birth of Google. Wired. https://www.wired.com/2005/08/battelle/.
Google Ads Help. (n.d.). How the Google Ads auction works. https://support.google.com/google-ads/answer/6366577?hl=en.
Mohsin, M. (2020, April 3). 10 Google Search Statistics you need to know in 2021 [infographic]. Oberlo. https://www.oberlo.com/blog/google-search-statistics.
Poorthuis, C. (2019, December 6). SEO and SEA: What is the difference and what are the advantages of the two? Grid Marketing. https://www.griddigitalmarketing.com/seo-and-sea-what-is-the-difference-and-what-are-the-advantages-of-the-two/.
Randolph, K. (2020, December 28). What is Organic Search in Google Analytics? WebFX. https://www.webfx.com/blog/seo/what-is-organic-search-in-google-analytics/.
Setupad. (2021, April 22). First-Price vs Second-Price Auction | Differences Explained. https://setupad.com/blog/first-price-vs-second-price-auction/.
Sukhraj, R. (2019, November 19). Organic search vs paid search: What’s the difference in 2020? iMPACT.https://www.impactplus.com/blog/organic-search-vs-paid-search.
Tenney, M. (n.d.). What is header bidding? Adthrive. https://www.adthrive.com/what-is-header-bidding/.Tran, T. (2020). A Beginner’s Guide to Using Google Ads (Previously Google Adwords). Hootsuite.https://blog.hootsuite.com/google-ads/.
Hi Shirley,
Thanks for your insightful blog post. I like that you wrote about a topic that is so clearly linked to the materials of the course, which you seem to understand incredibly well. I agree with a lot of the things you mention. But, I think that eventually publishers will adapt their margins to the new model and will not necessarily earn more. As in the second price auction model, they could bid their true value and be sure that they would still make a margin, changing this to a first price auction model would then result in them lowering their bids to still earn some margin. I also read a blog article in which Google already stated they didn’t see a big revenue impact for the publishers. Nevertheless, I do think it was a smart decision of Google to change to this model, as it’s made their service more fair and increased data transparency for publishers and buyers. Though this might not affect Google’s business directly, I feel like this does make their business ‘better’.