Tuesday, May 22, 2007

Killing AdSense

Nick Carr argues that "Google ... is vulnerable to a pricing attack on its AdSense service" and that Yahoo or Microsoft should "introduce a free version of AdSense":
Immediately, you put a lot of pricing pressure on an important source of revenues and profits for Google.

Turning the delivery of contextual ads into a free service for publishers would put Google under financial pressure ... but it wouldn't cause any harm, of a material nature, to Microsoft.

Turning the AdSense market into a free market would help neutralize that edge and generally redefine the competitive dynamic to Microsoft's benefit.
Rather than trying to play the advertising game, Microsoft could seek to end the game. It could seek to eliminate the high margins advertising brokers, like Google, currently enjoy.

No surprise that I agree with Nick on this one given that I have made similar arguments in the past. Back in Dec 2005, I wrote "Kill Google, Vol. 2", where I said:
AdSense revenues -- revenues from ads placed on other sites -- may be particularly vulnerable to attack. This was 43% of Google's revenue in Q3 2005. With these ads, the owner of the site gets roughly 70% of the revenue from the ad. Google takes the other 30%.

It seems like Microsoft could do a fair amount of damage here by trying to drive the share the advertising engine takes in this deal to near zero. To do that, it just needs to launch its own AdSense-like product and be willing to set its take to its breakeven point.
A few months later, I wrote "Kill Google, Vol. 3", where I said:
If I want to beat Google? I would throw everything I have got at an AdSense killer.

AdSense is now about half of Google's revenue and their future growth. Microsoft should strangle Google's air supply, their revenue stream.

Microsoft should use its cash reserves to make being an advertising provider unprofitable for others, lowering ad broker revenue share to near 0%.

Microsoft should ruin AdSense, undermine it, destroy it. There should be no business in AdSense-like products for anyone.

If Microsoft wants to win, it should play to its strengths. It should not seek to change the game. It should seek to end the game.
Of course, since Microsoft just spent $6B to try to compete in the advertising market, killing the market may be less attractive that it was in the past. Too bad. It might have been a good way to save $6B.

6 comments:

Mr Juggles said...

These are weak arguments. They fail to understand that:
1) most estimate that Google monetizes inventory at a level 30-50% higher than MSN or Yahoo
2) Google pays out ~80% of its partner revenue to publishers.

Those two facts mean that even if MSN pays out 110% of the revenue (i.e., they subsidize the network and lose money) it receives from an AdSense competitor network, the publishers will still be receiving less money than they would if they stuck with Google.

Unless MSN or Yahoo can get their monetization to a level similar to Google's, they won't be able to hurt them.

Joe Laz said...

Interesting idea, but given that Google monetizes text ads much more effectively than Microsoft does, it's possible that the publisher will make more off of 70% of Google than they will from 100% of Microsoft, no? To win with this strategy, Microsoft may need to give the publisher more than 100% of the ad revenue.

Greg Linden said...

It's a good point, Mr. Juggles.

But, if Microsoft, Yahoo, and other competitors really have returns that much lower than Google, they could not survive anyway in the advertising market, free or not.

If they really have performance that miserable and can do nothing to improve it, they might as well give up now.

Rocky Agrawal said...

Back in the day (1999), I did an analysis on an "eBay killer". Given the higher liquidity on eBay, even if we paid all of our sellers to list on our auction site, they would still have been better off listing on eBay. (Higher likelihood of sale, and a better net price.)

These kind of network effects are hard to overcome.

Advertisers (like eBay sellers) go where the eyeballs are. I see many advertisers on the Google platform that don't bother with Yahoo! and MSN.

Matt said...

Having just done a test with Adsense vs YPN I think there is a stark difference in how well they monetize, and even paying out 200% Yahoo would still be short.

Seun Osewa said...

Business is not about "killing" your competitors. It's about serving your customers better than your competitors. Microsoft should forget about "killing" Google and think about how to make advertisers, publishers and Windows/Office users happier.

Yes, this is obvious, but people tend to forget. Business is not war, it's not all about "killing" or "destroying" your opponents.