The New York Times
October 30, 2005
IN many ways, Larry Page and Sergey Brin seem an
unlikely pair to lead an advertising revolution. As
Stanford graduate students sketching out the idea that became Google, the two software engineers sniffed in an academic
paper that "advertising-funded search engines will inherently be biased
toward the advertisers and away from the needs of consumers."
They softened that line a bit by the time they got around to pitching their
business to venture capitalists, allowing that selling ads would be a handy
safety net if their other, less distasteful ideas for generating revenue didn't
pan out.
Google soared in popularity in its first years but had no meaningful revenue
until the founders reluctantly fell on that safety net and started selling ads. Even then, they approached advertising with the mind-set
of engineers: Ads would look more like fortune cookies than anything Madison
Avenue would come up with.
As it turned out, the safety net was a trampoline. Those
little ads - 12 word snippets of text, linked to topics that users are actually
interested in - have turned Google into one of the biggest advertising vehicles
the world has ever seen. This year, Google will sell
$6.1 billion in ads, nearly double what it sold last year, according to Anthony
Noto, an analyst at Goldman Sachs. That is more
advertising than is sold by any newspaper chain, magazine publisher or
television network. By next year, Mr. Noto said, he expects Google to have advertising revenue of
$9.5 billion. That would place it fourth among
American media companies in total ad sales after Viacom, the News Corporation and the Walt Disney Company, but ahead of giants
including NBC Universal and Time Warner.
Not content to just suck advertising dollars from Web search, Google is
using its windfall to pay for an eclectic range of ambitious projects that have
the potential to radically disrupt other industries. Among
other things, it is offering to build a free wireless Internet network in
More quietly, Google is also preparing to disrupt the advertising business
itself, by replacing creative salesmanship with cold number-crunching. Its premise so far is that advertising is most effective
when seen only by people who are interested in what's for sale, based on what
they are searching for or reading about on the Web. Because
Google's ad-buying clients pay for ads only when users click on them, they can
precisely measure their effectiveness - and are willing to pay more for ads
that really sell their products.
HIDDEN behind its simple white pages, Google has already created what it
says is one of the most sophisticated artificial intelligence systems ever
built. In a fraction of a second, it can evaluate
millions of variables about its users and advertisers,
correlate them with its potential database of billions of ads and deliver the
message to which each user is most likely to respond.
Because of this technology, users click ads 50 percent to 100 percent more
often on Google than they do on Yahoo, Mr. Noto estimates, and that
is a powerful driver of Google's growth and profits. "Because
the ads are more relevant," he said, "they create a better return for
advertisers, which causes them to spend more money, which gives Google better
margins." (Yahoo is working on its own technology
to narrow that gap.)
Google already sells its text ads for many other sites on the Internet
(including nytimes.com), and is
also moving tentatively to sell the picture-based interactive advertising
preferred by marketers who want to promote brands rather than immediately sell
products. Now it is preparing to extend its technology
to nearly every other medium, most significantly television. It
is looking toward a world of digital cable boxes and Internet-delivered television
that will allow it to show commercials tailored for each viewer, as it does now
for each Web page it displays.
Eric E. Schmidt, Google's chief executive, explains the company's astounding
success in advertising - and reconciles it with the founders' distrust of
hucksterism - by suggesting that advertising should be interesting, relevant
and useful to users. "Improving ad quality
improves Google's revenue," he said in an interview at the company's
headquarters, known as the Googleplex. "If we target the right ad to the right person at the
right time and they click it, we win."
This proposition, he continued, is applicable to other media. "If we can figure out a way to improve the quality of
ads on television with ads that have real value for end-users, we should do
it," he said. While he is watching television,
for example, "Why do I see women's clothing ads?" he said. "Why don't I see just men's clothing ads?"
The media and advertising industries certainly see a future in which
television ads are aimed at individual viewers. But
few outside of the engineering Ph.D.'s at Google think that television ads
should simply be utilitarian, rather than entertaining, provocative or
annoyingly repetitive - the models that have worked so far. And
some media industry executives wonder whether Google, which has already become
the most powerful force in Internet advertising, should also become the
clearinghouse for ads of all types - a kind of advertising Nasdaq.
"For all of us to throw all our eggs in the Google basket is dangerous,
because no one should have that much power," said Jeff Jarvis, a veteran
magazine editor who publishes BuzzMachine, a blog
about the media, and is a consultant for About.com, a division of The New York
Times Company. He added that if Google were to expand
its ad sales to other media outlets, prices would fall. "Google
commoditizes everything," he said.
There is no better example of that than Google Base, a service that allows
users to post all sorts of information free, including classified ads, he said. Newspapers, which increasingly use Google to sell ads on
their own Web pages, will see Google Base as a "frontal assault" on
their lucrative classified-ad business, and they will say, "I can't trust
Google," Mr. Jarvis said.
Mr. Brin said that preliminary versions of Google
Base leaked onto the Internet and that the company's partners should not fear
it. "Google Base is as much about classified as
it is about zoology," he said.
Larry Page and Sergey Brin were exceedingly
ambitious from the day they started Google, but the job of finding some source
of revenue fell to Omid Kordestani,
an amiable former Netscape sales executive who was brought to the company in
1999 by K. Ram Shriram, another Netscape alumnus and
an early Google investor. Mr. Kordestani
explored a range of ideas, including charging users for searches as well as
selling Google's technology to corporations or to other Web sites - notably
Yahoo - that were less shy about selling ads.
Eventually, in 2000, Google started to sell ads on its own site, but they
were only a few lines of text placed above the search results.
There were no graphics and no banners. At
first, these ads - and later, a second form of text advertisement that ran down
the right side of the page - were sold at fixed prices. But
such an approach would not last long.
In early 2002, a Google employee, Salar Kamangar, now 28, convinced Mr. Schmidt and the founders to
switch to an auction-based system like the one set up by Bill Gross, the head
of IdeaLab. Mr. Gross had
created Goto.com, a search engine made up entirely of ads, where advertisers
paid only if their ad was clicked on, and the advertiser who bid the most per
click was listed first. (Goto
was later renamed Overture Services and then bought by Yahoo, an early Google
backer that has become its fiercest rival.)
Mr. Kamangar, though, had an important improvement
on the model. Rather than giving priority to the
advertisers that bid the most per click, as Goto did,
he realized that it was better to save the front of the line for ads that
brought in the most money - a combination of the bid and the number of clicks
on the ad. This was not only more profitable, but it
also linked readers to ads that were more relevant to them. He
also figured out that the system should use what is called a Vickrey auction - that is, to charge the winner only one
cent more than the second-highest bidder. That gives
advertisers an incentive to bid high, knowing that they will not be penalized
if they are far higher than the rest of the market.
Mr. Page and Mr. Brin were suspicious of any
system that put high-bidding advertisers at the top, Mr. Kamangar
said. "They thought if someone was willing to pay
more it was a negative," he recalled. But he was
able to convince them that the site could be improved by incorporating how
often users clicked on an ad.
Mr. Schmidt, who was still new as chief executive, was worried more that
moving to an entirely auction-based system - amid a recession in online
advertising - could be financially disastrous. "I
said to Salar, 'Promise me the revenue won't go
down,' " Mr. Schmidt said. "I was afraid
people would realize these ads were worthless." In
fact, revenue quickly increased tenfold.
As Google's audience took off, advertisers came running - many thousands of
smaller ones at first, but soon large companies as well. Among
Google's largest advertisers is eBay, which has long bought keywords for nearly every sort of
merchandise it sells.
"The smartest thing that Google did was getting smaller advertisers to
buy in," said Ellen Siminoff, the chief
executive of Efficient Frontier, an agency that helps advertisers manage their
campaigns on search engines. She estimates that Google
has two to three times as many advertisers as Yahoo does, largely because Yahoo
has a 10-cent minimum bid. This lets Google earn money
on more obscure search terms for which rivals have no ads.
This growing advertising business gave Google the confidence to expand its
audience. Most significantly, in 2002, America Online
brought in Google to replace Overture, which provided both search and search
ads; that deal enshrined Google as the premier search engine and ad network. Google won the deal by guaranteeing AOL a substantial sum,
which it would not disclose. Google was willing to
make that bid only because of its confidence in its advertising sales prowess. "If we were wrong," Mr. Kordestani
said, "there were some scenarios that would bankrupt the company."
But by that point, Google had figured out that the same sort of computing
and engineering skill that it used to find Web pages could also be used to
improve the quality and, ultimately, the profitability of advertising. "Initially, we didn't understand how fundamental the
computer science was in advertising," Mr. Schmidt said. "We
didn't have enough staffing or focus on this area. I
managed to fix that."
GOOGLE introduced its current system for determining which ad to show on
which page late last year. It is a wonder of
technology that rivals its search engine in complexity. For
every page that Google shows, more than 100 computers evaluate more than a
million variables to choose the advertisements in its database to display - and
they do it in milliseconds. The computers look at the
amount bid and the budget of the advertiser, but they also consider the user -
such as his or her location, which they try to infer by analyzing the user's
Internet connections - as well as the time of day and myriad other factors
Google has tracked and analyzed from its experience with advertisements.
"If someone is coming from a particular location, a certain ad may be
more popular there," explained Jeff Huber, Google's vice president for
engineering. "The system can use all the signals
available, and the system itself learns the correlations between them."
This technology is both amazing and potentially frightening. Google already collects and keeps vast amount of data
about what Web pages and advertisements each of its users click on, and it can
evaluate that history - and compare it with that of hundreds of millions of
other users - to select the ad shown on each page. For
now, Google says it identifies users only by a number in a cookie it places on
each computer that uses Google. It says it has not
connected the vast dossier of interests and behavior to specific users by name. But that could change as Google offers more personal
services - like e-mail messages and social networking - and works more tightly
with partners who already have such personal information.
Lauren Weinstein, the founder of the Privacy Forum, said the data that
Google collects creates troubling privacy issues, especially because it
declines to say what data it keeps or for how long. "If
you start to target people based on a corpus of data, it can be abused in
various ways internally and externally by organizations and government
agencies," he said. Government investigators and
lawyers in civil suits regularly get court orders to force Internet companies
to reveal e-mail messages and other personal information about users.
Google recently rewrote its privacy policy to make it easier to understand
what data it collects, but it did not scale back its data retention. Nor did it, as Mr. Weinstein and others have demanded, give users the right to see the data collected
about them and their computers.
For now, the only personal information Google says it considers is the
user's location, which allows it to display ads for local merchants. It is starting to encourage other Web sites to send it the
ZIP codes of their registered users so Google can display ads relevant to their
location.
Mr. Brin said he was not sure what other information
about users might prove useful, but he said Google would not use the data
inappropriately. "I don't think it's a big deal
to show opera glasses to someone searching for binoculars that you somehow
infer is a woman," he said. "But you don't
want to pop up ads for H.I.V. drugs on someone's page, because you inferred
they have H.I.V., when their boss is standing there looking at their
computer."
To be sure, other Web sites are far more aggressive in using personal
information. Yahoo will let marketers display ads to
users based on demographic information the users provide as well as the users'
surfing and searching history. Microsoft's new system for MSN explicitly allows
advertisers to bid different prices for clicks from users of different ages, sexes and locations.
In addition to selling ads on its own site and on other sites that use its
search technology, Google also places text ads on all manner of sites published
both by professional media companies and by amateurs. Mr.
Brin created this program in early 2003 after he
became worried that the Internet crash would keep people from creating
interesting Web pages for Google to index. This
technology, called AdSense for Content, has made
advertising on Google more attractive and provided the
economic foundation for the rise of blogs.
"God bless Google," said Mr. Jarvis, the BuzzMachine
blogger. "They took the
cooties off citizen media." Until Google's
program came along, advertisers shied away from placing ads on individual
user's pages. But AdSense
analyzed each page and tried - not always successfully - to find ads related to
the page's content.
Now Google is looking to expand its advertising into even more places. It is testing a plan to buy pages in magazines on which to
place text ads. And it also shows ads as users browse
its new book search service. "A lot of the
world's content is not accessible today and thus it is not easily monetizable today," Mr. Kordestani
said. "We will figure out how to get more and
more content and find the right way to put ads on it."
Advertisers, meanwhile, have had to scramble to adapt to this completely
different approach to buying ads. They needed to find
ways to keep track of bids on thousands of keywords, and to measure which ads,
tied to which keywords, produced which sales - and then to figure out if they
had bid the right amount for the ad.
Many advertisers and their agencies have a powerful love-hate relationship
with Google. They find it a meaningful source of leads
and sales, and the effectiveness of Google's ads is much easier to measure than
that of traditional media. But Google has sometimes
been hard to deal with. There is a growing sense that
a significant number of clicks that advertisers pay for are fraudulent - made
by competitors trying to deplete advertising budgets or by Web sites trying to
bolster the revenue they get for displaying the ads. Google
says it has technology to minimize what is called click fraud, but many people
in the Internet business are skeptical that the incidence of fraud is as low as
Google contends.
Here, as in other places, many advertisers criticize Google for being like a
black box, because the company gives them less specific information and control
than they would like. Until recently, for example,
advertisers could not specify where their ads ran, though they were convinced
that some Web sites in Google's network were much more likely than others to
send them customers. Google responded with what it
calls "smart pricing" technology that discounts certain ads if
Google's analysis shows that they are seen on sites it determines are less
likely to produce paying customers. But Google
discloses little about how this works, and advertisers
find it frustrating.
"Google is very opaque and bizarre to deal with," said Joshua Stylman, a managing partner at Reprise Media, a search
advertising agency, but he added that Google had become somewhat more
responsive in recent months.
Mr. Schmidt addresses those complaints by saying that advertisers are
missing the point of Google's new model. It shouldn't
matter what Google does with their ads, he argues, so long as the received
value, which advertisers can measure, is higher than the price they pay. The entire discipline of media planning, which has long
been important on Madison Avenue, may be rendered obsolete - just as Google's
fully automated news Web site threatens the livelihoods of human news editors.
In any case, there is little doubt that Mr. Schmidt believes that science
will replace much of the art of marketing. "I
have this fantasy that goes like this," he said at one point. "You are the C.E.O. of a large company, and I come to
you and say, 'Give me $1 million and give me your Web site, and we will
guarantee you will get $100 million in sales.' Which
C.E.O. would turn that down?"
Google isn't quite pursuing that sort of deal, but it is trying to have big
retailers link their inventory systems directly to its advertising auction. That way, a toy store chain, for example, could respond to
a search for dolls with an ad for either Barbies or Bratz, depending on which were overstocked in the store
near the user's home. "Most retailers only
advertise 5 percent of their products," said Tim Armstrong, Google's vice
president for ad sales. "We can let them
advertise all of them."
ON the other end of the spectrum, Google is also trying to focus on what the
Internet market calls branding advertising - the sort that dominates television
and magazines and creates awareness of a product, but doesn't directly call on
viewers to buy right away. Yahoo, AOL and MSN have all
evolved the simple rectangular banner ad into much more elaborate units with
animation, interactivity and sometimes video formats that have been embraced by
national advertisers.
Google has been able to convince some companies that its text ads can help
build awareness of their products, even if people don't click on them to buy
something. But top executives are also meeting weekly
to develop a broader strategy for branding advertisements. Google
has already allowed its so-called publisher network - those non-Google sites
for which it sells ads - to accept advertising with limited graphics. At first, these were simple images, perhaps with a little
animation. It is now moving to accept ads that use the
popular Flash technology that allows for more interactivity. So
far, these nontext ads have been only a tiny part of
Google's business.
Indeed, such ads shine a spotlight on the mental compromise that Mr. Brin and Mr. Page made when they overcame their initial
objections to advertising on their service. Text ads,
they argued, were not the normal fluff of Madison Avenue, but actual
information that was useful to searchers.
"Advertising was not a business built by logic, and we don't work by
algorithm," said Wenda Harris Millard, Yahoo's
chief sales officer. "Yes, we need to be more
accountable, but that doesn't mean you sacrifice art and creativity."
Mr. Schmidt acknowledges that as Google explores moving into television, it
may well face a conflict between its core belief that advertising must be
useful and the typical television commercial that is "based on feeling and
emotion."
"Our model is likely to affect television last," he said, while
expressing optimism that a formula for useful, targeted commercials could be
found. For now, he quickly added, the market for
various forms of direct marketing is three times larger than that for
television ads. "I was shocked by this," he
said. "All of us are so conditioned to television
as the height of advertising.
"We are in the really boring part of the business," Mr. Schmidt
concluded, "the boring big business."