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What GMail Taught Me About Competition, and Why it Makes Me Worry About AdWords

Published: April 13, 2008

Author: David Rodnitzky

I have a clear recollection of the day I heard about GMail. I was sitting in my office at FindLaw in 2004 when someone sent me an email announcing the GMail launch and the limited number of beta test invites available to the general public. For the next week, I set out on a mission to contact every friend at Google I had until I had secured an invitation. Once accepted, I tried to secure “david@gmail.com” or even “davidr@gmail.com” but these were already gone. Still, I did OK and I felt cool for having an early invite.

At the time, I didn’t think that GMail would ever replace my Yahoo Mail account as my de facto email address. In fact, initially the whole concept of “dynamic tagging” of messages confused and annoyed me (I like to call it “quantum tagging” because the same message can exist in two or more folders at the same time). Over time, however, GMail grew on me. I began to like the interface better, I liked the free POP forwarding, and the huge and free storage size was a big win over Yahoo’s then measly 6MB of storage.

During the same time that GMail was launching, Yahoo was raising prices on Yahoo Mail. If I remember correctly, to get 25MB, you had to pay $20/yr, and for more storage, it was something like $50 a year. And the free version didn’t allow POP forwarding, and hadn’t really been updated for years (and the SPAM filter was pretty bad to boot).

As GMail’s popularity began to grow, the folks at Yahoo Mail slowly realized that their “pay for less” servic” was no match for Google’s “get it all for free” competitor. In a matter of months, Yahoo significantly increased their storage size, improve their SPAM filtering, and set in motion a new look and feel for Yahoo Mail that was basically a direct copy of Microsoft’s Outlook program.

For me at any rate, Yahoo’s response to GMail came too late. By the time Yahoo had matched most of Google’s features, I had migrated most of my email traffic over to GMail. Indeed, although GMail has only been around for four years, the service now boasts 51 million subscribers, compared to Yahoo Mail’s 250 million. So yes, Yahoo is still in the lead, but I suspect that many of those 50 million users on GMail are former Yahoo users like me. And when you consider the fact that Yahoo had to reduce or eliminate their pricing for most users as a response to GMail, it’s clear that GMail has had a majorly negative impact on Yahoo Mail.

The story of an upstart entering a market and forcing its established competitors to improve services and reduce prices is nothing new. Indeed, books like The Innovators’ Dilemma can spout case study after case study on the concept of “disruptive technology“. From a legal perspective, this is one of the primary arguments in favor of antitrust legislation. Let’s face it, companies with huge market share (whether to the point of an actual monopoly or not), don’t have much incentive to innovate, be customer-friendly, or be competitive on pricing.

All of this leads me back to AdWords. AdWords is probably not a monopoly from a legal perspective. Unlike something like oil, water, or an operating system, businesses and consumers aren’t forced to use search engine marketing to survive. And there are strong competitors already, such as Yahoo, MSN, and Ask. But even with these competitors, it’s worth considering whether Google really had an incentive to make AdWords better for it’s clients.

But I would argue that Google is not doing as much as it could for its clients because it doesn’t have to. A few examples demonstrate this point.

1. The broadening broad match algorithm. Over the last few years, the “long tail” has become harder and harder to find on Google, mostly due to Google’s expansion of their broad match algorithm. This reduces the opportunity for advertisers to find bargain keywords with few bidders, it reduces overall ad relevancy for searchers, and it of course increases the cost per click for these keywords. The result is bad for advertisers and bad for consumers but good for Google. If Google had major competition like GMail versus Yahoo Mail, I doubt the broad match algorithm would have expanded so quickly and massively.

2. Hiding the negative keyword feature. Google does a lot of UI testing. A recent change to the UI that made it more difficult to find the negative keyword feature seems like a change that could only result in more revenue to Google (as a result of less negative keywords and thus more advertisers showing up on more queries). Again, a benefit to Google, but not to consumers or advertisers.

3. Arbitrary price minimums. Advertising on Google is no longer truly a free auction. Google sets the minimum bid, determines who can bid in what auction (see point #1 above), and in many cases bans advertisers they don’t want in the auction entirely (see point #4 below). Many advertisers complain of having to pay huge minimum CPCs – for their own trademarked keywords! But Google has the traffic they want, so they pay it rather than let their competitors buy those clicks instead. There’s no recourse against price minimums. If Google had more competition, you wonder whether the pendulum would shift and advertisers would move their budgets (perhaps even out of protest) to competitive sites.

4. Selective Persecution of Quality Score. Jay Weintraub recently wrote a compelling and heart-felt post about a friend of his who suddenly saw his entire AdWords campaign shut down – not because of any violation he had committed, but because he was associated with anoth
er advertiser who had committed some wrong-doing in Google’s eyes
. As Jay recounts in his post:

The arrogance, lack of information, and unwillingness to help by Google employees who find themselves in the position of power and more frustratingly the almost unquestioning trust in their system’s correctness in dispensing sentencing. Without a doubt, you are presumed Guilty, but you will not be allowed to prove your innocence.

Google can shut people down at will because they know that there is nowhere else for these people to advertise. It’s somewhat ironic, but Google can “act badly” because they are “so good” at delivering great traffic. Still, in five minutes I am can find you ten examples of ads showing up on Google that are clear violations of Quality Score. Type in “nursing degree” and check out how many times a single advertiser is showing up on the same query (not just double serving, but quadruple serving). Or take a look at the number of advertisers showing up on the keyword “free ipod.”

Why do some people get banned for linking to bad neighborhoods while others openly flaunt the rules for months on end with no consequences. As Jay notes, when you advertise on Google, you play by Google’s rules, and not all the rules are explained to you in the first place!

5. AdSense improvement. A few years ago AdSense was horrible. Most savvy advertisers avoided it like the bubonic plague. At some point last year, however, it suddenly became much, much better. Indeed (as I will be discussing in greater detail in the next print edition of Search Marketing Standard) some people now believe that the Content network in many cases is better than AdWords itself!

Why did AdSense improve? Was it altruism on the part of Google’s product managers? Of course not. It improved because several smart competitors started to take away market share from Google through their innovation. In particular, competitors like Quigo AdSonar, IndustryBrains, and Kanoodle provided better targeting, more transparency, and an overall better value proposition for both advertisers and publishers.

As big publishers (ESPN.com, BankRate.com, SFGate, etc) started to leave AdSense, AdSense was forced to change for the better. Today AdSense is finally useful for both publishers and advertisers.

Conclusion: Waiting for a GMail alternative to AdWords

Companies with dominant market share don’t change unless they have to. Why rock the boat when the money is pouring in? Yahoo Mail was a product that Yahoo executives clearly thought was a mature market-leader – one which could only grow revenue by charging customers more and more for usage. AdWords is now in the same situation. Having captured something like 60% of the search market, I’m sure that Google executives spend most of their time thinking about how to increase monetization per search, rather than increasing performance for advertisers.

That mindset – as with the mindset of Yahoo Mail managers – will only change once a GMail-like competitor comes along to challenge Google’s dominance. Just as Quigo and Industry Brains forced AdSense to revamp their platform, AdWords needs their “Avis” (“we try harder“) to stimulate improvement. Until then, we search engine marketers have no choice but to accept our daily bread from Google and wait for the day when we do have a choice.

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