In recent years, Alphabet Inc.'s Google has made substantial changes to its ad auction model, which have had a significant impact on the market. Everything started around 2017, and the changes are, until now, having repercussions even on the pricing of Google's ad auctions. Read on to know more.
Google's Auction Restructuring
In 2017, Google made significant alterations to its ad auction formula, and, according to a US Justice Department-backed economist, Michael Whinston, an economics professor at the Massachusetts Institute of Technology, they all came through "Project Momiji", a project named after the Japanese dolls that contain hidden compartments for sharing secret messages which the primary goal was to increase prices against the top bidder.
Whinston says that the changes led to a 15% price hike. And this price surge has likely resulted in billions of dollars in additional revenue for the tech giant!
Now, Google's ad auctions operate on a unique premise: the winner only pays a cent more than the second-highest bidder.
The Auction Process And Google's Monopoly
In 2016, it was found that the second-highest bid on ad auctions was typically 80% of the winning bid. Google's goal was to close this 20% gap. To achieve this, Google provided the runner-up with a built-in advantage, increasing their offer. This fact was revealed through internal emails and confidential testimony by Google finance executive Jerry Dischler.
Despite appearing as doing a competitive auction, Google is in control and sets the rules that demonstrate the company's monopoly on online advertising. The Justice Department has accused this giant of technology of unlawfully sustaining an online search monopoly by paying outsized sums to web browsers and smartphone manufacturers, making its search the default option for users.
But Let's Talk About Money
Anyway, over 60% of Google's revenue comes from search ads, and this revenue amounts to over $ 100 billion in 2020 alone. The company has consistently seen its search ad revenue growth in the "high teens" since 2012.
According to the testimony of Jerry Dischler, Google periodically tweaks its ad auctions to meet revenue targets. One such modification known as "squashing" is aimed at making the second-highest bid more competitive. And FYI: this strategy – combined with charging more for longer ads – may increase the company's revenues by 15%.
For now, what is clear is that the changes in the ad auction system as part of Google's strategic maneuvers have significantly impacted the market, leading to a surge in prices and potential billions in extra revenue for the tech giant.