Category: Google

The Yield Optimization Dilemma

Yaron Galai1 Comment

Pickpocket_1
With Yahoo recently announcing their intention to join the rest of the civilized world in optimizing their text ads for yield (rather than for bids, which can be fairly meaningless in a PPC world[1]), and with Wall St shaking up a little, it’s a good time to look into an interesting, and generally overlooked, aspect of the yield optimization algorithms used by Google, Yahoo and MSN.

But before jumping into the Yield Optimization Dilemma, a little bit of background:

First came Overture and ranked results by cost-per-click bid. The highest bidder always got 1st place, etc.

Then came Google, and by combination of: a) having to bypass Overture’s patent on CPC-based ranking, and b) figuring out that CPC-ranking can, again, be quite meaningless[1], they introduced a yield-based algorithm for ranking ads.

Yield-based ranking basically means that ads are ranked according to the following formula:

Yield = CPC x CTR

Or in English – The yield of each ad is determined by what the advertiser is bidding (CPC) times the # of clicks users are actually committing on that ad.

The beauty of yield optimization is that it inherently improves the relevancy of the ads shown over time, and therefore is good for the publisher (more $$ money[2] for its screen real estate), good for the advertiser (ads shown where users "vote" them to be relevant), and obviously good for the ad network (again – more money).

On its surface, the yield optimization formula (Yield=CPCxCTR) has the feeling of being ‘scientifically true’, and can therefore always be applied to auction-based ad networks as-is.

But there’s a devious little detail in these formulas that is completely overlooked these days, but could be a major issue in times of recession and diminishing advertising budgets. This factor, which is baked into all the yield optimization algorithms out there, can be summarized as:

The Yield Optimization Dilemma – When optimizing display of ads for potential yield, should it be the publisher’s yield be optimized, or the ad network’s yield?

I know – it’s almost petty to mention this issue these days. Google is flush with ad dollars[2] and with multiple advertisers competing for every conceivable word mutation. With about $1B estimated of unspent ad budget by Google advertisers[3], Google can almost always show the best ad (=highest yielding) on all of its page views, both on owned properties (Google.com, Gmail, etc) and on 3rd parties via the AdSense network.

But if the advertising history has taught us one thing, it’s that the ad market is cyclical and very sensitive to recessions. After every advertising bull run, it is almost guaranteed that a recession will kick in. And when that happens, the first budgets to be slashed are usually the advertising budgets.

When that day comes, and I bet it does[4], this is basically what will happen within the black boxes of Google, Yahoo and MSN millions of times per day:
"We have 1 ad with a remaining budget of $X which is the best yielding ad for keyword Y. That keyword has just been submitted by an AdSense/YPN/MSNwhatever partner, but we predict this keyword will be submitted to our own search engine (Google.com/Yahoo.com/Live.com) 100 times during the remainder of the day. Should we serve Great Ad to the partner site, or keep it for later for our property?"

Remember that every such decision is amplified about 4x by the revenue-share factor (=Google/Yahoo/MSN do not share revenue on clicks on their owned properties and therefore they make about 3-4x more on each click generated on those properties versus clicks on sites within their networks).

In numbers this is how this decision might look on 2 ads, one of which is yielding a $1 eCPM, and the other yielding $1.5 (assuming a rev-share of 70-30 with the publisher[5]):

  1. Do-No-Evil algorithm (or – Good Ad served on partner site) – publisher makes an effective CPM of $1.05, while Google makes an effective CPM of $1.45
  2. Do-Evil-As-Long-As-Nobody-Notices algorithm (or – Good Ad kept for Google properties) – Publisher will drop to a $0.70 eCPM while Google’s eCPM jumps to $1.80

That’s a 25% difference in revenues for the ad networks operating their own properties, all with a simple flick of an algorithm that only they control, and probably only they truly understand.

In times of advertising recession, when this Yield Optimization Dilemma will pop up on servers many many times a day, the decisions made may amount to tens or even hundreds of millions of dollars annually going (or more likely – NOT going) into publishers’ pockets.

Publishers should be aware of this, as it’s part of the cost of doing business when handing ad management over to companies that are big publishers themselves and have a huge financial interest in monetizing their own content before they monetize a partner’s site.

 

[1] I say that CPC-based ranking can be meaningless, because an advertiser can bid $50 per click yet have an ad so irrelevant that no one ever clicks on it, making its overall yield for Yahoo and the publisher a nice round $0 for all the impressions it was shown on.

That $50 ad may be "pushing out" an ad with a 50c bid that’s extremely relevant to the keyword and can get tons of clicks, making it a very high yielding ad.

[2] This one’s for you, Tami…. 😉

[3] As estimated by Goldman Sachs analyst Anthony Noto during Google’s recent analyst day.

[4] Of course Google is much more resilient to such economic downturns, thanks both to it’s large advertiser base (~350K?), and the fact that it is heavily geared towards direct marketers who are much less likely to slash ad spending than brand advertisers. But if I have to place my chips, I will bet that a recession will eventually hit, and even mighty Google will find itself with more content than it can supply ads and budgets for.

[5] This is obviously an extremely simplified example. There are many other parameters in the real world, but the genera idea is basically the same.

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USS Google vs USS Microsoft

Yaron GalaiLeave a comment

Lekiu4
In the navy, the 1st rule of engagement with an enemy ship is to try to hit it with multiple missiles coming from multiple directions. Most naval ships can handle one missile shot at them fairly easily using chaff, electronic warfare or even shooting it down with good old shotguns. But throw at that same ship multiple missiles at about the same time, and it’ll have its crew running around like chickens without heads trying to figure out which threat to handle first.

With each new product Google announces (latest being Google Spreadsheets), I can’t help but think that Google is brilliantly applying naval missile tactics at USS Microsoft.

Microsoft has a long history of easily swatting off single-missile threats as if they were mosquitoes. Ask Netscape, Real Media, Lotus, Novell, etc, etc, etc. Each time such threat surfaced, Microsoft moved massive resources and all of its brightest folks to strike the missile and beat it. 

But Microsoft has no experience in handling multi-missile attacks, which are a completely different ballgame. It’s a fairly easy decision to shift your entire crew to attack Netscape, when the cash-generating cows like Windows and Office are safe and cushy and don’t need much attention. It’s a *completely* different decision to move those same resources onto a new, high-risk and currently-revenue-less adventure (=MSN adCenter) while putting in jeopardy the company’s existing assets.

Google Spreadsheets is obviously not core to Google in any way. I can’t see how in the world it complements their search, and obviously it won’t contribute anything worth mentioning in ad dollars (if they ever integrate ads into it, which I doubt). And being that it’s free, I don’t think anyone in Google’s finance team is assigning anything but losses to this product in the future.

So the only remaining conclusion is that this is just one of a set of missiles[1] aimed at Microsoft, forcing them to spend significant resources on defending their castles rather than attacking Google’s (AdWords + AdSense) full force.

I don’t envy Microsoft in this scenario….

But then again, as I said in this post in more detail, this may just be the 20% pet project of a few Googlers… 😉

[1] The next such missile on its way from Mountain View to Redmond is probably a word processor following Google’s acquisition of Writely. More to come, I’m sure.

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And now to the funnies…

Yaron Galai1 Comment

This morning’s joke is brought to you by Google (via NYTimes):

…The new browser [IE7] includes a search box in the upper-right corner that is typically set up to send users to Microsoft’s MSN search service. Google contends that this puts Microsoft in a position to unfairly grab Web traffic and advertising dollars from its competitors.

…"The market favors open choice for search, and companies should compete for users based on the quality of their search services," said Marissa Mayer, the vice president for search products at Google. "We don’t think it’s right for Microsoft to just set the default to MSN. We believe users should choose."

WTF?! Marissa must be kidding! When I install Firefox on my computer, I get Google as the default browser search box, Google as the default home page and now Google Toolbar as the only embedded toolbar.

Instead of complaining about the MSN search box being embedded into IE7, Marissa should send Microsoft a big bouquet of flowers with a thank you note, saying how much they appreciate MS for sitting on their asses for so many years, not releasing a tiny IE patch adding MSN search by default and in the process letting Google become the biggest internet company in the world.

Google also goes on handing MS some good product advice on how it should design IE (lessons learned, I assume, from the Google’ized Firefox…):

The best way to handle the search box, Google asserts, would be to give users a choice when they first start up Internet Explorer 7. It says that could be done by asking the user to either type in the name of their favorite search engine or choose from a handful of the most popular services, using a simple drop-down menu next to the search box.

So lets clear this one up – Google is suggesting that Microsoft use its last real asset in the search war which it has practically lost (13.2% market share and declining) and hand it away to Google so that it can, in essence, become a monopoly. Lets get real about this – the embedded MSN search box is not going to make MSN the leading search… In MSN’s rosiest dreams it may level the market a little and create a more competitive landscape between the big three engines. So having the market leader (Google) accuse a small and insignificant player (MSN) in exercising monopolistic behavior, is ridiculous and almost outrageous. It seems like Google is being evil here and building upon the bad connotation of the name Microsoft being associated to monopolistic behavior in very different cases.

BTW, Google will probably claim that the fact that MSN is the underdog in search is irrelevant, proof being how it came back from similar market share and killed Netscape. That is bullshit for many reasons[1], but primarily for this one:

A search engine is not a browser in one fundamental way: A browser is
not something you easily swap, and is definitely not something you can
use concurrently with another browser or within another browser. So in essence a browser is
somewhat of a binary thing – you either use this one or that one at any given moment, making it practically a zero sum game[2]. So if one player figured out how to ‘force’ users to use its browser, those users would come directly out of the other’s pool of users.

A search engine on the other hand is traditionally a website accessed via a browser, and that’s how most of the users have come to know it and use it. So even if MS placed 20 MSN search boxes on IE7, users still can, and will, use IE7 to access Google.com via the address bar. This, therefore, is not a zero sum game, and having one player add functionality to a browser does not prevent users from using the other player’s service within that same browser.

If MS were to block the site Google.com from appearing within the browser, or would re-route requests for Google.com back to the MSN search engine, that would be using the browser in an unfair way. Google’s current claims are simply ludicrous.

Before wrapping up this post – Microsoft, playing the side kick in this comic article, added the following punchline:

Microsoft insists it has no intention of deploying its browser as a weapon in the search wars.

Oh yeah. If I’ve ever seen a weapon in the search wars, this is it.

More coverage by Don Dodge

[1] A couple more reasosn why Google aint Netscape and why browsers aint search engines:

  1. Google is generating billions of $’s a year and taking over huge markets (yellow pages, classifieds, news, etc) while Netscape was at the end of the day a fairly wimpy company with close to no revenues. Netscape caused its own demise as much as MS inflicted it upon them.
  2. Firefox is living proof that product quality can be as powerful as product bundling, and Internet Explorer simply became a better product than the stagnant Netscape at some point in the past.
  3. Google is a pretty big bundler on its own right (Google Pack, Google Toolbar + Desktop Search, Firefox + Google Toolbar, etc, etc) so it seems like bundling is a game Google is fairly content with as it relates to its own business…

[2] Sure – you can have more than one browser installed and used on a computer, but a) extremely few people actually use more than one browser, and b) you cannot use 2 browsers concurrently (in the real time sense of it). It’s either-or at any given moment.

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