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  • The Google Squeeze: How Google’s Black Box Affects Partners’ Revenue

    1. BY - Jan 15, 2009
    2. Domain Parking
    3. 15 Comments

    Google’s black box of ad pricing makes it impossible to understand if partners are getting a fair share.

    When Google (NASDAQ: GOOG) offered a “direct to consumer” domain parking option last month, many cheered. “Finally, we can cut out the middleman!” they exclaimed. But others worried about potential downsides. Specifically, domain owners realized that they have little bargaining power with Google compared to parking companies that aggregate significant traffic.

    Google’s Domain Parking Agreements

    To better understand how Google can squeeze its partners, it’s important to understand the deals Google has in place with partners such as DomainSponsor, NameMedia, and Sedo.

    These contracts are confidential. But thanks to NameMedia’s (since aborted) attempt to go public, we can peek inside a Google Adsense contract. Here are some things to note:

    1. There are three types of feeds: Adsense for Content, Adsense for Domains, and Adsense for Search. Adsense for Search is the search feed from Google. This ad feed can be called anytime someone types a search query into a box on a parked page. It is also called if someone clicks on a link on a parked page labeled “Related Searches”. I’m still unclear as to the difference in ads shown on Content and Domains, but these ads can be shown on the landing page of a parked page or on additional pages. If you have a one-click lander with Google, all of the ads on the home page are from the content or domains feed.

    2. Parking companies get a higher revenue share if they send more traffic. The NameMedia agreement has three tiers, which presumably pays a higher percentage of revenue to NameMedia if it sends a greater amount of revenue to Google. (Note that it is based on revenue amount, not traffic amount.)

    You may be thinking “Great! The parking companies have negotiated certain revenue share percentages with Google that cannot be changed. We’re locked in.” Well, sort of.

    First, this is one of the main concerns with going direct to Google parking and cutting out the middle man. You won’t have a guaranteed percentage, so Google can squeeze you whenever it needs to boost earnings.

    Second, just because the percentage payout to the parking companies can’t change during the contract period doesn’t mean the actual amount paid out can’t change, as I’ll explain below.

    An Elusive Revenue Share

    Let’s consider how percentages mean very little in these agreements, and why Google may have an incentive to collect less per click on the parking pages even if it means Google in turn earns less per click.

    In order to understand this you need to consider Google Adwords, the program that supplies ads to Google Adsense. Google Adwords Advertisers generally bid a maximum amount per keyword. But they also set a budget. For example, I may say “Bid $1 per click for these keywords, but I don’t want to spend more than $1,000 a day”.

    At first it seems Google will want clicks on all pages — whether part of the Google.com or Adsense sites — to be close to the maximum price. But Google’s margin is much higher on Google.com because it doesn’t have to pay partners. So it has an incentive to have more of the ad budget spent on Google.com than at partners.

    For example, assume an advertiser has a $1,000 budget and it is maxed out every day. Google could send half of the traffic from Google.com and half from the AdSense network at $1 a click. Here’s how much Google will make, assuming the partner has a 75% revenue share:

    500 clicks on Adsense x $1/click x 25% = $125
    500 clicks on Google.com x $1/click = $500
    Total = $625 profit

    Now, what if Google discounts the clicks on Adsense 50%, arguing they aren’t worth as much as those on Google.com? The advertiser still wants to spend $1,000 a day. So the rest of the traffic goes to Google.

    500 clicks on Adsense x $.50/click x 25% = $62.50
    750 clicks on Google.com x $1/click = $750
    Total = $812.50 profit

    As you can see, Google needs to merely shift the budget toward its own properties to earn more money. The advertiser gets more clicks, too. Google can pay the same percentage to parking companies but pay less per click, while at the same time making more money for itself.

    Note that this is against Google’s stated goal of offering the best deal to the advertiser. If both Google.com and Adsense convert at the same rate, the second option gives the advertiser more conversions. But a third option of all Adsense traffic would be the best for the advertiser, but the worst for Google: it would only earn $250.

    Is Google squeezing us already?

    A lot of people cite Google’s Traffic Acquisition Costs (TAC) metric to show that advertisers are getting less. But the metric says very little about partner payouts. Here’s a graph of TAC updated in Q3 2008:


    Above: a graphic that means a lot to investors but little to partners.

    The blue line represents Google’s expense for traffic as a percentage of advertising revenue. The green bars primarily represent the amount paid out to traffic partners.

    Many people point to this falling percentage — 37.2% in Q1’05 and 27.9% in Q3’08 — to show that Google is paying its partners less. But this number means very little, because we don’t know what percentage of traffic is generated on Google.com versus Adsense sites. In fact, you can see that Google is actually paying more to partners now than before. But again, without knowing the actual traffic amount we know very little.

    Indeed, revenue on Google.com and other Google properties increased 34% in Q3’08 compared to one year earlier. Revenue on Adsense increased only 15%. But this is revenue, not traffic, so we still don’t have much insight into if Google is paying more or less to its partners. It’s a black box, and only Google knows what’s inside.

    A Ticking Time Bomb
    There’s one other thing that could drop parking partners’ shares of revenue overnight faster than a gradual squeeze.

    In the NameMedia agreement (and I’m told the same goes for other agreements) Google retains the right to eliminate the search ad feed. Search ads generally pay more than content ads. So overnight, domain owners could see a massive drop in revenue. Google is required to provide a replacement feed to NameMedia if it removes the search feed. If the replacement feed doesn’t perform within x% of the search feed, NameMedia has one recourse: cancel its agreement with Google.

    Canceling the agreement doesn’t seem like a good alternative.

    Should we bite the hand that feeds us?

    For all of the complaining about Google, keep in mind that without Google the domain industry would be a shadow of what it currently is. Google’s ad network has propelled the parking industry to where it is today. Should we not complain about Google’s market power? Should we be thankful for what it has given us and not question its motives?

    It’s a tough question. We know our parking revenue is dropping, but is it because Google is squeezing us? Because it’s a black box, partners’ relationships with Google are based on trust. And Google has been losing a lot of trust. Notifying parking partners of a drastic change in competitive strategy just a day or two in advance doesn’t build trust.

    It’s good to question authority. Which is why we shouldn’t all run out and thank goodness that Google is cutting out the middleman.

15 Comments
  • GREAT summary on the whole situation. I am pretty much out of parking and into development now. The days of park, get revenue and sell the domain at X times annual revenue are over. Revenue is down and sales are selective.

    I develop one site per category then point the related domains to that one site. Use adsense, related affiliates and try for direct advertisers.

    Fact is that we have to work harder to make less. In the offline world we will have to spend more to get less.

    That is how I see 2009.

  • Sahar Sarid says:

    January 15, 2009 at 4:08 pm

    Great summary indeed, Good to see DNW is becoming a leading force in the domain industry. Businesses tend to push as far as they can and Google is no exception. The balance of powers will change only when domain owners find and utilize alternatives, in reality, telling Google what they offer is not good enough anymore. Until that day domain owners are at the mercy of the big G.

    The ultimate solution to all business pressure is the creation of alternatives. For those who are interested in the concept, look up “BATNA”.

    Keep up the good work!

    Sahar

  • Great post.

    In actuality, there is still a ‘middle man’, Google. Albeit a very powerful, influential and necessary middle man without which the domain industry would not be where it is today. On the other hand, I think your line of questioning is very important. Keep them honest, or, as honest as possible given the circumstances. As for the ‘Do No Evil’ motto, I question its validity in times like these.

    Thanks again for the interesting article.

  • Excellent analysis.

    I was not excited about Google’s new entrapment. I experienced a similar situation in a different industry which put all of the small and mid size companies out of business.

    Domainers need to do what Rob described above.

    And, we hope Yahoo and MS remain in the category.

    That will only get us thru the next 12 months.

    We need to figure out where we need to be 3 to 5 yrs from now.

  • Andrew, that is a nice write up.

    I’ve been saying this for years and people don’t believe it….

    “one day you will wake up, with no google to monetize your domain traffic and your parking company will be powered by a third tier ppc feed paying approx 10-20x less than what you used to”

    Get it through your head folks.. Google does not wanna be buddy buddy with you — they are sharks and have taken the industry for a ride. Each year it gets worth.

    It is coming…

    Kaboom !

    Best,
    Mike

    http://www.wannadevelop.com

  • You make some good points int he article and as stated above, domainers have to give thanks to Google for making domaining what it is today. The best way to get leverage with Google is to provide a better class of traffic. Let me ask you what improvements you have made over the past year or two?

    Google’s primary goal is to provide end-users with results they want and click on..advertisers or not. If that means development, improved parking pages or better management of the keywords we are using. That should be the focus of all of us. After all. we do those things and we should see more revenue.

  • […] To better understand how Google can squeeze its partners, it’s important to understand the deals Google has in place with partners such as DomainSponsor , NameMedia, and Sedo. These contracts are confidential. But thanks to NameMedia’s (since aborted) attempt to go public, we can peek inside a Google Adsense contract. Here are some things to note… More… […]

  • For those of you who work in the advertising industry and can spotlight Google clicks down to a very granular level, the conclusion is that Google generate clicks generally perform horribly for call-to-action campaigns, and has tremendous bounce rates.

    It’s not that the day of CPCs are dead, its just that the new analytics being used to track click quality has improved tremendously in the past 2 years.

    The early domainers who exploited bots and human farms on hundreds of thousands of domain names (steal a little so nobody suspects theft) made the money. Admitted as Rick said “Thank god for fools” Those guys exploited ignorance, which was rampant with clients at that time. The word CPC was enough to convince them.

    That time is coming to an end, the big boys know that. Lets all just move forward with development.

  • Excellent post indeed. It seems alot is happening on the Google side, especially with adsense and such… Wonder where it will lead us to…

  • Numbers are falling for alot of reasons. I’m sure Google Squeezing us is 1 of them.

    Of course they are sending more impressions to Google.com than the partner network. Wouldn’t you do the thing that makes you more money (all things being equal for the advertiser)? If google didn’t do this I would be more concearned with their future because I’d say they are making bad decisions. Doing otherwise is like throwing away profit.

    I imagine their system does some testing and probing with each ad, and shows the ad wherever it will make the most $$$ for google. If CTR for an ad is 2% at google.com, but 80% at a partner site, you can bet they will show it at the partner, and not waste their precious screen space on a poorly converting ad on google.com. They optimize their ad impressions just like we optimize our landing pages.

  • […] more to domainers, improving its overall positioning. Further, Google domain parking contracts include tiers with different revenue share rates. This acquisition may push it into a higher […]

  • Great write up.

    At least with semi-developed sites, you have some second tier ad networks that will give you a comparable but still much lower pay out.

    As advertising dollars continue to dry up over the next couple of months, I wouldn’t be surprised if Google continued to pull more and more of their advertisers from the domain space.

    Time to partially develop and experiment.

  • […] the overall percentage shared with publishers. I explained much of this in a previous post “The Google Squeeze: How Google’s Black Box Affects Partners’ Revenue“. For background you should read that article. But there are some additional relevant points […]

  • Its a business folks. What did you think you signed up for?

  • Hi Andrew,

    Very well written and detailed post…very nice.

    Loved it up to this part:

    “For all of the complaining about Google, keep in mind that without Google the domain industry would be a shadow of what it currently is. Google’s ad network has propelled the parking industry to where it is today. Should we not complain about Google’s market power? Should we be thankful for what it has given us and not question its motives? It’s a tough question.”

    ___

    For me it is not a ‘tough question’.

    I think the domain industry would be much better off without their ever being a Google.

    It has held the domain industry as a whole, back…not moved it forward.

    Without domain names, Google does not exist at all…Period.

    It makes money off of other peoples property and assets for free. Great work if you can get it.

    Why is it that some domain owners think “SE’s like Google and Yahoo somehow have the right(s) to own the Internet or something?

    When in ‘reality’, domain name owners own the Internet…we just have allowed these companies to use us like we are their servants.

    Domain names are the Internet…not Search Engines.

    Just IMHO as always :)

    Peace To All!
    Dan
    ___
    BTW: @ Mike ~ Spot On!

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