Online advertising Hal Varian SIMS Online advertising Banner

Online advertising Hal Varian SIMS

Online advertising • Banner ads (Doubleclick) – Standardized ad shapes with images – Normally not related to content • Context linked ads (Google Ad. Sense) – Related to content on page • Search linked ads (Google Adwords) – Related to search terms SIMS

Search linked advertising • Very good performance • Rapid growth but small part of market – Americans spend 14% of media time on Internet – Total US advertising: grow 8% to $265 billion in 2004 – Online advertising: grow 25% to $9 billion SIMS

Search linked advertising • Highly effective since it reaches people when they are interested in a topic • Relevant, yet not obtrusive • Has expanded rapidly in last few years • Expectation of further growth… SIMS

Stock market valuation SIMS

How does Google work? • Advertiser bids on search terms – Can use Traffic Estimator to see how many clicks they will get • Ordering – Overture: high bidder gets first position, 2 nd highest bidder second position, and so on – Google: rank by bid x estimated CTR. Puts best ads on top of page. SIMS

Aligning incentives • Google sells ad impressions (views) • Seller generally wants clicks and ultimately conversions (purchases) – Rank ads by how much advertisers are willing to bid for impressions: – Bid/click * clicks/impr = bid/impr – But may want too many impressions – Answer: disable if e. CTR is too low SIMS

Payment • Price you pay depends on bidder below you – Overture: pay bid of bidder below you – Google: pay minimum necessary to keep you above that person. (Ad. Words discounter) • Why not pay your actual bid? – Would then want to cut bid to just enough more than adv below you to keep your position – With discounter don’t need to constantly inspect bid landscape SIMS

Vickrey auction • Similar in spirit to Vickrey auction • One item to sell, many bidders – English auction: person with highest value wins, pays price equal to second highest value+ bid increment – Vickrey auction: award to highest bidder, pays 2 nd highest price • Always want to truthfully reveal your value in Vickrey auction SIMS

Vickrey auction • Payoff = (v – b 2) Prob[b > b 2] – If (v – b 2) > 0, then want to make Prob as large as possible – If (v – b 2) < 0, then want to make Prob as small as possible – Either way truthtelling is optimal • Ad auctions don’t quite have this property, but close… SIMS

Mechanism design • This is an example of an economic mechanism – Agents report messages to center – Center makes choices based on messages – Agents make payment to center based on messages and outcome of choices • Problem: incentive compatibility – Surprisingly enough, can be solved for wide variety of cases – Vickrey auction is relevant example SIMS

Ads system from viewpoint of seller • Choose your creative text – Standardized size – Various optimization tips available • Choose your keywords – Exact, broad, phrase, negative keyword – Follow guidelines for content • Implement conversion tracking if desired SIMS

Setting up ad, cont. • Choose your max. CPC – Value of a click = prob of sale * profit per sale – Can you Traffic Estimator to see how many clicks you will get – Discounter will set actual CPC to minimum amount necessary to retain position • Set daily budget • Let ‘er rip SIMS

Ad. Sense Program • “Content ads” – Use keyword matching engine to pick ads related to content on page – Matching algorithm tweaking to deal with multiple content on page – Auction needs tweaking to deal with position – Generally lower CTRs, lower conversion performance, adjustments made in payment SIMS

Technology • Engine to match ads to queries – Choose most relevant ads using various criteria (plurals, synonyms, etc. ) – Returns up to 10 ads to show on a page – Promotion policy: depends on CTR performance and CPC • Auction engine – Ranks ads by CPM, records payment SIMS

Factors affecting revenue Monetization = (RPM) = = = Revenue Queries Revenue Clicks CPC x ( 1 K ) x x x Clicks Queries w/ Ads Queries Coverage Price x Ads Queries w/ Ads x Quantity SIMS Depth x x Clicks Ads CTR per Ad Quality

Increasing revenue • Increase CPC – Create higher conversion prob for advertiser – Capture more value by increasing competition • Increasing coverage – Get more keywords – Match more broadly (affects CTR) • Increase depth – Get more advertisers, more ads • Increase CTR – Show more relevant ads SIMS

Advertiser optimization • Choose good creatives, follow tips • Determine your value per click – Can use Google’s conversion tracking – Or use your own tool • Maximum bid = maximum value per click – Shade down depending on competition • Minimums – Bid: 5 cents – CTR: around 1% SIMS

Syndication network • Can syndicate search and/or ads – AOL = both – Ask Jeeves = ads only – Yahoo (formerly) = search only – MSN served by Overture/Yahoo • Negotiated revenue share with partners – Intensive bidding against Overture SIMS

Competition • Search – Intensive competition to improve search – Hampered by attempts to manipulate algorithm – Entrant has an advantage! • Monetization – Size of ad network – Non-exclusive nature – a “media businesses” – Can partner in various ways, co-opetition issues SIMS

Business challenges • Scale – Large, complex system: keeping it running and improving it is a challenge • Advertising guidelines – Detection and enforcement – Regulatory issues • Fraud – Credit card – Click fraud • Advertiser relations SIMS