This series of articles continues directly on from one another. I would encourage you to read the prior articles before this one.
Part 1 - Google and the domain industry
Part 2 - Google and the quality myth
Part 3 - Smartpricing traffic
So if Google has created the perfect system for manipulating traffic and advertisers then why have they been lowering their margins? The first thing to realize is that traffic is a finite resource and is in massively short supply. For example, if we were to convert television to Internet terms it would look something like this.
Average number of advertising spots seen per hour = 25
Average number of hours watched per day = 4
Number of people watching TV in the USA = 300m
Number of views per month = 900 billion
Sure, this is back of the envelope calculations but my guess is that it will be reasonably close to a huge number. Compare this to Google's traffic. If the average user searched once per day at Google and there are about 200 million Internet users in the USA then this equates to a traffic level of 6 billion (ie. 200 x 30 days). This is a fraction of the TV audience measurement. Compared to TV advertising traffic is in short supply.
In particular, as we saw in part 3 that good traffic is worth its weight in gold but bad traffic is worth even more to the bottom line as long as you mix it with a little good.
If we were to use the example from part 3 the challenge for Google has been to try and determine what the sustainable click through rate is per market vertical. In other words you don't want really happy advertisers and you don't want really mad advertisers you just want them satisfied. Getting to that satisfied point is critical for Google's business model.
The gap for Google has been how to determine the typical conversion rates for each market verticals so that they can appropriately mix the good and bad traffic. In the past as soon as a click left the Google network it was no longer visible therefore Google had no idea whether they had happy or mad advertisers. Often the only way to determine this was to wait until advertisers began exiting the network and this is not a sensible methodology. What they needed was a plan to know more about a customer than the customer themselves knew.
Out of the Google research labs materialized a product so good and so helpful that it dazzled the netocracy with its shear ingenuity. The product was Google Analytics. Just plug Google Analytics into your site and you can find out everything about your visitors, from geographical location to time spent browsing. The problem is that Google now knows all of this as well.
Point 6 of the terms of service for Google Analytics outlines what Google is allowed to do with your data collected by Google Analytics.
6. INFORMATION RIGHTS AND PUBLICITY . Google and its wholly owned subsidiaries may retain and use, subject to the terms of its Privacy Policy (located at http://www.google.com/privacy.html , or such other URL as Google may provide from time to time), information collected in Your use of the Service.
Google Analytics solved the problem of the last missing piece of the advertising puzzle, the conversion rates. As long as Google had a statistically large enough sample of data for each market vertical using Google Analytics then it could calculate the average conversion rate for each vertical. This information could then be fed back into Google Adwords so that advertisers are kept satisfied.
Is this a conspiracy theory? I don't really think so. If you consider that Google's core competency is its ability manipulate massive amounts of data (search is now been applied to text, video, human genome project, images plus a host of other applications) then Analytics just provides more data to digest.
The challenge for parking companies is how to negotiate with a partner that has perfect information about all aspects of the click stream. The only real negotiating point could be to up stakes and go to a competitor (eg. Yahoo) but this poses a lot of problems and with Yahoo in a complete state of flux it's probably not a direction that many Google based parking companies would like to take.
The next option is to learn about the complete "click stream" and to offer a Google Analytics type service to advertisers to select market verticals or to partner closely with advertisers so that they are prepared to release their conversion data. I wouldn't be surprised if one of the parking companies either purchases an analytics company for this purpose or develops a technology for expanding their understanding of the "click stream". Until the parking companies understand the complete "click stream" they will always be at a disadvantage when negotiating with their upstream advertising partners.
I believe that the race is on to be the first parking company that completes the "click stream" picture. A first mover advantage in negotiations and the subsequent flow through of revenue to the domain owners will place that company in a very strong position as more traffic begins to flow through them.
So now that Google has finally achieved perfect information in the pricing side what does it need to do now to increase its revenue line? The next article in the series will tackle this question and how it will impact domain owners.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- May 14, 2008