It's almost impossible not to pay Google

By Bloomberg | 09 Mar 2019 at 07:35hrs
Google controls many of the ways businesses access customers online in the U.S., making it almost impossible to run a company without buying advertising from the internet giant.

As politicians increase scrutiny of large technology companies, Google's lock on these digital relationships is becoming a potential liability, not just a lucrative advantage praised each quarter by Wall Street analysts.

Presidential candidate and Senator Elizabeth Warren outlined a proposal Friday for breaking up Alphabet Inc.'s Google - and Facebook Inc. and Inc. - because they have "too much power" and have "bulldozed competition."

While consumers pay nothing for most Google services, some businesses say they often can't avoid giving more money to the company because the internet giant is the main source of answers when Americans go online to get information. Google has more than 81 percent of the mobile search market, according to research firm NetMarketShare.

While Facebook matches advertisers with people interested in certain topics, Google can tell what a person really wants, right as that person types their query into the search bar. Showing up at the top of search results is imperative for most companies and in recent years Google has changed its software, especially on smartphones, to make buying ads the best way to achieve that goal.

It's not possible to run a business without advertising on Google, according to Joey Levin, chief executive officer of IAC/InterActive Corp., which owns internet services like Tinder, HomeAdvisor and Vimeo. He spends about $350 million on advertising every quarter, much of that on Google.

Lyft Inc., the ride-hailing company, spent $92.4 million on Google advertising last year, more than double the amount of two years earlier. That was about 10 percent of its $991 million loss in 2018.

"Google has dominance in search, it's utterly, completely, dominant," said Brian Wieser, president of business intelligence for GroupM, the media investment management arm of advertising giant WPP Plc.

The Federal Trade Commission closed an antitrust investigation into Google in 2013 but there's been a rising chorus of voices on the political left and right demanding Google be cut down to size, somehow.

Nowhere is Google's power more pervasive - and potentially damaging to businesses - than in the esoteric market for "branded keywords." This is where businesses buy ads based on their brand names. So Lyft bids on the word "Lyft" and when people search for that, Google runs an ad at the top of results usually linking to the ride-sharing company's website.

Some businesses say that they have to buy these ads - whatever the cost - because rivals can bid on the keywords too. If Lyft doesn't pay up, Uber Technologies Inc. is ready to pay Google instead and grab customers. A search for "Lyft" on Friday on a Google Pixel smartphone showed an ad at the top from the company. Right underneath, there was an ad from Uber saying "Your Ride is A Tap Away."

"You have you buy the ads every day," said Mike Lindell, CEO of MyPillow Inc., which sells bedroom items online. "Google gets a piece of every single MyPillow sold and it's wrong. Why should someone be able to bid on your own brand words and why do you have to buy your own just so people can see you online? That's wrong."

In recent years, this pressure has increased because on mobile devices Google search ads show up at the top of the results, rather than on the side of the page with desktop results. This means people are more likely to click on the ads, rather than the free, "organic" links to companies' websites.

MyPillow's marketing team has tested not buying Google search ads for "MyPillow," and the slot is immediately purchased by other businesses, sometimes selling knock-offs on e-commerce marketplaces like Amazon, Lindell said. "We've had to bid more to get back on there after we stopped," he added.

"Limiting the ability to advertise around brand names would restrict competition and make it harder for people searching for one brand of product to make informed decisions by comparing features and prices," a Google spokesman wrote in an email.

The company has said in the past that it doesn't break antitrust laws and that competition online is just a click away. Google also regularly stresses that it never accepts payments to be included in or to be ranked higher in organic search results, and doesn't manipulate search rankings to benefit advertisers.

American Airlines Group Inc. and Rosetta Stone Inc. sued Google years ago over selling their brand names in search ads, arguing the internet giant shouldn't be allowed to use protected trademarks in this way. Rosetta, a language learning technology provider, lost its case in state court, but it was revived on appeal and Google settled in 2010 for an undisclosed sum, according to Ars Technica.

More recently, companies have tried to work with - or around - Google's system. Online travel agent TravelPass Group sued a group of leading hotel chains late last year alleging they conspired not to bid on each others' branded keywords, according to the complaint. The hotels are fighting the suit and the case is ongoing.

Beyond just branded keywords, the cost of all types of Google search ads has been rising at about 5 percent a year, according to Mark Ballard, vice president of research at Merkle, an agency that helps retailers and other companies buy Google ads. That's well ahead of U.S. inflation, which is running at 1.6 percent currently, according to data compiled by Bloomberg.

Google search ad prices often surge when the company restricts the growth of supply, and they fall when Google dramatically increases inventory - a sign of strong pricing power. The cost for Google U.S. search ads jumped 13 percent in the first quarter of 2018 and 12 percent in the second quarter as the growth in the number of clicks declined, according to Merkle data.

Many Google advertisers are happy to pay more because the company has so much data that it can target the marketing messages and generate big returns on that spending, said Ballard.

"To the extent that Google has close to a monopoly on this area, they can't force advertisers to pay more than makes sense," he added. "Prices have risen, but returns are higher."

Where that breaks down is in the branded keyword market, Ballard said.

"When it comes to brand keywords, some advertisers will spend beyond what makes sense. These decisions are not as rational," he added. "That's a question that comes up when advertisers see costs go up. People are thinking about that and testing it by stopping buying those branded keywords to see what happens."

Those tests usually result in a decline in traffic, both from search ads and from free, or organic, results, according to Ballard. How big depends on the advertiser. "If you're a well-known company with a unique name, you will capture organic traffic without buying your own brand keyword on Google," he said.

For everyone else, they must continue to pay Google.



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