Google: The Auction King

Having co-founded a first-generation web search engine, I occasionally spend time watching Google take over the world and reflect on the factors that led to their amazing success which built upon what initially seemed like a me-too idea, while the early search engines such as Excite, Infoseek, Lycos and Inktomi floundered.

Most of us know Google because we use it every day to search, read emails or spy on ourselves with Google Maps. In exchange for providing these amazing free services, we supply Google with a huge daily inventory of searches and pageviews, which Google then sells to the highest bidder. This has resulted in one of the most incredible revenue ramps in startup history.

Of course, advertisers (aka Google’s paying customers) and publishers (aka additional traffic inventory for Google) interact with another side of Google, namely the AdWords product where they bid on and purchase click-throughs to bring traffic to their own sites, and the AdSense product, where publishers supply their search and pageview inventory to Google so that Google can serve advertisements on their sites in exchange for a cut of Google’s revenues generated on their pages. This is the revenue-generating side of Google that has enabled their meteoric rise, and has transformed online advertising into a quantitative discipline that can reliably (and measurably) generate traffic and commerce for an advertiser.

To me, the most profound aspect of Google’s pay-per-click model is the fact that it is powered by an auction marketplace that resembles eBay’s, only it is far more efficient and is sublimely frictionless, with Google collecting a much larger share of each transaction since they are not only the marketplace, but also the supplier and seller of the inventory. Even more impressive is that Google runs a real-time auction (which is really a hairy multivariate optimization problem that would impress even the brightest Wall Street quant) to serve advertising links every time someone searches on Google or views an AdSense-enabled page.

To put this in perspective, the NYSE and NASDAQ see average daily trading volumes in the low billions, while Google is certainly processing and delivering a comparable order of magnitude of advertising auction transactions every day given the number of searches performed daily coupled with the much greater number of page views generated by AdSense publishers.

Whereas eBay’s supply of merchandise is constrained by the number of sellers and the rather cumbersome process required to put an item up for sale, the genius behind Google’s long tail marketplace is that inventory is limited only by the number of searches and pageviews on Google properties (and non-Google properties via AdSense), while every item for sale is just a simple string of text, resulting in a marketplace with incredible liquidity and a potentially infinite inventory of items that are bought and sold with far more ease than would ever be possible on eBay, given that the sheer variety of items for sale in that global garage-sale defies easy categorization and standardization.

Ultimately, numerous human beings are directly involved in every eBay transaction: one very busy seller and numerous interested buyers who have to devote some of their precious attention intermittently during the typical week-long transaction. Google’s juggernaut is enabled by the fact that every transaction occurring on their system happens with far less overhead and enables the company to make money while they (and their paying customers) sleep. Nice work if you can get it…

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  • Hear, hear! (or is it: Here, here?)
    I’ve marvelled at the simple beauty of Google’s business model for quite some time myself. Their approach is so damned efficient AND SCALABLE it’s boggling.
    And it makes me feel stupid for not having thought of it. Maybe those Stanford boys really are smart.
    However, that being said, I think the larger market really has a hard time understanding the difference between the elegance of Google’s solution and some of the other hacked-together solutions in the market. I mean, how badly did they miss the IPO???
    The worst part is that I know that there is a similar solution just waiting to be discovered for mobile and I’m going to kick myself if I don’t discover it.
    Sheesh…

  • Hey – really dig your blog, I came across it doing research for project on Google and Sustainable Development – just blown away by this company and it’s new way of thinking – I’ll have some excerpts posted on my blog soon (hopefully) if you’re interested – http://www.strategiesforsustainability.blogspot.com/