TechDirt forgets the SEM Golden Rule

TechDirt (which recently got great write-up from the SF Chronicle — congrats to Mike Masnick and crew!) responds to a SiliconBeat post by Michael Bazeley about the prospects of Google being accused of predatory pricing given its recent track record of substantially cutting the price of offerings it has acquired.

I’m going to steer clear of that debate for now, but respond to something that TechDirt’s Dennis Yang said.

Quickly then, Denis… the golden rule of SEM is… He who owns the marketplace, rules. (Droll, I know…)

Which is why, when you wrote (emphasis mine):

“With Urchin, Google is looking to impress upon more of its users the importance of analytics. Conspiracy theories aside (as in, is it good for Google to have access to all of this data?), the idea is that better analytics will lead to smarter ad spending, which is ultimately good for everyone.

… you were speaking (I’m guessing) from instinct, not analysis of the impact of a bidded marketplace at liquidity.

Here’s what I wrote in The Value of Search Marketing Relationships w.r.t. Google’s acquisition of Urchin:

“On the surface, the play here is obvious: if you hold ROI constant and increase conversion rates, CPC prices will rise (proportionally). Said another way, as long as all of the ROI doesn’t go into the advertiser’s pocket — and it won’t, because their competition will eventually wise up and use the same solution, thereby increasing competition — Google will profit.”

So what really ends up happening (assuming rational marketplace participation) is:

1. Advertiser 1 gains a short-run margin advantage using analytics

2. Competitive advertisers figure this out and start using analytics

3. The equilibrium ROI is restored (as reflected by increased CPC) , except that:

A. Everyone’s now paying Google $200/mth. It’s very important to remember that this represents 1) non-TAC revenue, and 2) diversification of revenue streams; and

B. Google’s marketplace has ‘sucked up’ the incremental margin through higher CPCs; and

C. Google has a lot more data on your business

Very seriously here for a moment… if you haven’t run a Five Forces analysis on SEM (or more broadly, on continuous bidded marketplaces), you simply must do so; you’ll see the game much more clearly. If you don’t have the time or horsepower to do it, drop me a note; always happy to help a new client see what’s afoot.

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2 comments on “TechDirt forgets the SEM Golden Rule
  1. Mike Masnick says:

    I’ll let Dennis speak for himself, but I think you’ve sold us a bit short here. Remember, you’re dealing with a bunch of mainly MBAs who were forcefed Porter-analysis tools for quite some time — and who also recognize its limitations.

    In this case, perhaps in an effort to advertise your own consulting services, I think you’ve jumped to conclusions about our analysis that aren’t correct (that’s okay, though, the debate may be interesting).

    As with any analysis, it’s a chess game, and we’re all making bets about how the next few moves will go. In the space of Dennis’ post on Techdirt, he doesn’t go into the details for the reasoning (which makes you, falsely, assume that it’s all on “instinct”).

    You make valid points about the next few steps that you see, but what you leave out, and which we factored into our analysis was the moves of competitors. As the prices drop on analytics, the analytics *across the board* become cheaper. It’s not just Google, and not everyone goes to Google. This puts downward pressure on pricing in the space (and may force others to adjust their business model). However, other companies can certainly come out with claims that their analytics work better, and also positioning their offerings against Google (pushing the “you don’t want them to have all that data” angle or just pushing that their service works better).

    What we do believe, however, is that more targeted advertising is definitely a “plus” for advertisers, and lowering the prices, across the board, of analytics drives better targeted advertising. If companies are spending the same amount of total money (budgets… budgets…) but getting better results, that’s good for everyone. That was the basic point of our internal analysis on this, led by Dennis, but discussed by a few of us — and we stand by it.

  2. Tony Gentile says:

    Mike… surprised by your reaction here. Sorry (sincerely) you were offended.

    I think, however, that you think I’m addressing something other than what I’m actually pointing out (hint: it was nothing to do with future deterioration in analytics pricing… though that actually //supports// my position).

    Read Henrick’s take here (he says it quite clearly):

    Lemme know man…