Google AdWords - Does it add up?

Notice anything interesting in the Google Search results page below? 
The search string was simply “amazon”

What surprised me is the ad for Amazon which can be seen right at the top of the page, surrounded by Google search results, both below (the organic search result), and on the right (consolidated knowledge panel).

An identical result was seen for Flipkart, one of the leading e-retailers in India.

Any user who clicks the first link will be taken to the Amazon webpage, the same as clicking the second link, just that Google gets paid in the first instance, presumably by Amazon which had bid for the ad to be displayed. Most of the text ads on Google pages are on pay per click (PPC) basis, where the sponsor pays Google based on the number of clicks generated by the ad.

So why would a company like Amazon or Flipkart, both reporting continued quarterly losses, waste ad money on Google Search results page on a search string where the organic result would have done the job for free?

My initial thought was that I had stumbled upon an inefficiency of the e-commerce giants, which I discounted soon after – these are smart companies with smart people and would not be making such an obvious mistake. After a few hours of googling, here is what I think is happening-

Google is clearly the market leader in web search and enjoys a monopoly position. And despite its “do no evil” motto, a monopoly cannot but impose rules favouring itself.

The first thing you note in the search result above is that the Text ad is almost completely indistinguishable from the organic search result, the only visual cue is the small yellow text box Ad prefixing the ad, and the even smaller (i) on the right giving information about ads. The text ad almost seamlessly merges with the search result. This was not always the case, as distinctly remember that until quite recently, the background colour of the top of page ads was a pale pink, and could be easily distinguished from the organic search results.

The text ads on the Google search page operate far differently from the way ads are published on other media like print, or TV, were price alone would be the primary criteria for eligibility. Google's ad program, AdWords (https://www.google.com/adwords/) uses a proprietary algorithm, with a bidding system which determines whose ads gets placed on Google’s search results page. You can listen to Google's chief economist  Hal Varian here on how the auction system works.
Hal Varian begins by saying: “Google users want ads they see to be relevant.  They don’t want to be bothered by ads that are not closely related to what they are searching for”

This is a bit of a stretch. Personally, I think ads are a pain, I would rather not see ads at all.

The text ads on Google search page are triggered by the search executed by the user by examining the text entered by the user in the Google Search box.

Google uses its algorithm to compute an AdRank for each of the ads competing for the search string entered by the user. The algorithm is based on multiple parameters such as Expected click-through rates, Landing page experience, Ad relevance, and Formats associated with the ad, and of course, the Bid amount. The end result of this ranking could be that highest bidder for ad placement may not be the one whose ad finally gets shown on the search results page. One can reasonably assume that the Google AdRank algorithm aims at maximising the ad revenue for google while ensuring that the ad is “reasonably” relevant as to not cause too much annoyance to the user. The MIT Profs who designed the course "MITx: 15.071x The Analytics Edge" available on edX.org seems to have read the situation in a similar manner, as the example of Google AdWords in their Linear Optimisation section framed the problem as how to maximise Google’s ad revenue.  Google’s stated commitment of showing ads relevant to the search string does not stand scrutiny, as both bid amount and relevance are parameters for ad selection, implying that relevance can be compensated by a higher bid amount. Relevance and bid amounts are like apples and oranges, how does one decide how much of relevance can be traded away for a higher bid amount?

With the recent changes in search results page where the ads at the top of the page are almost indistinguishable from the organic search results below, it is now even more important for Google to keep the ads relevant for fear that their organic search results may get contaminated. Google would have realised that many users would be clicking ads appearing on top of search page without even realising that it is an ad and not a genuine search result. This adds to Google revenue. There are two other locations on the search page where Google places ads, on the right panel of the page and at the bottom of the page, which are clearly different from the organic search results, and would never be mistaken for a search result. The click-through rates for these ads are likely to be substantially lower.

Thus Google “selects” the ads that are shown on its search page. Contrast this with Super Bowl, which has frequently been the most watched American television broadcast, with over 100 million viewers, and where a 30 second ad spot sells for around USD 4 Million. The notable commercials of the last few years have been sellers of beer, cars, movies, chips, pizza. How would the American public react if the if CBS, Fox and NBC, the current Super Bowl broadcast right owners, were to sell the ad spots based on their assessment of what is “most appropriate” for the viewer?

With ads merging with the organic search results, Google has no option but to apply a strict selection. At the same time, the entities wanting to publish ads or promote their websites have no option but to pay Google even for keywords (Search strings-words) which would guarantee them a first place in the organic search result, lest their competitor places a bid on that keyword and ends op on top of the page.

This is best exemplified in the search result image show below; the search term was Google AdWords.

The first organic search result was the link to Google AdWords, as is to be expected.

What should now no longer be surprising to the readers is that the first top of the page ad is by Google itself, for its Google AdWords service. And the very next Ad is from Facebook, pedling its ad service. Googly should very rightly be concerned about growth of Facebook eating into its online advertising share,

The only way to avoid this waste is for Google to once again show its commitment to its “do no evil” motto, by clear;y distinguishing its Ads from the organic search results, preferably by removing top of page ad completely, and confining ads to the side pane and the bottom of the search result page.

The Paul Hankson test for Search Engines - Google Rules

After listening to the excellent book by Tim Geithner, Stress Test, I googled for Geithner's predecessor as Treasury Secretary, Henry(Hank) Paulson.
Just that instead of typing Hank Paulson, I typed Paul Hankson- a simple transposition error, which I should have been forced to correct. But lo and behold, the God of search engines seemed to have read my mind and gave the correct result. The very first link was for Hank Paulson.
Thinking that this must be a standard error made by many, and not willing to elevate Google to God status without giving a fair chance to its competitors, I ran the same search on Bing and Yahoo- both failed miserably. Have a look-

Google Search for Paul Hankson

Bing Search for Paul Hankson

I had to tell Bing I was really looking for Paul Hankson- which gave me the following result-

Yahoo search for Paul Hankson

As in case of Bing, I had to tell Yahoo that I was definitely looking for Paul Hankson, to get the following result:

How does Google do it?
This is both amazing and scary. It is almost like Google has found the secret sauce to make AI, while others are still working mechanically on indexing the web pages.
Google is at least a few order of magnitude better than its competitors. The more we search on Google, the better it gets, so this is a positive feedback loop which will probably end with the creation of artificial intelligence of sorts.

Discounting the discounts - How numbers can be made to deceive

The festive season in India (October-November) gets our brick and mortar retailers competing with each other for the increasingly diminishing customer footfalls. The change is palpable- the clicks are slowly demolishing the bricks.
Yesterday I walked into a garment retail outlet (Pantaloon http://pantaloons.com) , and saw the following banner:

That looked like a 50 % discount to me, just what I had started getting to expect after the recent madness of e-retailers (Amazon ,Flipkart, and Snapdeal) slugging it out with discounts. 

It appeared that all I needed to avail the 50% discount was to shop for Rs 2000, and claim the gift vouchers for Rs 2000. Never the one to postpone gratification , I picked up stuff worth a shade over Rs 4000, planning to get and encash my gift coupons in one masterful stroke.
And then I was hit by the fine print. To cut a long story short, the discount offer effectively translates to the following:
1. Get 20% off on purchase of Rs 10000.
2. Become eligible for a maximum of 25% discount on your next four purchase of or exceeding Rs 2000.

To be availed in the next 6 Weeks.
This is a far cry from the banner which implied a 50% discount.
This is layered fine print at its best. Have a look:

I don't know how many get pulled in and fooled by such marketing campaigns which are designed to mislead.
It was no fun realising that I too had succumbed to the fine print blindness.
On my part, I collected the gift vouchers after making the Rs 2000 purchase, did not go ahead with the next Rs 2000 purchase as originally planned, and gifted away the gift vouchers to those standing in line behind me so that they could avail the 25% discount now.
And resolved to blog, tweet, and yelp.

Behind the Big Billion - Flipping the Kart and Snapping the Deal

Consuming the surplus – Why the rise of e-retailers may not be good news to the consumers

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations, Vol 1

If we rephrases Churchill quote on Democracy as: “Market economy is the worst form of economy, except for all the others”, there would be few who would stand up to argue.

But one also needs to keep in mind what Adam Smith said in his book written in the year of American Independence, the land of market economy, regarding the self-interest of butcher, brewer and baker which makes the market economy work.

And therein lies the beauty of the market economy, no one is expected to be a saint, yet the end results are near heavenly. Of course, economists came and identified cases of market failure, and grudgingly accorded a role for the inefficient government to play the role of an impartial umpire.

In the recent past, the Indian media has rejoiced the multi-billion dollar valuation of our very Indian entrepreneurs, the Bansals of the Flipkart fame. Not many of us may have followed the subsequent news that Flipkart is no longer an “Indian” company, as it is registered in Singapore and owned by a Singapore based holding company. Not that this aspect makes any difference, market economy does not expect any benevolence from any quarter for it to work efficiently.

The media also heralded the recent arrival of Jeff Bezos, the man behind Amazon, and of the impending clash of the e-commerce giants – Flipkart and Amazon, in India. We are told that the only beneficiary from this increased competition is the customer.

Here is where I would like to disagree, and try to present an alternate, and a very likely scenario.

Let’s keep in mind that none of these firms are here to do charity. Jeff Bezos, the Amazon honcho has famously been called the Apex predator- the most intelligent and patient sort, who will not stop till Amazon is the last retailer standing. Amazon makes a wafer thin profit, if any, but its sales keep increasing at a dizzying rate, and so does its stock market valuation. It is for this reason that Matt Yglesias, the Slate columnist, had once characterized Amazon as a “charitable institution being run by elements of the investment community for the benefit of consumers.” Bezos took issue with this in a letter to shareholders. His argument is that Amazon isn’t a charity; it’s a business—a business whose strategy is to make its customers as happy as possible. Bezos had said “Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

I find it difficult to accept Bezos viewpoint at face value. A large market share of any e-retailer coupled with recent advancements in big data analytics provides for the first time the possibility of the retailer keeping most if not all of the economic benefits of the market economy.

To understand this, we first need to get down to the basics of supply and demand, and how an open market price determination provides economic benefits to both the buyer and the seller. The gain, called the producer’s surplus and the consumer’s surplus occurs because of the way the final exchange price is determined by the intersection of the supply and demand curve. This is illustrated in the figure[1] below-

The consumer surplus is the gap between the price that the consumer is willing to pay for a good and the price that he actually pays. It is thus a measures of the benefit that buyers receive from a good as the buyers themselves perceive it. There is a similar explanation for a producer surplus. These surpluses together are what makes market efficient and contribute to its perceived beneficial aspect.

The economists have been telling us ever since the first book on economics was written that monopolies are bad, for it concentrates market power, and allows the monopolist firm to determine the final sale price by controlling the supply. But the economists’ objection to monopolies was not on the grounds of justice or fairness, but because they cause the so called deadweight losses, the shrinking of the economic surplus comprising of the producers surplus and the consumers surplus. The economist does not care who gets the surplus provided somebody gets it. There is inefficiency if the size of the surplus shrinks.

The current scenario of increasing market share of e-retailers like Amazon and Flipkart, coupled with advanced big data analytics allows the possibility of the e-retailer keeping all the economic surplus with itself, without being blamed by economists for inefficiency or causing deadweight losses. Of course, if this aspect of price discrimination becomes more generally known, the e-retailers will be accused of a more insidious form of price gouging, for which public has shown little sympathy or tolerance.  The economic surplus can be appropriated by the e-retailer by knowing the consumer so well as to determine the price that he/she is actually willing to pay for the product, and price it accordingly. This is called perfect price discrimination, and recent academic research has already found some evidence of the adoption of such price discrimination by e-retailers. In such a case, the price offered by the e-retailer would perfectly follow the demand curve, giving the product to the consumer at a price just below the subjective value attached to it by the consumer.

Few web surfers among us would have failed to note how the ads seem to be chasing us. It’s near spooky how the ads shown on random web pages that we surf through are for products that we may have searched for on our favorite search engine or e-com site. They know us. This is predictive analytics at its very basic manifestation. It doesn’t take much more to make a good guess of how desperately we want to own that product, assess our paying capacity, and estimate the highest possible price that will still entice us to buy. And that’s how the retailer can keep all the consumer surplus for itself. In the last one year, I have bought the same product online at discounts ranging from 20% to 80%. With such variation, the concept of fair price itself has lost its meaning, and I am ready to believe that any price is a fair price. Did the e-commerce site correctly assess my need for the product?

Welcome to the new reality of super-efficient analytics powered marketplace of the future.

So next time you see these e-retailers fighting it out, don’t rejoice, for the battle will end soon, and it will be time for us to pay exactly the value we place on the product. The economic surplus is not lost to society, it is just transferred to the e-retailer

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[1] "Economic-surpluses" by User: SilverStar - Own work. Licensed under Creative Commons Attribution 2.5 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Economic-surpluses.svg#mediaviewer/File:Economic-surpluses.svg