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.