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Innovative Online Advertising – Watch out Google!

The article/blog piece I will be discussing in my blog today is:

http://paidcontent.org/2012/11/06/the-20-ad-campaign-small-businesses-find-alternatives-to-google-adwords/

 

This article focuses on the dilemma small companies are facing in online advertising. As Google’s online advertising service becomes more and more popular, the rates for advertising are also increasing. Now, small companies that no longer have the financial clout to advertise on Google must search for advertising alternatives. Advertising companies such as Outbrain and Virurl are two such alternatives. These companies advertise by embedding advertisements in third party publisher websites and on social media web pages like Facebook and Twitter.

I think that the emergence of new companies like Outbrain and Virurl with their new innovative advertising strategy poses a considerable threat to Google. These companies could seize a sizable chunk of Google’s advertising market.

 

First I would like to focus on the basic advertising mechanisms discussed in the article. Implicit in this article, there are two types of advertising discussed. The first type is advertising on Google’s search results page (page users see after searching for a term), and this sort of advertising is only feasible by Google. The second type of advertising is advertising on third party websites such as the New York Times or Washington Post websites.

It is clear why the first type of advertising is preferred by companies. When a user is searching for an item on a search engine, it usually means they want that item. This coupled with information Google gets from user’s email and other websites visited allows for highly targeted advertising. Each piece of advertisement is specific to each user.

However, for the second type of advertising (that both Google and Outbrain/Virurl could support), why do small companies not directly approach New York Times and Washington Post? Why do they employ intermediaries such as Outbrain and Virurl? This is partly because intermediary companies have access to many buyers (small companies) and sellers (third party publisher websites) in the market and can match them up more optimally. This is also because these intermediaries allow for highly targeted advertising. Both Google and Outbrain/Virurl use algorithms to determine which users would be interested in which advertisements to allow for targeting.

Previously, due to the lack of companies such as Outbrain/ Virurl and the fact that Google is the most prominent search engine internationally, Google has had a near monopoly in online advertising. This means, that for the second type of advertising, Google would be a sole trader linking together a lot of potential buyers and sellers. They can then play off different buyers and sellers against each other to maximize their revenue. Buyers and sellers would have no choice but to use Google as an intermediary since it is the only intermediary they are connected to. If for example, all buyers valued the good at $1, and all sellers values the good at $0, Google would be able to buy the good from the seller at $0 and sell it to the buyers for $1 earning a profit of $1.

Now I would like to focus on the different pricing strategies used. As discussed in class, Google uses a second price auction for pricing. It is possible to use matching markets (matching buyers to advertising slots by calculating the utility gained from assigning a slot to a certain buyer) for pricing, but it is rather complicated when there are/ could be numerous different prices due to targeted advertising (the value of advertising to different people would be different).

The second price auction is an auction wherein the highest bidder wins but pays the second highest price. This is a good mechanism that allows for bidders to use a simple dominant strategy – bid their true value. To prove this, let’s consider a bidder with true value $5 and a second highest bid of $3. If the bidder bids below his true value (say $2), he might not win the auction and thus have no utility gain. If he bids below and wins the auction (say he bids $4), he pays the second highest price ($3). Had he bid his true value, he would have still paid the second highest price, and so his utility (true value minus price paid) would have been the same ($5-$3=$2). If he bids above his true value ($7) and wins the auction with the second highest price being above his value (say this time the second highest price is $6), he will have negative utility of -$1. If he bids above, and the second highest price is below his true value (say $3 again) then he would have gotten the same utility had he bid his true value ($5-$3=$2). Hence, bidding the true value is always at least as good as bidding any other value, so it is a simple but dominant strategy.

At this point it is not clear how Outbrain and Virurl are pricing their advertisements. The article does say however, that they offer clients a choice of selecting their own budget and generating an advertising campaign to match that budget. Although Google’s pricing mechanism allows for buyers to play a simple strategy, it is still exhausting to bid for multiple advertisements frequently. Outbrain and Virurl offer better customer service since they generate a ready-made advertising campaign for you.

 

While Google’s advertisement mechanism is pretty well developed, Outbrain and Virurl’s new innovative advertising strategy is also pretty good. By linking their clients’ pages to third party publisher and social media websites, Outbrain and Virurl are increasing the ranking of the clients’ page using the Hubs and Authorities way of ranking pages. A hub page is a page that provides a list of links to websites that answer a specific information need. An authority page is a website that answers the information need directly. The ranking of a hub page is given by the sum of authority weights of the sites to which the hub page points to. The ranking of the authority page is given by the sum of weights on hub pages that point to this site. For the Outbrain/ Virurl example, the third party publisher websites act sort of like a hub page. If you are searching for “How to make sphaghetti” for example, you could be directed to a cook book page that has advertisements on it for Italian restaurants. The Italian restaurants would be kind of like an authority page (answering the need for making Italian food) while the cookbook page is similar to a hub page (pointing to websites that answer the need for Italian food). Hence, the more hubs that point to the authority page, the higher ranking the authority page would be. This explains why Outbrain/ Virurl scatters their advertising across so many different websites, and why this type of advertising is generating good response.

 

Google is pretty good at the advertising it does but new companies using innovative ideas such as Outbrain and Virurl could quickly grow to become serious competitors. Watch out Google!

 

Here are two additional articles/websites that are relevant to my blog, and provide more information:

http://www.nytimes.com/2012/10/18/business/smallbusiness/as-pay-per-click-ad-costs-rise-small-businesses-search-for-alternatives.html?_r=1&

http://techcrunch.com/2012/10/22/outbrain-adds-self-service-to-its-content-discovery-platform-now-the-long-tail-of-smaller-brands-can-use-it-too/

 

Relevant concepts: second price auction, matching markets, intermediaries, web advertisement (opposed to traditional advertisement), hubs and authorities

-butterknife

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