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Google’s New Competition

Google has controlled online advertising for over a decade.  Google was not the first search engine on the internet, but it created the most innovative search technology to make it the top search engine.  Its internal innovation to create a dominating advertisement marketing system has led it to become one of the wealthiest companies in the world.  With all of its market power, Google has had a stronghold on the Search Engine Industry, which has given it free reign to raise the price of its ads to soaring prices.  For example, Gerald Gorman of spends around $100,000 a month on advertisements near Google search results.  This data shows how Google’s business model is pricing many businesses out of reach for its Google AdWords program.  Now, new companies are emerging with significantly cheaper pricing options that raise traffic on business’s websites.  Two such companies are Outbrain and Virurl.  Both companies “supply the message in the form of a link to a piece of content—a picture, a story, or a video”.  Outbrain works with primarily large publishers and works to “find spots for ad-driven content” whereas Virurl aims to make “ad-content go viral on social networks, such as Twitter, where ‘influencers’ retweet the links”.  These two companies offer online campaigns starting at $20, in which customers can pay 8 and 5 cents per click compared to Google AdWords which can be up to $10 per click.  These new companies offer cheaper advertising solutions, which allows small and medium businesses to compete for internet traffic, and thereby lowers the equilibrium price between traders, sellers and buyers.

For a long time, Google has been the largest intermediary trader by selling and placing ads on its search engine which help to create a trade between companies selling a product or service and potential buyers that are browsing the internet.  Although Google is not transferring the product itself, it is connecting the seller and buyer of products through its Google AdWords.  Although the advertisements are used to get the viewer to purchase from the company whose ad is displayed, for the purposes of the comparison to trading networks, the viewer is actually the seller and the company is the buyer.  The viewer has no value for the advertisements, his/her value in relation to the context is 0.  On the other hand, the company has a value for the advertisement.  Owning the advertisement space draws in potential consumers, not owning the advertisement space means there is no potential for drawing in the consumer.  The equilibrium for this model would be if Google gave AdWords to companies for free.  Then the ask and bid would both be 0 and Google would make no profit.  Unfortunately, this is not how Google rose to its dominant position with its vast fortune.  The ask price will always be 0 from the viewers because the ads have no value to them, but the companies who have the potential to make a profit by selling their product to viewers will always have some value v.  Google’s popularity and dominance has given it the power to slowly raise the price of its advertisements to the point that the bid price is out of reach of small and medium businesses and the difference between ask and bid is far from the equilibrium difference being 0.  These newer companies with different internet advertising strategies like Outbrain and Virurl still have an ask price of 0 from the viewers, but the bid value from the companies is a small fraction to that of Google’s, hence its difference in ask and bid values is much closer to equilibrium; however, it will never be exactly at equilibrium as long as they wish to survive economically speaking.  These new companies offer hope for smaller businesses in an environment dominated by Google.


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November 2012