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Google Looking to Build Profits through Mobile Device Ads

The New York Times published an article entitled  “Google Profit Will Depend on Wringing More From Mobile Ads” on October 15, 2014. The article talks about what Google is doing in response to seeing an effective drop in advertisement prices as its “cost per click” keeps falling. The drop in advertisement prices has to do with more people spending more time on their mobile devises versus a desktop computer.

Google is now trying to push more advertisers to invest in mobile advertisements because of the change in people’s device choice for “surfing the web.” Today, people spend a quarter of their time on mobile devices, up from 14 percent just two years ago. For example, last year, Google announced its “enhanced campaigns.” It basically forces advertisers to bid for advertisements across different device types instead of having separate campaigns per device type. In an effort to convince advertisers of the efficacy of this approach, Google is arguing that even though people might not click on an advertisement on their mobile devices immediately, they could come back and click on the advertisement later on, but maybe on a different device.

Interestingly enough, Google’s advertising strategy relates directly to a topic covered in class. Google’s auction bidding for advertisements system works like a Generalized Second Price auction. In a Generalized Second Price auction, the advertiser would place a bid on the “value per click” that they would be willing to pay for, and then the advertiser is assigned a slot based on their bid. The advertisers are then charged the next highest bid per click. So for example, let’s say, three advertisers X, Y, and Z each says it is willing to pay $3, $4, and $2.50 per click, respectively. Accordingly, the advertisers would be assigned slots X –> A (the first slot), Y –> B (the second slot), and Z –> C (the third slot) based on the price each is willing to pay. However, advertiser X would pay Advertiser Y’s bid, Advertiser Y would pay Advertiser Z’s bid, and Advertiser Z would pay $0. Looking at how the Generalized Second Price auction works shows why Google’s profit has been decreasing. In effect, Google does not set its own prices for advertisements; the advertiser does as it bids against other advertisers. Therefore, if advertisements on Google are not doing well for advertisers, then they will be less willing to invest a lot of money for a bid slot. If Google wants to increase its profits from advertisements, then it will have to find a way to convince advertisers that their ads are working and make it more rewarding for advertisers to buy advertisements for mobile devices where consumers are spending more and more time.

 

NEW YORK TIMES ARTICLE LINK: http://www.nytimes.com/2014/10/16/technology/google-earnings-will-depend-on-wringing-more-from-mobile-advertisers.html?_r=0

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