Google’s Radio and TV Advertising Business
This blog post will reference the following Google paper: http://static.googleusercontent.com/media/research.google.com/en/us/pubs/archive/35113.pdf
It is common knowledge that Google sells many advertisements for its online products and services, such as search, youtube, etc., but Google has used its vast influence and resources to expand its control over advertising to even more areas, including TV and Radio. In fact, Google runs an online auction service that facilitates the communication between advertisers and TV and Radio publishers.
Google receives from these publishers a list of advertising time slots, generally between 30 seconds and 120 seconds each, and assigns each of these time slots a particular cpm – cost per mille, or price per thousand people who view the ad (such views will hereinafter be referred to as impressions). Google provides an online interface for advertisers to bid on advertising time on different stations at different times of the day; once the results of the auction are known, Google relays the information, along with a vast majority (but notably not all – Google takes a cut for its services) back to the publishers.
The strategy that Google employs to determine the best prices for its auction is very similar in structure to a second-price auction, and is designed such that it is the dominant strategy for each advertiser to bid its true value. To begin, Google asks its advertisers for their maximum advertising budget, as well as the maximum cpm they are willing to pay, say, perhaps $5 per thousand impressions.
In developing their auction algorithm, Google had to balance the maximization of two quantities: the revenue brought in for Google and the publishers, and also the advertisers’ value. Again, their strategy for maximizing these quantities is very much similar to those strategies we have discussed in class.
More specifically, Google employs what is known as a simultaneous ascending auction, in which each time slot for each publisher is assigned a low-reserve price (a minimum price that the publisher is willing to accept in exchange for advertising time, perhaps dictated by the value it could get by using the time for some other purpose, such as its own advertising), which increases every time a new advertiser comes along who has a greater value for the given slot than the current holder of the slot. In this way, the results of the auction are very similar to those results had we applied a pure second-price auction from class: the person with the highest value always gets the slot. However, it is important to note that Google also does not charge this advertiser’s precise value; they charge something a bit lower.
Once there are no more advertisers with higher value for a particular slot, the price of that slot ceases to increase, and the slot is sold to the present holder (with the highest value). In this way, Google is able to maximize both its revenue and the cumulative value of all of the advertisers.