Google has come under fire for its search dominance from competitors, advertisers, publishers and regulators. And now a university professor is taking issue with Google's habit of purchasing house ads.

According to Santa Clara University professor Eric Goldman, Google gets an unfair advantage when it comes to bidding on its own ads. And he has a few points.

Many publishers run house ads. But in Google's case, the situation is a bit different. In a post called The Problem With Google House Ads, Goldman writes:

"When Google runs house ads, it simultaneously conducts the auction that it is bidding in—an impermissible conflict of interest."

This is something that all search platforms deal with. But it's becoming a bigger problem because Google simply handles so much of the online search market. (71.4% in July, according to Hitwise.)

Google often runs its own ads to explain strange search results and to promote charity pages during large crises. But Google also runs ads to promote its own services. And when it does this, the company is bidding against its own customers. Writes Goldman:

"Google’s positioning breaks down when Google buys house ads via AdWords. In those situations, Google is both running the auction and bidding in that auction as an advertiser."

Google claims that it pays the same price as any advertiser would. But it's different when the money is coming from and going to the same place. Moreover, Google's bids affect the price of ads for its customers (and competitors for these ads).

No one knows how Google's internal bidding goes, because Google does not make its algorithm public.

But advertisers who lose an ad auction to Google could be paying more for the ads they get, or they could simply be paying same price for a lesser search spot. In either situation, Google's entrance into a search ad bid changes the outcome for its customers. According to Goldman:

" If the other bidders’ prices stay the same and Google siphons away some clicks from them, Google’s ads have a clear opportunity cost. However, if Google’s entry into the auction prompts other bidders to pay more, some or all of that opportunity cost will be made up by increased revenue on the remaining clicks. It’s even possible that Google’s house ads could create net new profit. From an auction integrity standpoint, it’s unacceptable for Google’s entry into the auction to affect the prices bid or paid by other bidders (its advertisers), whether Google’s profits increase or decrease."

Google already buys ads from sites like Yahoo and Bing. But Goldman suggests that if Google wants ads in its own search results, the company should create additional units that others cannot bid on.

The recommendation seems sound, though it would bring a level of transparency to the process that it currently lacks. And that could encourage more complaints. If advertisers (or more likely direct competitors) see that Google is reserving prime real estate for itself and not allowing others to purchase certain spots, it could open a whole new can of worms.

Goldman concludes:

"I feel a little silly writing nearly 2,000 words explaining why auctioneers should not bid in the auctions they run. We all already knew that. Yet, Google apparently violates this basic rule every time it runs house ads in AdWords auctions. Google should fix this—and restore integrity to its AdWords auctions—by no longer competing with its advertisers in those auctions."

And Google has already responded. According to a spokesperson:

"As we've always said, all search engines run ads to inform users about services that they provide. Google is no exception to this practice. We believe in the value of our advertising platform and use it in the same way that other advertisers do."

The problem with this repsonse is that Google's competitors don't control over 3/4 of the search market. And the bigger Google gets, the more this becomes an issue.

Meghan Keane

Published 19 August, 2010 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

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Scott

Surely Goldman's view is wrong unless the bidder is purely interested in 'outranking' their competitor?

Most experienced AdWords techies I think would agree that bids should be set based on target CPAs or ROI margins .. so who is trying to out perform Google on their keywords then?

on a side note, has anybody tried bidding on [google] since the trademark keyword bidding was opened on AdWords?

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