I am sorry, I can’t stop going after posts I disagree with on the web.
The head of Group M complains to Ad Age that if Yahoo isn’t competing with Google, search prices will rise:
“The party who bids highest and who achieves the highest quality score, comprised of price, relevance and likelihood to click, wins. And in a competitive market the price is capped by the incremental cost of the click to the advertiser in search engine A vs. search engines B, C or D and the total volume of clicks that the advertiser wants, needs or can afford.”
There are real issues in pricing in this specific monopoly (read here), but this economics theory argument misses the reality of the situation. As Aaron Wall already pointed out, breaking down the data, you already pay more for clicks on Google, but that is only because the backend performs so much better.
Rob misses the target further:
“Inevitably, the per-click price of search will continue to rise if other channels deliver less volume and efficiency, and, if not capped by internal competition in the market, they will rise to a fraction below the costs of non-search channels.”
Err, I think the real economic theory here is that the price rises until the market CPA is exactly the same across channels. For ease of discussion, a simple market like mortgage leads can be looked at. Let’s say that a mortgage lead is worth $100. If 10% of clicks turn into mortgage leads, then a mortgage lead firm is willing to pay up to $10/click. If Yahoo offers worse converting clicks (as Aaron illustrates), then maybe the conversion rate is only 5%, lowering what an advertiser is willing to pay to $5. If we are theorizing an efficient market, and that is certainly what he implies, then the backend performance will be equal across search and non-search channels. If it is unequal, then there is an arbitrage opportunity and the advertiser is inefficiently spending in one medium or the other.
Now, search performs great, don’t get me wrong. People are actively seeking things related to a product! That is going to perform great. But the result is higher per click prices in an efficient world, driving to the same back-end result. This happens regardless of how many search providers there are.
How does internal competition in the market keep per click prices low? Really, it isn’t about having lots of players, it is about optimization. Better optimization provides better targeting. More players doesn’t lower prices. In fact, by distributing budgets across many algorithms, testing costs rise, creating potential inefficiencies.