Google spanked for bidding on its own ad auctions

Google likes to argue that its search advertising empire is immune to anti-trust claims because it doesn't set ad prices. AdWords, the company says, is an auction where advertisers bid for the placement of paid links. But the reality is far more complicated.

One issue is that in some cases, Google is bidding in its own auctions. As you may have noticed when, say, Google unveiled its Nexus One phone or told the world it might leave China, Mountain View uses AdWords to run its own house ads.

For Santa Clara law professor and noted tech blogger Eric Goldman, such an arrangement shouldn't be allowed. "Many publishers run 'house ads' to self-promote their own offerings. Google does too," Goldman writes in an online article seven months in the making. "However, Google differs from most publishers because it auctions ad space on its network. Thus, when Google runs house ads, it simultaneously conducts the auction that it is bidding in — an impermissible conflict of interest."

Asked to discuss the issue, Google responded with a short statement: "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 difference, of course, is that Google controls as much as 90 per cent of the search market. "Google’s positioning as an auction conductor has emerged as a central defense to the increasing antitrust attention being paid to Google’s remarkable share of the search advertising market," Goldman says. "However, Google’s positioning breaks down when Google buys house ads via AdWords."

In response to queries from Goldman, the company also defended its arrangement by saying that house ads “are subject to internal marketing budgets.” Presumably, this means that if the Nexus One team wants to run a Nexus One ad, the cost comes out of the team's budget — even though no actual money is changing hands. But this hardly addresses the problem.

"I don't think the fact they have separate budgets is a response [to the issue] at all," Goldman tells The Reg. "It's orthogonal." The problem, he explains, is that Google has insight into its auction that others don't have.

With AdWords, online businesses can arrange for ads to appear in response to keyword searches. The program is indeed an auction — though it's not an auction like any other.

If a business bids high enough, its ad will appear each time someone searches on a particular term or collection of terms. And each time someone clicks on the ad, the business pays Google somewhere south of its bid (until they exhaust their daily budget). But ads spots aren't calculated by bids alone. Google also assigns each advertiser a "quality score", and placement is determined when bids are multiplied by this numerical rating.

The rub is that no one quite knows what goes inside the AdWords auction — except for Google. Quality score is explained in generalizations not specifics, and advertisers never see the bids of competitors. Google says it keeps the details under wraps to prevent bad actors from gaming the system, but the setup is also problematic for legitimate advertisers — for many reasons, one being that Google is both bidder and auctioneer.

"Google’s behavior lacks any auditability or verifiability; as outsiders, we have no idea what Google is doing under the hood," Goldman writes. We have no idea of knowing whether internal Google teams have access to competing bids, and more importantly, Google alone knows how it calculates quality score. "Actual ad placement depends on ad quality scores, and Google has acknowledged that it has 'exceptionally high Quality Scores' which should automatically give it a bidding advantage over everyone else," he says. "No one else can audit or verify Google’s self-designated ad quality scores."

What more, Google has more wiggle room when it comes to daily budgets. "Because all Google bids just involve internal funds transfers and no out-of-pocket cash payments, Google can easily increase departmental budgets to enable more aggressive bidding — after all, if no cash changes hands, it’s just funny money anyway."

The end result is that house ads may drop other ads down the page — or nudge advertisers into upping their bids. "Some advertisers will seek to reclaim their prior ad position by increasing their bids," he says. "Indeed, Google’s AdWords tools will automatically encourage advertisers to pay more to generate more clicks. For advertisers using Google’s automated bidding tool...Google may automatically increase an advertiser’s bid to increase click volume. Thus, Google’s entry into the auction could cause other bidders to increase their bid amounts in a variety of ways."

But even if house ads don't end up boosting revenues, Google is undermining its argument that AdWords is an auction. "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."

But, Goldman argues, Google could easily end this conflict of interest. It could exclude all other advertisers from auctions it's bidding in — or simply limit its own ads to non-AdWords units. "As Google already does on occasion, Google can create new ad units outside AdWords exclusively for house ads. Running ads in a separate ad unit would obviate the need for Google to compete with advertisers in an auction, although I imagine some advertisers still will be annoyed by any click siphoning."

Judging from Google terse statement on the matter, neither is likely. ®