Thursday, September 20, 2007

Google stops agency bribes

A version of this piece was published in Marketing in 2007

Late last week, Google announced the latest changes to their controversial ‘Best Practice Funding’ scheme – the most significant of which is, it’s being dumped.

Launched in 2005 with just 13 weeks’ notice, the scheme upset many agencies and concerned many advertisers, who saw it as anti-competitive, market distorting and untransparent.

The scheme was designed to incentivise agencies to invest in search, by kicking back a percentage of their spend with Google.  But of course because it was only predicated on an agency’s spend on Google, its purpose was to incentivise investment on Google.

But for many agencies who had transparent relationships with their clients, the kickback was passed directly back to those clients, thereby negating the incentive effect and only rewarding agencies who kept the payment.

Advertisers complained that the unpredictability of the level of rebate made it harder to budget, and found that rebates coming back five months after the activity simply got deployed into whatever happened to need funding at the time – as often as not, something other than search.
But much worse than this, the scheme incentivised all sorts of behaviour that the ubermenschen at Google hadn’t anticipated.

There are a lot of clever people in marketing and media, and they’ve spent a large amount of time over the past two years figuring out how to play the system – time that might have more profitably been spent making their search campaigns work better.

Google’s offering an extra 5% ‘growth kicker’ to agencies that showed a given level of quarterly growth led to certain advertisers moving agency every quarter, knowing that their addition to an agency’s billings would qualify it for the extra 5%.  And since this applied across all the agency’s billings on Google, these advertisers often demanded a share of other clients’ rebate too (did you get all yours?).

The scheme’s market distorting effect was proved when tenders for search business started to include the question “what is the level of your agency’s BPF rebate?”, with procurement departments (understandably) seeing this as a part of the competitive dynamic between agencies.  

This seriously disadvantaged small agencies, creating barriers to entry and allowing poorer performing (but multinational) operations to offer greater rebates.  (arguably Google were knowingly subsidising the fees of poorer performing agencies in the knowledge that their inefficiency was actually more profitable to Google).

So the news that from 2009, the scheme will be dropped is a healthy development for the search market, which has grown to over £1bn in the UK.  In the meantime, it’s adjusting the scheme, dropping the problematic growth kicker and reducing the qualifying thresholds for the higher tiers of rebate.  Additionally it’s dropping the flat-rate 10% commission on non-search products like YouTube.

Whilst some agencies will fear the abolition of BPF, relying on it to fund their businesses, the move to a net model will create a level playing field in this market.  Agencies will have to demonstrate the value of their service, and will now only compete with each other on ability rather than rebates.

Advertisers’ attention will be focused on the role and effectiveness of their search activity, and won’t be subject to the distracting lure of deceptively cheap fees and market-distorting incentives. 

And whilst it’s irritating that the scheme will continue for a further 15 months, these businesses do need time to adjust their commercial arrangements, and Google’s preparedness to listen and to learn from previous mistakes is to be welcomed.

Google this year is expected to make more profit in the UK than ITV and Channel 4 combined, and with a market share of over 80% its imposition of the BPF scheme has led to it being accused of abusing a dominant market position.

With the EU’s competition authorities taking industry soundings over their acquisition of DoubleClick, the company is understandably wary of such accusations.  BPF’s demise is to be welcomed, but it could be little more than a sign that Google has bigger fish to fry.