Thursday, November 2, 2006

Google's plan to destroy transparency

In 2006, Google introduced (with virtually no notice) a scheme designed to boost the income of traditional media companies, who had been slow to develop their search propositions.  In doing so, they allowed thousands of advertisers to be ripped off by their agencies, and embedded a system that built in a disadvantage for the small specialist agencies who had helped Google to its success.  The scheme was quietly abandoned two years later.  If nothing else it demonstrates that even the smartest people get it wrong sometimes.  (First published November 2006)

From time to time, Google like to remind us that they’re a technology company, not a media company.  Whilst they admit they’re in the advertising business (99% of their revenue comes from ads), Eric Schmidt, their CEO says “that doesn’t make us a media company.  We don’t do our own content, we get you to someone else’s content faster”.

Now setting aside the clear nonsense of this position – many broadcasters don’t make their own content any more and haven’t for years, and they’re still media companies – this outlook does manifest itself in Google’s attitude to advertisers.

Rightly, Google’s priority is its audience.  Look after them, it reasons, and the ad revenue will follow.
So why is Google running around in circles trying to induce agencies to spend money with them, when their market is so successful?

For 2007, Google have announced the continuation of their Best Practice Funding scheme – a rebate they pay to agencies for spending money with them.  This is only paid to agencies over a certain size (not direct advertisers), and is tiered dependent on spend with Google in a given quarter.
Officially, the line from the Googleplex is that firstly, BPF is for agencies – not for clients – and that it’s there to encourage agencies to invest in services to support search.  Secondly, replacing agency commission with BPF creates a level playing field for all search advertisers.

But most agencies are contractually obliged to pass back media discounts to clients.  BPF doesn’t reward them, whilst for agencies that keep the rebate, it’s an inducement to spend money on Google to generate kickbacks, rather than to reflect the merit of the channel. 

Creating a level playing field in search is a worthy objective, and Google’s abolition of agency commission makes sense in this respect.  Agencies are paid by their clients – commission is allowed for in that agreement anyway.  But what Google have done is to replace a simple discrepancy in the market (some got 15%, some nothing) with a complex and inconsistent discrepancy.  Customers now get varying percentages, and some still get nothing.  So there’s no more a level playing field now than there ever was.

This complexity has another consequence.  BPF has created a forecasting headache for agencies and advertisers alike.  Agencies (and most advertisers) can’t predict with absolute certainty at the beginning of the quarter what they will spend by the end.  Because the kickback is paid two months following the end of the quarter, if advertisers want to reinvest it they have two options.  They can estimate the level they’ll get, and risk overspending if it’s short, or they can simply wait for it to be rebated and then decide what to do.
Many opt to wait, and find that their priorities have changed - sometimes they’ll re-spend the money on Google of course.  Often they’ll spend it on something else entirely, or simply keep it.

Finally, as media has over recent years taken huge strides in transparency for advertisers, BPF represents a real retrograde step as it’s not just untransparent, it’s anti-transparent.  Because agency groups aggregate their spend across Europe, a client of an agency group in London would have to be able to audit spend on Google out of the Milan office – perhaps even of a different media network in the same group – in order to know that they are getting their fair share. 

Now I can’t believe that an agency group would attempt to short-change its clients, and nobody’s suggesting that.  Rather, the problem is that Google have put in place a scheme that mitigates against transparency, undermining agencies’ ability to demonstrate probity.

Google is set to be the fourth biggest media company in the world by revenue this year.  It is an outstandingly effective channel – which makes it all the more perplexing that they feel the need to induce agencies to spend with them.  Google might not regard itself as a media company, but advertisers certainly see it that way – it’s time Google grew up and started acting like one.

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