A Modest Proposal on How To Commoditize Away Google’s Advertising Revenues.

New eBay blogger Josh Scott muses about Bill Gates’s comments that Google isn’t really free because they serve up ads. To quote Josh paraphrasing Bill:

[S]earch engines like Google get their revenues from advertising because people use these search engines, but they don’t share these advertising revenues with the end users who help them get the revenue.

Later on, Josh hits on my number one long-time issue with making money from search:

[Google should] be concerned about the lack of network effects, but also by the related fact that the switching costs both as a searcher and as an advertiser are so low.

I use Google now because it’s the best. But I used to use AltaVista. And before AV, I used Lycos. If (when?) someone else comes along, I’m going to switch.

Google has no inherent structural advantage over other companies in regards to search. They are no lock-in costs or network effects. They’re just better at it. But companies such as Microsoft and Yahoo! and eBay can also hire engineers who can write search engines. They can even hire away Google engineers.

If eBay sellers will go through the hassle of selling their items through multiple channels, you better believe advertisers will go where they get the best bang for their buck, too. As long as Google continues to aggregate demand and provide the “best” clicks, they’ll continue to capture massive value.

However, when other companies catch up, either by providing a better service or by paying me to use their search engine, Google will need to cut into their AdSense margins to remain competitive. This hurts Google and all search engines on the supply side.

In related news, Tim Bray talks today about “The Future Search Market” He describes an application that has a Web search window and:

When someone types in “Britney Spears” or “Mayan Eschatology”, I send the query off three different search engines who pay me a small retainer for the privilege of getting them…. You could imagine an alternative setup in which you send the search terms to the engines and all they come back with is their per-click bid price, and then you only send the actual search to the winner.

It’s certainly true that companies such as Google and Yahoo! pay to be the search provider for popular applications, such as Firefox and Safari. They also pay to be the search provider for popular Web applications, such as AOL and the Washington Post. However, this doesn’t need to apply to big companies.

Another way Google currently pays for traffic is through their AdWords program. Tim’s idea applies just as well (if not better) to any page on the Web that runs contextual ads — which are essentially embedded search results intelligently served-up based on a fancy back-end algorithm. This algorithm guesses what a visitor would have typed into the search box (if only one had existed).

Right now, Google (presumably) has a nice margin between what they charge advertisers (via AdSense) and payout (via AdWords). This makes them a tidy profit.

But Yahoo! and Microsoft have similar products. As a content provider, you’d switch from AdWords if you made more money from the Yahoo! Publisher Network. But right now, your choice of contextual advertisements is all or nothing: you’re either with Yahoo! or Google or Microsoft. You have a few choices, but you’re forced to pick one and stick with them until you switch.

This is quite coarse and inefficient. You’re leaving money on the table because it’s not really a question of whether you make more money overall from one company or another. What you should really care about is whether you can make more money for them (and thus from them) for this specific visitor at this specific instant in time.

Tim’s idea becomes:

[A]n alternative setup in which you send the search terms page URL to the engines and all they come back with is their per-click bid price, and then you only send the actual search to serve contextal ads of the winner.

If Microsoft and Yahoo! want to make a big dent in Google’s AdWords business, they should provide a pricing Web service for contextual advertisers. By providing transparency in the market, they’d commoditize away Google’s demand side, too.

If you were a company that made money from multiple channels and you were facing a large scary competitor that made 99% of its money from advertising, wouldn’t you do your best to erode as much profit margin from advertising as you could?