Google didn’t become the behemoth that they are by having the best technology. They didn’t invent a faster computer to retrieve the most accurate search results in .15 seconds. They became the leader in search and online advertising by being creative – and they did it through auctions. Yes, Google is the world’s largest auction company.
Have you noticed the advertisements that come up whenever you do a common Google search? They show both on the top and side of your search results (see image) and match incredibly closely to what you are looking for. Have you ever thought about how Google decides to place the accurate ads? Behind the scenes a genius little auction is held for every search that takes place.
Advertisers place bids for what they would be willing to pay to show up next to search terms that they believe are close to their product. Google also ranks the relevance of the ad using a complex algorithm. These two pieces of data are combined to rank each potential advertisement. Then a Vickrey auction is held to determine the price each advertiser must pay and the order of the ads. I highly recommend this extremely concise explanation from Wired magazine (only 226 words).
Well that isn’t so complicated, how much money did they make with that idea? Sure one step of the process is technologically complex, but even if their relevance ranking was created in one day, it would be able to get the job done. The real genius is applying an automated auction system to online advertising, optimizing for price and relevance while allowing the advertiser a high degree of control. So that begs the question – where else can I apply an efficient auction process that will make me billions of dollars?
Of course there are a lot of reasons Google is where it is today, I don’t mean to oversimplify things. But this simple auction is a good chunk of the $24 billion in revenue they made last year.
More:
- Descending-clock auction for electricity – Trade Electricity Like Pork Bellies
- Terrific full Google article in the Wired magazine issue – Secret of Googlenomics: Data-Fueled Recipe Brews Profitability