Is the 800-Pound Gorilla a Search Engine or an Advertiser?

Posted on Thursday, December 17th, 2009 by Print This Post Print This Post

Categories - Featured, SEM

There comes a time in most businesses where manufacturers look around at various opportunities for growth and struggle with them due to channel conflict.  According to Wikipedia, channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products direct to consumers through general marketing methods and/or over the internet through eCommerce. (http://en.wikipedia.org/wiki/Channel_conflict)  In the case of Ad Words, Google is the manufacturer and as you can see below, they are now also the advertiser who is in the business of re-selling mortgage refinance leads.

Reinance Mortgage Rates

As Ad Words is starting to reach maturity, Google has a tough decision to make.  Does it bite the advertiser’s hand that has fed them and made them into the monolith that they are or do they start to smear this line?   Personally I think this is a risky strategy because there are numerous online lead aggregation businesses that have paid Google millions of advertising dollars over the years.  Now Google is going head to head with them.

Another interesting aspect of channel conflict is that consumers usually want this to happen.  If Sony is willing to sell me an HDTV at a better price than BestBuy, I am the winner.  But Sony has to factor in what this will do to their relationship with BestBuy long term.  If Sony has enough strength in the marketplace (i.e. consumer demand for their product is strong), then they probably get away with it.  But there is a risk that over time that retailers like BestBuy will feel shafted and decide to promote other brands.  Coming back to Google and the example above, the consumer will probably love this functionality, but how does a Lending Tree feel?  What can they do about it?  The answer is probably nothing right now because they need Google.  If they pull their ad dollars in isolation, it has no impact and they probably need to play ball with Google due to their scale.

The thing I am so interested to watch is how Google wields this market dominance they have over the coming 5 years.  If something shifts in the online advertising market and there are viable options to Google, advertisers could jump at the opportunity due to decisions like this one.  There is a big difference between being the 800 pound gorilla and acting like it.  Channel conflict is real and cutting out advertisers could have long term implications.

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3 Responses to “Is the 800-Pound Gorilla a Search Engine or an Advertiser?”

  1. Ted Ives says:

    It’s really hard to fathom why Google, with so many other revenue possibilities open to it, would choose to do this.

    Other examples of major channel conflict episodes I can recall in technology include:

    - Compaq beginning to sell direct in response to Dell in the early-mid-90′s (this drove Compaq resellers crazy and was a painful transition – but it was almost a matter of survival, the threat from Dell was so big).

    - Apple’s on-again, off-again dalliance with Claris, its software subsidiary – this drove Mac software companies crazy sometimes, but often it was simply because there were serious holes in the Macintosh ecosystem Apple wanted to make sure were well filled.

    - Intel moving into Motherboards, Video Cards, and Ethernet cards – but again, this appeared more to be to either foster or arguably control large portions of an ecosystem to keep it all moving together synchronized – standards play a huge role in the PC market.

    Google’s move does not look like a response to a threat, and it doesn’t seem to involve any sort of fostering of an ecosystem or platform really – I agree with you, it just resembles a forward integration reach for revenue.

    If Lead-Gen companies have been making inordinate profits while providing less value than one thinks they should, then that points to some kind of breakdown of the free market. Perhaps information has not been flowing freely enough somehow (for instance, in most real-world auctions when you lose, you at least find out what the other guy paid ;-)

    Absorbing lead-gen functions into Google seems very un-Google-like…I think we’ve all become accustomed to much bigger ideas from Google, which usually lead to huge platforms and markets that myriads of partners can leverage – not the reverse(!)

  2. Alec Green says:

    The lead gen companies (particularly in personal finance) have been consistent spenders on AdWords, so this could end up being a case of a company biting the hand that’s been feeding it.
    But along with a bunch of really smart engineers, Google has a bunch of really smart business people. They must be confident the incremental revenue from selling mortgage leads direct will more than make up for the forgone CPC revenue from its advertisers.
    Will be interesting to see if this continues and to what other verticals Google applies this model.

  3. Why exactly Google decided to get into this game is crazy but i’m sure they want to make a few more bucks. I still think this kills it for the advertisers spending money on ads in this search category.

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