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.
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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