NYT: Small Businesses Face Soaring AdWords Costs

The New York Times recently published an article about the rising costs of using Google AdWords for small businesses and advertisers. The article tells a familiar story that, unfortunately, is not a new one.

At first, AdWords seemed like an attractive and effective tool for small business owners and advertisers, who pay Google a fee for each user who searches pre-selected keywords and clicks through an ad. But prices for AdWords have been steadily increasing, and Google reported a 42% increase in paid clicks in the second quarter of 2012 over the same period a year earlier. Google’s overwhelming market share – 79 percent in the U.S., more than 90 percent in Europe, and 97 percent on mobile – means advertisers have few alternatives if they want to reach the most Internet users. And because of the price increases, “AdWords can bleed many a small business dry,” according to Sharon Geltner, an analyst at the Small Business Development Center at Palm Beach State College. Here’s one tale from the Times story of prices doubling:

“Mr. Telford had started a new management company, Cedar Creek Cabin Rentals, and was spending $140,000 a year on pay-per-click advertising to promote the 45 cabins in his charge. The programs had become increasingly popular and competitive, which meant that in order to retain his ranking in search results, he had to pay about $1.25 a click, double what he had paid initially. ‘The cost per keyword climbed dramatically over the years,’ he said. ‘And it’s still going.’

And that is a problem. While Mr. Telford agreed to pay more for his keywords, he said he did not see a commensurate increase in sales. ‘For a while, I was spending more than I was getting,’ he said. ‘It finally hit me to ask, ‘Can I sustain this?'”

We’ve seen this pattern before, in Google Maps and Analytics and mobile apps. Google hooks users on products, so users become accustomed, then raises the prices to staggering heights.

Google still maintains control over search results through its secretive algorithm and expansion into vertical search. Numerous businesses have reported being excluded or penalized through Google’s algorithm updates.

Google used to focus on high quality search results. In 2004 Larry Page said, “We want to get you out of Google and to the right place as fast as possible.” Now, Google wants to keep users on its own pages as long as possible—because Google can keep 100% of the revenue from ads on Google’s own sites, rather than splitting that revenue with external advertising partners. That enables the company to use subjective quality scores and to set minimum bid prices for key words to keep prices higher than they would be in a truly competitive search advertising market. Google’s restrictive advertising business practices are part of the focus of the four potential illegal abuses of dominance that the European Commission is investigating.

If Google is engaging in practices that hurt small businesses by restricting their ability to use other search advertising platforms and that drive up their costs artificially, another leg of the search giant’s argument against enforcement of the existing antitrust laws falls away. The evidence is mounting that Google is harming small businesses and innovators that seek to compete. The FTC, attorneys general and European Commission have collected evidence of Google’s abuses of dominance and have the power to put an end to them. The time for action is now.