Tuesday, June 19, 2007

Google vs. eBay

Lots of folks have commented recently on eBay's highly publicized decision to pull their ad spend from Google, after Google equally publically kicked eBay in the nuts over the PayPal/GoogleCheckout fight.

Here's the interesting bit, for me at least. I have a theory that because of Google's huge mindshare, and because their tools are so easy to use, that it's just easier for an advertiser to use Google than to use any of the dozens of alternatives (whether first, second or third tier). In other words, Google's dominance is a classic example of a market inefficiency; and as anyone with a smattering of economic theory knows, market inefficiencies equal money. I suspect that there's a lot of profit to be picked up on the second tier PPC providers, for anyone who's willing to overlook the herd mentality Google has found it so profitable to cultivate.

So eBay's decision to pull their spend from Google (and presumably push those dollars to other networks) will be an interesting test case. If my theory is correct, and pricing pressure is excessively high on Google's network, eBay will be able to get the same clicks for a lot cheaper on these other networks. And of course: eBay is a big enough customer that this switch will help these networks pay more out to their publishers – resulting in more volume running through these networks: a classic virtuous circle.

That's my hypothesis, at any rate. The alternative is that eBay will discover that these other providers aren't as sophisticated as Google, and that a click in their networks isn't worth nearly as much as a click in Google's. (Some of that will happen in any scenario: Google is pretty darned sophisticated.) The next couple of weeks will be interesting. If eBay switches any substantial portion of their spend back to Google, that will be a Very Bad Sign for tier two providers who are struggling to compete against a reasonably ruthless 800 pound gorilla.

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