May 27th, 2008

Google AdWords: A Brief History Of Online Advertising Innovation

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All innovation looks inevitable, except while it’s happening.

Google’s search advertising model didn’t spring forth fully formed. It was iterated, and many of the key concepts were borrowed — something many people don’t realize. But a few key market-defying decisions, and one stunning insight, made it all work. Here is a brief history to inspire, taken from John Battelle’s The Search (required reading for anyone who wants to innovate anything on the web):

In late 1999, Google began testing a program to sell ads on a CMP basis, the dominant ad model of the time.

But instead of using banner ads, the dominant ad format of the time, Google decided to sell only unobtrusive text ads. And they decided to target those ads based on search terms, and to keep the ads separate from the main search results.

Advertising first appeared on Google.com in January 2000 — text ads were sold by a sales rep on a CPM basis. (Yes, that’s right, there was no pay-per-click, no self-serve, no bidding.)

“It didn’t generate much money.” – Sergey Brin

In what would turn out to be a massive irony, based on its initial lack of success with advertising, Google had planned to give its inventory over to DoubleClick, the largest banner ad business of the time.

But then the bubble burst in Spring 2000, and the online ad banner market crashed.

In the wake of the bust, Google introduced a self-serve model for buying text ads — they got the idea from GoTo.com, although they did not then adopt GoTo’s pay-per-click model.

In October 2000, Google introduced AdWords, with this announcement on the main page, “Have a credit card and 5 minutes? Get your ad on Google today.”

This first version of AdWords still sold ads on a CPM basis — the program was successful.

In 2001, Google’s ad revenue was on pace to hit $85 million, but was outpaced by Overture (the renamed GoTo), which earned $288 million in ad revenue selling pay-per-click ads on an auction basis.

(Nobody remembers Overture because it was never a destination — it powered PPC advertising for other sites, and was later acquired by Yahoo, to become Yahoo Search Marketing — yes, more irony.)

In February 2002, Google introduced a new version of AdWords, two years after launching its first ad program and nearly a year and a half after first launching AdWords.

The new version of AdWords adopted Overture’s pay-per-click auction model, where advertisers bid on how much they will pay per click.

If Google had copied Overture entirely, the history of the web might be very different… but they didn’t.

Instead, Google introduced a breathtaking innovation.

Overture’s pay-per-click auction model allowed advertisers to buy their way to the top of the listings — highest bid gets the most exposure.

Google realized there was a problem with this approach. If an advertiser bid their way to the top of the ranking with an irrelevant ad, and no one clicked on it, then nobody made any money from the advertising.

Fortunately for Google, they understood relevance.

Google introduced clickthrough rate, as a measure of the ad’s relevance, into the ranking algorithm. So if an ad with a lower bid per click got clicked more often, it would rank higher.

The result — a lower bid ad with more clicks generated more revenue than a higher bid ad with fewer clicks.

As Battelle put it:

Google’s decision to factor clickthrough into an advertiser’s ranking forced an economy of relevance and profit into the pay-per-click model.

That “economy” turned Google into the great money-making machine that it is today.

Google had two moments of pure brilliance. The first was PageRank. The second was introducing relevance into the pay-per-click auction model.

So brilliantly obvious — yet nobody else at the time thought of it.

What’s notable is that Google didn’t invent search or auction-based pay-per-click advertising — their innovation was perfecting it.

The challenge of innovation is that we are all boxed in by what we know, by our assumptions about how things work.

Nobody at the time thought there was anything wrong with Overture’s model — it was making lots of money.

Nobody at the time thought search was a business — it was expensive and resource intensive, so most portals like Netscape, AOL, and Yahoo outsourced it — ultimately, to Google.

The next Google-like innovation is right in front of us — we just need to see past our own assumptions.

Forget what you know.

  • Thank you for such a great post and for reminding all of us that there was actually a company before Google that offered pay per click advertising. Today, everyone is so caught up with Google that they forget about Overture. The reality is that PPC is nothing new. However, it has spawned a whole entire industry that never existed before.

  • I was actually working (and selling) pay-per-click search engine results at a meta search engine called Mamma.com years before Google. I even remember them struggling at the beginning and people saying that they could never catch up to GoTo.com.

    It was (and still is) an exciting time.

    I find it even more fascinating that in the multimedia world of the Web, the big win in online advertising is text... speaks volumes to the written word and it's happening even more so now with stuff like twitter.

  • Very interesting read, but Google hasn't done anything new in quite a while.

  • Great post. What it illuminates is that genuine innovation - that aha moment - is really what creates great value (with persistence of course). What is fascinating is that one innovation alone and Google might be nowhere, but it was the combo of the two just at the right time...

  • Really great fantastic article!
    What next then?
    Will it be with the Semantic Web?
    Searching for "holiday in Rome" and getting ads packed from an intelligent agent.

    Are you searching from the UK (?), are you logged in google (?), do you have any cookies on your pc (?).
    The more of it, the better the "agent pack" will be!

    The results is that it won't look like an ad, but a complete full service including: place to stay, place to eat, travel/tour around Rome, museums and monuments to visit, cars to rent, tickets to buy, shopping places, and so on... (including the most relevant events during your staying).

    A perfect agent who provides a list of services relevant to you... and you will only need to check the box: yes or not.

    Personalized/customized relevant useful (and probably pleasant) "hidden" ad service!

    And it can always be improved!!! ;)

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