By: Chris Beasley

June 25th, 2003

Reader Rating: 8.5

A few months ago, Google began distribution of the AdWords advertisements that are normally found at the right side of their search results (for more on AdWords, see http://adwords.google.com [1]). This distribution was based on CPM rates, and was limited to sites that served more than 20 million impressions a month, along with ad networks like Burst!Media, TribalFusion, and Fastclick.

Last week, Google launched a new service called AdSense [2], which expanded on this distribution program and made it more accessible to smaller publishers.

This new program differs from what is now “AdSense Premium”, in that it is CPC based and, for the time being, offers less flexibility in terms of ad sizes -- only banners and skyscrapers are currently available. Publishers can apply using their existing AdWords accounts, or may request a new account. Applicants are usually notified within a day as to whether they’ve been accepted for the program.

There are no strict criteria for acceptance into the AdSense program, which, unlike other ad networks, does not place minimum traffic requirements on applicants. The only real criteria are the standard “acceptable content” requirements that exist just about everywhere. Of course, AdSense wants to attract quality content sites, and will only allow AdSense members to serve one ad per page – the service can’t be used for both banners and skyscrapers.

Once you’ve been accepted, you’ll be able to run AdSense advertisements on any site you own using the same ad code, provided you obey the guidelines. Reporting doesn’t occur in real time, but is updated regularly throughout the day. Currently, you cannot view reports based on a domain or site basis if you run the ads on more than one site. Google has published a very lengthy and detailed FAQ [3] on the AdSense site, and if you’re thinking about signing up, you should definitely read it.

How Does The Targeting Work?

Google uses its search engine ranking technology to decide which ads to show on your site, and on specific pages of your site. For instance, on a Webmaster site, an article about Flash might be accompanied by an ad for Macromedia products, while an article about Web hosting might show an ad from a hosting company. This type of targeting is very effective, and results in good click-through rates in most circumstances.

However, this type of targeting isn’t perfect. One key issue with the system is that Google seems to be doing very little in the way of ad rotation. If a certain ad is highly targeted to your content, it might be shown every time. This means that if you attract a large number of return visitors, or generate a high number of page views per visitor, you may experience declining click-through rates on the ads over time.

Another issue is that Google targets the ads based on your site’s content, not your visitor’s desires. The difference between the two might not be readily apparent, but it can have a significant impact on clickthrough rates.

For instance, I run a literature site that provides information on classic books and authors. Google will analyze my content and serve advertisements they see as being appropriate. For instance, on my Shakespeare page users may see ads for Shakespeare audio books or limited edition prints. The problem with this is that while those ads fit my content, they do not fit my visitors. Most of my visitors are students doing research and they simply aren’t interested in buying those types of products. In contrast, advertisements for essay or other homework assistance services do very well on that site. But unless an essay site owner specifically selects a keyword like “Shakespeare” in their AdWords account, visitors to my site will not see any essay advertisements.

In pondering this situation I was reminded of a company called TeknoSurf Adwave, who eventually turned into Advertising.com. Their original claim to fame was that they were a CPC-only ad network. Yet they took the time to identify the banners that performed well on each site, and optimize the ads they served. This proved very successful – members enjoyed clickthrough rates high enough to generate an effective CPM. Indeed, the company’s figures were usually comparable to, or better than, the CPM rates offered by many other ad networks.

If Google could implement a similar system, it could greatly increase the effectiveness of their AdSense program. However, a hurdle to implementing this kind of system is that, currently, AdWords advertisers specifically select keywords under which they want ads to be served. For Google to implement TeknoSurf-style targeting, it would have to allow AdWords advertisers to opt into a program in which Google could place ads on the basis of what had been proven as the most effective keywords for that advertiser’s product.

In this situation, if an advertiser served essay advertisements based on the “Shakespeare” keyword, and those ads did very well on my site, Google would remember this. The system would automatically compare the text of that ad to the text of other AdWords ads, it would run similar ads on my site, and it would track the results to see how they ads performed. In this way, Google would constantly be learning what types of ads performed well on members’ sites and what ads didn’t. After publishers had used the service for a while, the program would be able to serve ads that were tailored to publisher sites’ visitors, rather than their content. Thus, CTR rates would improve, both Google and the publishers would make more money, and the advertisers would attract more targeted traffic.

How Much Can You Make?

The amount of money you can make with Google AdSense depends entirely upon the niche your Website fills. For instance, a site about men’s health can make a killing on AdSense because of the high level of competition for related keywords. The CPC rates for competitive keywords can exceed $1, which translates directly to your site’s earning potential within the program. Of course, if you’re in a less competitive niche, you’ll make less money. Still, I haven’t seen anyone report earnings less than an effective $1 CPM, and the average seems to be more along the lines of $4-$5 CPM. Some people are making an effective CPM of $15 or more with this program. And all these figures reflect what the site owner receives after Google takes its commission.

Commission is definitely one thing is that’s up in the air with AdSense. Google doesn’t publish the percentage it takes as a “cut”, and only displays the publisher’s cut in member reports. So far, comparisons of AdWords rates with AdSense earnings have produced commission estimates between 40% and 60%. Why Google refuses to publish its commission rates is unknown. It could be for legal reasons arising from the contracts the business has with premium distribution partners, or it could simply be that Google wants the ability to change rates without having to explicitly announce those changes.

So far, most members report steady declines in earnings each day. This could be a result of the issues I mentioned above, including the lack of ad rotation. However, Google will likely implement changes to increase the program’s effectiveness in future, so this phenomenon is likely to be temporary.

Looking to the Future

Currently, the online ad market is in a fairly dismal state. Though it has recovered somewhat from lows experienced after the collapse in 1999, Web advertising is still very much a buyer’s market. This is not because online advertising doesn’t work – it’s because people either do not understand how it works, or don’t know how to make it work.

One other reason is that advertising has traditionally been the realm of big publishers and big companies. Ad networks have changed this structure, and allow small publishers to display ads from big companies. However, due to the large minimum buys imposed by ad networks, most small companies have been limited to PPC search engine advertising. Google AdSense takes the PPC search engine model and allows small publishers to benefit from it. Now, for the first time, small companies can easily advertise with small publishers.

The implications of this are far-reaching. Currently, many advertisers will design low-CTR banners and pay CPC rates on them, or design high-CTR banners and pay low CPM rates on them. The end result is that the advertiser enjoys the benefits of either cheap branding or cheap traffic, and the publisher earns much less than they should. With AdSense, many publishers will likely end up abandoning low-paying ad networks, as AdSense ads are more lucrative and less annoying to visitors. This means that ad networks may end up with less available inventory and they will either fail, or end up having to charge more in order to compete with AdSense. Eventually, it’s likely that advertisers will be forced to pay a premium to run graphic advertisements that are more intrusive than the simple text ads Google offers.

Google generally has the public’s goodwill, and as these ads are provided by Google (and are clearly marked as such), the public will likely be more accepting of the advertisements. The current anti-ad attitude that pervades many aspects of society may be lessened by these types of ads.

All in all, Google’s new program is good for publishers and the Internet advertising industry as a whole. Even if you choose not to run Google’s ads, the ripple effect of their introduction may mean higher rates for the ads you do choose to run.

[1] http://adwords.google.com
[2] http://www.google.com/adsense
[3] https://www.google.com/adsense/faq