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Comment by tpmx | Hacker News Reader

Suddenly Google's ad profits make a lot more sense.

When I worked in this field (and I must stress that this is 15 years out of date anecdata), my impression was that Google's profits came from a mix of a large influx of naive new users, and established companies with misaligned incentives.

By "misaligned incentives", I mean that we were rewarded with a % of ad spend. This is very common model in the old advertising industry, and AdWords was treated as adverts, not as a technology proposition. Of course this meant that we had very little financial incentive to reduce the ad spend.

A more aligned structure would have been to reward percentage of profits, but companies were reluctant to reveal their profit margins to a third party, and third parties couldn't trust their clients to report this data correctly anyway. Hence percentage of ad spend was what everyone used.

Percentage wouldn't necessarily be so bad, except that there's a certain base cost to setting up and running all of those systems. At some point getting someone to up their spending 10% has very little incremental cost. It would be far cheaper than trying to reduce overhead.

So now you have perverse incentives on perverse incentives.

And if you don't look at it too closely then you can feel good about all the money you're making helping people slowly self destruct. Your parasitism is perfectly justified by the mad stacks of cash you're making.

There's only two ways to get that much money. Do something really really good (at which point you probably will give a lot of that money away), or do something really really bad. If your company has to talk about 'evil', it's probably in the latter camp and always has been.

If you go with Google's suggestions when you setup an Adwords campaign, they will absolutely rinse your budget with minimal return. Google has a churn and burn mentality when it comes their Adwords customers as most new businesses fail within 12 months.

It would be interesting to know how significant a factor it is that established b2b companies try their best to rip off the new companies.

Absolutely. Two things I remember (from back in 2005) were:

Campaigns defaulted to worldwide. You've got some naive new user selling for example hand painted dolls to a UK audience. They sign up for AdWords, and get a huge influx of visitors, yet nobody is buying. Why? Because the website doesn't and cannot sell to all these new US and worldwide visitors. The thing is the seller is an expert in dolls, not SEO, and has no idea what is going on.

You can set a daily limit on ad spend, which is nice, but it means that your advertizing works really well for that niche midnight - 5am visitor profile, but doesn't actually bring in local buyers who are awake at normal times. Again, the naive AdWords users usually have no logging or stats (and if they do they wouldn't necessarily know how to interpret it) so they don't understand what is going on.

I hope Google have fixed these two things, but I'm sure there are plenty of other traps.

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