How Google Cashes In on the Space Right Under the Search Bar

• Updated on: 2018-09-02
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SAN FRANCISCO — Before Sergey Brin and Larry Page founded Google, they wrote a research paper as doctoral students at Stanford University in which they questioned the appropriateness of ads on search engines. “It could be argued from the consumer point of view that the better the search engine is, the fewer advertisements will be needed for the consumer to find what they want,” the pair wrote in the 1998 paper. How times change. Two decades later, it’s not unusual for a smartphone user to see only ads on a Google search page before scrolling down to the regular results. When Google’s parent company, Alphabet, reports earnings this week, the internet giant’s big profits are expected to demonstrate yet again that the billboard space accompanying Google queries is the web’s most valuable real estate for advertisements. In the 17 years since Google introduced text-based advertising above search results, the company has allocated more space to ads and created new forms of them. The ad creep on Google has pushed “organic” (unpaid) search results farther down the screen, an effect even more pronounced on the smaller displays of smartphones. The changes are profound for retailers and brands that rely on leads from Google searches to drive online sales. With limited space available near the top of search results, not advertising on search terms associated with your brand or displaying images of your products is tantamount to telling potential customers to spend their money elsewhere. The biggest development with search ads is the proliferation of so-called product listing ads, or P.L.A.s. In a departure from its text-based ads, Google started allowing retailers to post pictures, descriptions and prices of products at the top of search results in 2009. In recent years, Google has served more product ads and expanded their availability to more general search terms — for example, showing photo ads on a search for “running shoes,” not just “Nike Air Max.” It has also tinkered with the size, location and number of ads on results pages for both computers and smartphones. Retailers are snapping up product ads. They accounted for 52 percent of all Google search ad spending by retailers in the first quarter of 2017, versus 8 percent in 2011, according to the digital marketing agency Merkle. “P.L.A.s takes the search engine results page to a different level,” said Andy Taylor, Merkle’s associate director of research. A Google spokeswoman said the company’s goal had always been to quickly give people the best search results. “Our goal has always been to deliver results that people find immediately useful, which is even more important on mobile devices with smaller screens,” said the spokeswoman, Chi Hea Cho. “For most queries, we show no ads, and we recently removed right-hand text ads for all queries. For highly commercial queries, our extensive testing shows that people find relevant ads and offers extremely useful.” The importance of being at the top of search results is fueling fierce competition for ads. Reef, a beachwear manufacturer best known for its sandals, said it increased spending with Google by 76 percent last year — mainly because it nearly quadrupled the money it put into product ads. On a search result, Reef is competing with other manufacturers of flip-flops, as well as retail partners selling Reef sandals. On a desktop computer, a Google search for “Reef flip-flops” brought back three text ads above the search results — one from Reef, one from Zappos and one from Amazon — selling Reef sandals. There were also nine image-based product listing ads displaying different Reef sandals for sale; only three were offered by reef.com while the rest were ads from other retailers. On a mobile phone, Reef is competing with even more retailers. The same search brought back only Reef’s text ad, but below a scrolling carousel featuring more than 20 image ads for different types of Reef flip-flops. Only the first two images linked to reef.com. “We’re competing against each other,” Jessica Levens, director of e-commerce at Reef, said about the company’s retail partners. “We need to spend the dollars to defend that real estate.” Ms. Levens said the advertising strategy was effective, although she had to convince her chief financial officer about the wisdom of spending more. Those product campaigns helped triple sales that started from online queries, including instances where customers searched without including the Reef brand name. Google’s prospecting for ad sales has not been limited to P.L.A.s. The company has introduced new forms of search advertising for automobiles, hotels and even home services such as plumbing. “It’s impossible to rely simply on organic” search, said Caitlin Aylward, a senior associate at L2, a research and advisory firm for consumer brands. “The winner in all this is Google.” Andreas Reiffen, chief executive of the search engine marketing firm Crealytics, said Google’s revenue from P.L.A.s on smartphones was more than double its revenue from text ads, because it can place three product ads in the same space as a single text ad, and consumers are more likely to click on image-based ads than text-based ones. The rise of product ads is also a reflection of a shift to people doing more searches on mobile phones. Google’s mobile searches surpassed desktop queries for the first time last year. That’s important for product ads, because P.L.A.s take up a larger proportion of phone displays, and Google increased the size of those mobile ads in 2015 to make them stand out even more. Alphabet doesn’t break out revenue from search ads, but growth in paid clicks on Google’s web properties — search, Gmail and YouTube, among others — is accelerating. It rose 40 percent last year, after an increase of 33 percent in 2015. At the same time, the average price of Google ads fell 13 percent in 2016, in part because mobile ads and P.L.A.s are less expensive than traditional desktop text ads. Product ads that appeal to shoppers are also strategically important because consumers are starting their online shopping at Amazon.com. Last year, a survey of 2,000 American shoppers found that 55 percent turn to Amazon first when searching for a product, while only 28 percent start with a web search. While retailers and brands may feel like they have no choice but to spend on search advertising, many do so willingly because it works. Kristi Argyilan, a senior vice president of marketing at Target, said search advertising was accounting for a larger portion of her digital spending because the ads were “becoming so useful” and more relevant. Traffic from product listing ads accounted for more than 10 percent of sales on Target’s website, while information in the ads, like whether a nearby store has inventory of a popular product, has provided important information to consumers. “The ads are becoming more purposeful,” Ms. Argyilan said.