Growing Ecommerce – The Retail Growth Podcast
Feed your growth mindset. Ecommerce is growing, and so are the challenges and opportunities for online retailers. In the Growing Ecommerce podcast, Mike Ryan and other smec experts are joined by industry leaders in ecommerce, digital marketing, and data science. By sharing business trends, practical solutions, and best practices, this podcast helps online retailers solve the challenges of tomorrow.
Growing Ecommerce – The Retail Growth Podcast
Google's Auction Games: Beneficial or Manipulative?
Are you ready to peel back the curtain on Google's shadowy world of search auctions? Prepare for a shocking journey that will explore the murky details of Google's alleged auction manipulation, as revealed in the Department of Justice antitrust investigation. This is an absolute must-listen for anyone in the e-commerce space, as we navigate the mechanics of their reserve price increases, the mysterious RGSP system, and the controversial practice of 'squashing.' We'll dissect how these manipulations effectively push up the average Cost Per Click (CPC) and what this means for advertisers.
We're going to get up close and personal with the RGSP - Randomized, Generalized Second Price auction - system that Google uses to decide auction winners and runners up. It's a system that, on the surface, seems advantageous for consumers and advertisers alike. But as we dig deeper, we'll expose potential side effects and its anti-competitive implications. Through this episode, you'll gain a greater understanding of the 'squashing' system, its role in Google's revenue growth, and why these tactics might just paint a picture of greed. We'll explore the conflicts of interest and trust issues that arise when the auctioneer also plays bidder. This episode is all about the why, the how, and the what now – you won't want to miss it!
Welcome to Growing Ecommerce. I'm your host, mike Ryan of Smarter Ecommerce, also known as SMEC. Today is a special episode where I'm covering some breaking news out of the US Department of Justice antitrust investigation into Google. While the trial is supposed to be focused on Google's alleged suppression of rivals, interesting evidence and testimony arose about alleged manipulation of the search auctions, including Google Shopping. These allegations are so explosive they bring into question the entire validity of Google ad's auctions and since this is such a key customer acquisition channel for e-commerce companies around the world, I felt this topic is too important not to cover. Alright, let's get into it. So thanks for joining me today as we step into this episode.
Speaker 1:I don't know exactly how long this conversation is going to take You'll see that because you'll know the time stamp on the published episode but I'm going to try to keep it rather compact. I want to cover some of these topics that are coming out of the Department of Justice antitrust case against Google, and these are kind of more technical, sometimes dry topics, but I try to make them simple to understand and as entertaining as I can as well, and I also want to mention that they're not specifically related to e-commerce, but this affects basically every e-commerce advertiser out there, and I think it's something that really requires some daylight, because these are really troubling allegations at this point, I guess. But there's evidence there which is very troubling, to say the least. And specifically what I'm referring to here, I'm going to focus on three behaviors from Google that I'm aware of, revenue increasing behaviors that came to light recently. I'll explain the context more in just a moment, but we're going to be talking about these reserve price increases and a I don't know program is the right word for it or system, but let's say system called RGSP, and then another special kind of system or internal terminology at Google called squashing. Now, if none of the three of those make sense to you right off the bat, don't worry, we're going to explain those. But to summarize in a nutshell this reserve price increases is the kind of intersection of bid floors and add rank thresholds, and then Google's ability to just tune or dial those, the way that those behave. Rgsp is a way of switching the actual winners of auctions, the position of winners and runner ups, which is not usually how auctions work, and squashing is referring to kind of minimizing the difference between the winning bid and the runner up bid, and I'll explain how and why that's done in a bit. But that ultimately drives up the average CPC. So these are all revenue increasing tactics that have been disclosed.
Speaker 1:Let's just start right there. I mean revenue increasing tactics. Let's get in. Before we get into some more details here, I just want to say I don't have a problem with companies increasing revenue or wanting to increase revenue or profit. That is their reason for being as a company. That's that companies are here to make money. I don't want to like condemn something like that, all right, but we'll see why.
Speaker 1:In the context of Google, this behavior is a little more troubling. I don't want to fault Google outright for being a profit seeking company like every other and I think many of the behaviors or incentives or the way things, some of the communications, they feel so familiar, they feel commonplace and what makes it a little different at Google is that Google is not a commonplace company. I don't want to. I'm not really an antitrust guy. I don't think that companies sometimes I feel that they get penalized for their success, their victims of their success. They've, you know, they Google is, in my opinion, fairly and squarely the best. But they're also operating at a scale and they have an extent of control over their environment that is not typical and arguably problematic.
Speaker 1:But we'll get into that more detail. So let's start with what is the broader context here. We're talking about Department of Justice antitrust trial against Google. It's expected to take about nine weeks. Basically, the broad sort of accusation here or case here is that Google is stifling competition from other search engines and you know and this is tied into browsers and devices as well this is harming consumers and kind of the main topic that you might associate with this case is default search, the fact that Google is a default search on like in Chrome and Chrome is coming like preloaded and default in a lot of devices and so on and so forth. Just there's all kinds of relationships in place where Google is paying to get special placement to become that default setting and we know that default settings are not readily switched by consumers.
Speaker 1:Often I actually I don't care about that part of the case at all. To be honest. I don't buy that at all. I think Google is the best and I think anyone else could have paid to be the first default setting. I don't really get that part of the case whatsoever, to be totally honest with you and people have accused me of being like, too pro Google or something like that. But I mean, listen to what I'm about to say. In the rest of this episode. I think that I bring a pretty fair and considered approach toward what's going on here and I speak my mind against Google all the time. I just don't agree with that whole default search stuff whatsoever. I don't see the problem, actually, but I don't want to spend too much more time on that. Like, let's get into the purpose here.
Speaker 1:Like some very interesting testimony and evidence was presented on day five of this trial and specifically it related to testimony from Jerry Dishler. He's the VP and GM of ads at Google and a lot of the evidence had to do with the email chain from May 2019, stretching back a bit, the broad context there was that some guidance had been issued to Wall Street from Google CFO at the time and this guidance was maybe too rosy, too optimistic or whatever Things were. They were going to miss that guidance and it would have been their second time, their second quarter in a row missing guidance and they were very worried about the impact this would have on their stock prices, the kind of way this would impact the morale within the internal teams at Google. And well, jerry sent some emails to make sure that the situation will get avoided, and this is where a lot of the information comes from about these three topics that we're going to discuss. So, to get started, probably the most publicized so far, I'm going to go from most to least publicized with these. From my perception of what I've been reading, the most publicized has to do with Google increasing prices five to 10 percent and not communicating that toward advertisers, and generally, this is the one that bothers me the least of these three things, but it is still. It's definitely not great and we'll explain why.
Speaker 1:You know what is a reserve price? To start this off, a reserve price is basically a minimum bit that a seller will specify in an auction. So you know, imagine that a piece of our work is being sold in an auction and sometimes there could be like hey, bid starts at dollars or something like that for this, for this painting. There could also be like a hidden reserve price where you don't know where bits start, and this is common practice within auctions and, by the way, I'm not like an auction expert here or an economist, but my understanding is that this is pretty common behavior in auctions, and also that sellers have a right to disclose or not disclose their reserve price or their kind of minimum bid. That's kind of not really the problem here. It gets more complicated because Google is not only this seller in this situation, they're also the auctioneer, so they've got kind of a unique overview and control over the proceedings and due to this smart bidding topic smart bidding has greater than 80 percent market adoption, according to Google they're also functionally the bidder. And then a third way, or an additional way that this gets a little confusing or a little upsetting, is that this is also related to ad rank and quick shout out.
Speaker 1:Before I go further here, I really want to encourage you to go. You know you're probably on your phone right now listening to this and if you're not driving or something, check out an article from Kirk Williams called let's Talk Google Ads Bid Floors, and that's Kirk at Zato Marketing, so it's the Zato Marketing blog and he wrote that article. I'm actually I don't see it. I didn't see it date on there, but I think he wrote in like 2020 or he's been pursuing that line of thought for a couple of two, three years anyway, and he perfectly predicted back then that this. I won't say that this would happen, but this could happen in that, knowing the incentives of businesses, that this likely would happen. Yeah, he really explains in some more detail about why it's problematic to be the seller and the buyer and the auctioneer and how this whole ad rank thing works. Let me just explain that in a nutshell, though.
Speaker 1:Ad rank is actually not necessarily a bad system. It's in place to help ensure relevancy of ads because you know there's a lot of complaints. If you go on Amazon these days and you search for something this is my personal experience, I think I've mentioned this before it's a terrible search engine result page. It's just stuffed with ads. The ads are very low relevance. The, you know, in general the matching is not very specific to the queries that I'm searching. I actually have a hard time finding what I'm looking for on Amazon and Google wants to prevent that kind of thing. You know they want to monetize their search engine result page. Of course that's our core business, but they don't want to destroy the customer experience, which is that people are looking for information and trying to find things when they're using Google and they can't damage that value proposition.
Speaker 1:So ad rank helps ensure relevancy and what this also does. It will make it effectively cheaper to operate for someone, an advertiser, that is more relevant and offering kind of better quality and more relevant signals, and it then will penalize someone who's in that auction who's less relevant. This can also have the effect of dampening the effect of, like big budgets, someone who's just going to throw money at the wall and see what sticks, Someone who could sort of brute force the auction and just spend their way through without having that relevance. And that topic will come up again a bit when we talk about RGSP. But you know, ad rank is not necessarily a bad thing, but, as Kirk so rightly pointed out back then, and as turned out sadly to be the case, there's the potential to use these ad rank thresholds to sort of manipulate what's happening in terms of cost per click, because it's ultimately it's another layer of opaqueness or you know the word, black box within this system.
Speaker 1:At any rate, though, jerry Dishler he you know, he wrote in these internal mails that basically they're going to miss target and they need to famous phrase coming up here they need to shake the cushions. This, this is. You know, he talked about turning the pricing knobs, tuning these auctions and tuning the behavior of the system in order to increase revenues to Google. And, like Google, as a seller, they have they perfectly have the right to increase their floor prices and their reserve prices. They absolutely have the right. In response to whatever the case might be, let's say that their operating expenses are increasing and they need to adjust. Let's say there's inflation occurring and they need to adjust to that, there's any number of scenarios where it's completely justified that they're going to do that. They don't necessarily have to communicate that to advertisers. It would be nice, and they're, and they're also within their rights to keep those specific floors confidential to them so that they're not undercutting their own auction. This is this is not inherently the problem and it's why I'm kind of gentless on the most gentle is gentler, so word. I'm kind of most gentle toward this topic because I think in many ways they're sort of within their rights.
Speaker 1:But you know that phrase, that really shaking the cushions it gives me the creeps. It's kind of an instant meme like people have. It's immediately recognizable. People have been roasting that left and right and it is kind of surreal to just take this massively complex ecosystem. Some have argued it's more complex by far than the stock exchange. It's just the number of transactions, of volume, the interactions of this vast marketplace. And then compare it to a couch or a sofa and you're like reaching in there into the cracks to look for pennies and, by the way, those pennies don't belong to you. The whole thing is like it's so surreal and I'm glad that there is kind of a sense of community where we can kind of laugh at that phrase a bit together, because what else are we going to do? Cry.
Speaker 1:But at the same time you know you read the email he's writing for context here to a product VP. So this is kind of ultimately a conversation between sales and engineering and I mean it's partly damning. Here you can tell that he knows that this decision will be viewed distastefully within Google. He's kind of excusing the behavior and framing it internally as well, never mind externally, never mind what advertisers might think about it or what regulators might think about it, even internally in Google at the time. In the context you get the feeling that this was kind of cringy behavior that people were kind of squirming about. And you know, I think emails like this get sent every day in all kinds of organizations, between sales and engineering, or I don't want to just demonize sales here, but between the revenue side of organizations and then other parts of the organization. You know, trying to figure out what can we do. It's a conversation that on the one hand, is fair enough and on the other hand, as I mentioned, when you're Google and you control all sides of this thing, it certainly does become more problematic. But what comes next is worse to me, a little less understandable, a little less forgivable.
Speaker 1:I'm going to start with RGSP. I've said that term a couple of times now. You might be wondering what that stands for. I was wondering too. We found out that people were guessing. Well, rgsp stands for generalized second price auction. So this is a common auction mechanic. This describes the broadly the mechanisms of the Google ads auctions, and so people were wondering you know, the kind of million dollar question was what does the R stand for in there? My guess was reordered. Others I guess like reverse or runner up or randomized, and randomized turned out to be correct.
Speaker 1:This is according to Jason Kint. Now, jason, he's the CEO at DCN. That's an NGO, a non-profit or non-governmental organization in the field of trusted content. But Jason is very famous for his detailed commentary and documentation of different kind of you know you typically antitrust or privacy related cases and filings and so forth against meta Google, these kind of topics that come up, and Jason is not neutral in this. He seems to delight in the details here and seeing Google on stage in the hot seat. He's definitely not pro Google. You could call me pro Google or neutral, however that's fair, I can take it. But Jason is an experienced journalist. He has a lot of journalists to. Integrity, is very detailed, he documents everything that he's saying and he puts his opinions on that. That's perfectly fine. But Jason confirmed that this stands for randomized, generalized second price auction.
Speaker 1:Now to explain what this means was this all about? Why is this important? Because the auction has a winner and then there are runner ups. This is how auctions work, not at Google, not this time, at least not when this system is activated. What they're doing is they're systematically choosing a runner up and I'll say a runner up. My initial understanding was choosing the runner up. You know the second place in the auction and they're switching the two. So there's a winner and there's a runner up and they're switching the runner up and the winner. And the question would be why. That would be the first question. According to Google, it's because there are advertisers like Amazon and bookingcom who are two dominance in the auction, so they'll win basically every auction that they participate in.
Speaker 1:We mentioned the ad rank topic before. That should help prevent that kind of scenario. But let's imagine, let's talk about Amazon. Their bids are high, their budgets are high and they're relevant. Ad rank isn't really tackling that problem. So you could imagine kind of a consumer oriented or advertiser oriented reason why you might want to dampen the performance of Amazon in the auctions. I've reported extensively in the past on the presence of Amazon in the auctions and they're already extremely dominant even after this RGSP program. So in Google let's just continue with that Amazon example Google is systematically taking some percentage of auctions and switching Amazon out of that first position. This could offer consumers more choices. As I mentioned, this could alleviate some pressure on advertisers. As I mentioned. That would be like kind of the bright side of the story.
Speaker 1:There could be a dark side too. I don't have access to the full testimony because I wasn't there and unfortunately, or for better or worse, you could argue in fairness. The judge did decide this was fair. The DOJ is not allowed to publicly show these files anymore. They had to take down law files. So we're relying on some basically secondhand information from people like Jason who attended the trial and he also made some screen captures of emails before they were taken down and hopefully some people out there have downloaded the PDFs and can share some stuff with us.
Speaker 1:But, as I said, you could look at kind of a dark side to this picture too, which could be that Amazon is a competitor to Google and it could be construed as anti-competitive for Google to limit their visibility in the environment, even though they fair and square won the auction. Also, bookingcom, I think, is at least partially again one of these friend of me things. They're probably a big customer of Google's, they're probably spending a lot of advertising money, but also Google has their own kind of hotel advertising offerings and stuff and maybe there's some kind of conflict there. I don't know, that's just speculation and I would give Google the benefit of the doubt because that's what we do. But what we do know is that Google discovered, more or less on accident, that this had some kind of a knock on effect which they claim. Jerry Dishler claims not to understand, but he says that when RGSP is in place, so when they're switching winners with runner ups, it's somehow kind of magically increasing Google revenues. And this then made it not just some kind of a customer experience tool, which would be more excusable, right, it makes it into a revenue increasing form of auction manipulation, which is pretty concerning. Now, jerry might not have any ideas about why this increases Google revenues, but I have some ideas, and partly they're related with the third topic that we're coming to squashing.
Speaker 1:But in the first place, let's think about what happens in an auction. When the winner and the runner up are substituted, the winner of an auction is going to pay one penny more than the runner up bid, than the second highest bid, so you could bid $50. And if the next bid was $25, half of your bid, you would bid $25 and one penny. Now that's you know. Okay, I should probably choose some more realistic cost per click numbers there, but just for simple math, let's say 50 bucks and 25 bucks. Now, what's not clear not 100% clear is when that runner up got upgraded, so to say, when they got swapped into the winning position, they presumably yeah, they must have paid their bid plus a penny. Then they must be paying what the winner would have paid. But think about what happens now if you're Amazon, because I think this is a core thing about how this could increase Google revenues.
Speaker 1:And the next part is part two, with squashing Google, hasn't they're addressing a symptom, right? Google is concerned that Amazon is too dominant in the auctions and Google is also relevant. You know they have good ads, they have good targeting, they've got good everything, whatever they're relevant, their landing pages are good, blah, blah, blah. So you can't ding them for that, you can't penalize them for that. So the symptom here is that Amazon's too dominant and they're kind of regular, kind of regulating that symptom artificially by manipulating these auctions, manipulating the winners and runner ups, they're dampening Amazon's performance, because the effects of this on Amazon could be that they're seeing lower share of these top impressions. Their outranking is being negatively affected. These are some competitive metrics in Google ads and the kind of more practical implications could be that their click through rate might not be as high, because these secondary positions that they're getting bumped into are likely to have lower click through rates, so then their click volume could drop.
Speaker 1:So then there are. You know it follows on. It's a funnel, right? If there's less clicks flowing into the funnel for them, then there could be less conversions coming out in the end. And this is the type of thing like. The thing is that Amazon has the budget right and they're willing to bid high because they're not playing the same kind of efficiency game as you or I. They're bidding very aggressively according to kind of a different calculus than the way the average advertiser is bidding, and this would whether they're using smart bidding or automated bidding or whether they're bidding manually, it doesn't really matter. Their Google has addressed the symptom that Google that Amazon is too dominant, but they haven't addressed the cause, which is that Amazon wants to be dominant and so Amazon's going to then keep spending money, bid higher, throw more budget, win back those top spots, win back those conversions, and Amazon is putting so much money into this environment that they this can increase costs and increase the competition in an entire market or an entire vertical, or more or less all markets and all verticals, because Amazon is that present. So I'm not surprised to hear that this increases Google's revenues, and I think it's related to another topic that was disclosed on day five this infamous day five at this antitrust case.
Speaker 1:I haven't seen this one discussed that much. I only know about it because of Jason Kent, and this is a phenomenon called squashing. And to me this is the worst thing of all, because you know there's some kind of potential consumer positive or advertiser positive reasoning behind switching auction position and there's an argument to be made that Google can increase their floor prices as they want. But this last one squashing it's just manipulation. I can't see any other framing or excuse about this and the way squashing works, as I mentioned. Let's just take that.
Speaker 1:Those numbers I threw out earlier they're kind of dumb, but let's just take them anyway. 50 bucks and 25 bucks. The winning bid was 50 bucks and they'll pay a penny more than the runner up bid. So they'll pay 25 bucks and one penny. Squashing flattens the difference between those bids and what that actually means is that it lifts up the actual costs that will be paid by the advertiser. So let's just take those dumb numbers, 50 and 25, and let's assume by squashing the difference, google is meeting halfway. So I like what's half of 25, 12.5. So at 62.5.
Speaker 1:Now, yeah, this would look different. Yeah, maybe I chose the wrong scale here with a 50 bucks and stuff. It's a little slightly exaggerated. But you see the point there. They're meeting the middle. In a real auction. This would probably have to do with pennies, but you don't know. You don't know how high a huge bidder like Amazon is bidding, or someone like bookingcom or whomever. So Google is artificially lifting up bids. You know the rules of the game are you only have to pay a penny more than that next bid, but now suddenly you might have to pay substantially more.
Speaker 1:And this is manipulative behavior, pure and simple. It's just designed to increase revenues. And there's a lot of open questions here, like RGSP. They were switching positions for large advertisers. Who defines what a large advertiser is? How is that defined? Is it a small set of advertisers? Is it based on, like the budget? What is it based on? And what percentage of auctions is that occurring? And how often is squashing occurring?
Speaker 1:And the floor price thing you know I've said I'm more forgiving of that, but we have to ask questions about that too. Was it related to, like ad rank? Was ad rank used to manipulate this? And it seems clear that it had no other reason. It's. You know I said there are justifiable reasons for increasing your floor prices. We're responding to inflation, responding to changes in overall demand.
Speaker 1:You know, apparently Google modulates these floor prices hundreds of times a year, but we're talking in this case it was a significant jump, five to ten percent and it was not based on demand or changes in the market. It was based on a short-term need to avoid scrutiny on Wall Street and it's kind of that. You know it was otherwise. There was no Other reason for it, and it's that short-termism that could add to that perception of greed and make that problematic.
Speaker 1:So, all these things taken together, it's really troubling because it starts to not feel like an auction anymore when there are floor prices that can be manipulated despite you having a great ad rank, when there are winners getting switched with, with runner-ups and, by the way, I didn't mention my, my, my biggest problem with that almost is the word randomized RGSP. If they would just if they're like it sounds like you don't know who it's gonna be the the word randomized really worries me if they would have a clear system where it's like okay, we always take the second or the first runner up to second place and switch it, but it feels like they're just grabbing into the auction pool and pulling somebody out. I don't know the details, none of us do yet. But and then you've got this Squashing going on the floor. Prices are changing, the the winners are getting swapped out and the agreed upon bidding logic is are like Pay me logic here. Well, how your cost per click is calculated is changing. What is left is that auction.
Speaker 1:Where is the integrity in that auction at all? So, while this isn't specifically an e-commerce topic, it affects every e-commerce Google ads campaign out there. Potentially. We don't know when this stuff happened, how often this happens. There are big question marks here, but it damages trust and you know, I Like Google, I think Google is a great product, I like Google as a company, but it just feels like lines are being crossed here. It's not every Googler, you know. There are executives making these decisions and I think that's something I want to keep in mind is that there are plenty of frontline Googlers All of them, basically, let's say, I mean people are just trying to make an honest days living, you know, and they.
Speaker 1:But I Am so uncomfortable with the information coming out of this testimony and I think it has to be shared. I Got a kind of accused the other day of being like some kind of pro Google Shill or spokesperson or something like that Having I've been told I have conflicts of interest. Of course I do. I mean, everyone has a conflict of interest when it comes to Google, even the, the journalists covering this. You know, the more sensational the headline, the more clicks they get and, by the way, they're some of the biggest customers of Google on earth. You know, when they cite anti-privacy research and they've they're supporting, they're showing us give me there they're showing research reports from for-profit consultants for whom this is PR, people who who bash Google because you know new technology from Google is hurting their, their agency model or whatever. There's Plenty of people have a conflict of interest when it comes to Google because Plenty of people are making money from from Google. But I think it's always a matter of you know, everyone has incentives and conflicts and it's a matter of do you act on those conflicts or do you try to remain neutral and act in everyone's best interest, and I do try to do that.
Speaker 1:So I've had Google on this podcast before. I plan to have them on again. I'm actually working on an interview, but I also have to speak up when I see stuff that's not right and this is not right. So I hope this episode has been valuable to you. I hope that you understand the issues a little bit more. I hope that it's giving you maybe a deeper knowledge. And what's just in the headlines or the you know Article on vergecom or wherever, where they just mentioned a five to ten percent discount? They don't talk, or five percent increase and they don't explain how it works or any of these other details. I Think you should know about this.
Speaker 1:I think it's kind of all of our sort of ongoing due diligence or buyer beware as we consider which channels we invest in and why, and the thing is that I wouldn't put it past any other advertising platform To do this exact same stuff. That's the world that we live in right now. There are these very automated systems. This does not, by the way, necessarily have to do anything with automation, but it's. There are these layers of opacity or intransparency. It's black box effect. Automation then picks up on the data at face value and and is unaware of things that might be manipulated behind the scenes, just as you would be if you were bidding manually or.
Speaker 1:However and I said I'm not like an antitrust guy I don't know what the correct remedy is here. I don't want Google to be Like. I don't really think that breaking up Google or something it's not something that I advocate for, but I think it's clear at the time for oversight and insight has come. We've known that these systems could be abused. Google has had a really great reputation and people trust in that reputation, but at the end of the day, they have a lot of power. You know the saying about power it corrupts, and they are profit seeking or revenue seeking company. They have these incentives in place. It's only natural that this happened. I think the question is how can we stop it from happening again? Thanks for listening to growing e-commerce and if you enjoyed this podcast, please consider sharing it with co-workers, friends or within your professional network. We really appreciate it. This podcast is produced by a smarter e-commerce, also known as mech. To learn more, visit smarter-e-commercecom.