system and GoTo’s system was that the GoTo auction was a traditional auction model in which the highest bidder won. The GoTo auction model is referred to as a first‐price auction. However, Google developed a modified Vickrey second‐price auction system. In a second‐price auction, the highest bidder on a keyword won the bid, but paid only what the second‐place bidder bid plus a penny.ii This model, counterintuitively, causes people to make higher bids than in a first‐price auction, thus raising the final price because bidders know they will pay less than the price they actually bid.18
The second‐price auction was a stroke of genius because it eliminated buyer’s remorse, which often happened after a buyer won a traditional auction.19 Google made another decision that finalized the earth‐shattering effect AdWords had on marketing. Instead of charging on a CPM model, it adopted GoTo’s model of charging an advertiser only when someone clicked on an ad. It was a cost‐per‐click (CPC) model.20
The third innovation, and one that was purely Google’s was its quality score. A quality score is determined by a complex algorithm that determines how relevant a website is to users. If someone clicks on a keyword search result ad, and goes to a site that is not relevant, that site gets a lower quality score. For example, if someone searches for “jobs,” does Google put up a result about Apple founder Steve Jobs or does it put up results about employment opportunities? The beauty of the ad quality score is that “it makes the advertiser do the work to be relevant,” according to the 2002 Google head of advertising, Sheryl Sandberg, who in March, 2008, was named the COO of Facebook.21
On January 24, 2002, Google tested the new AdWords auction system and soon not only small businesses with a credit card were buying search results on a self‐help, second‐price online auction and CPC model, but also major advertisers such as P&G and Coca‐Cola were participating. The immediate, runaway success of AdWords not only led to Google’s first profitable year at the end of 2002, but it changed the entire marketing/media ecosystem and the way media would be bought and sold from that time on.
By mid‐2018 Google was the most valuable media company and the third most valuable company in the United States. It had more than twice the market capitalization of older production‐oriented companies such as General Motors and General Electric combined.iii In 2018 Google was by far the largest media company in the world, garnering an estimated $136.5 billion in revenue in 2018, 86 percent of which was from advertising. Google 2018 ad revenue was almost two‐and‐a‐half times more than the second largest media company in terms of advertising revenue, Facebook, which had an estimated $56 billion in advertising revenue. In 2018 the largest traditional media company in terms of advertising revenue was Comcast’s NBCUniversal division, which had roughly $33 billion in advertising revenue.
For the purposes of this book, we are defining media companies as those that are supported primarily by advertising and are ranking them according to the amount of advertising revenue they generate. Bloomberg BusinessWeek, other financially oriented publications, and many Wall Street analysts consider Google and Facebook to be technology companies, and both Google and Facebook’s top management also consider their companies primarily tech companies. However, for the purposes of this book, Google and Facebook, often referred to in the advertising and marketing business as “the duopoly,” are considered media companies because Google and Facebook’s incredible success as advertising platforms clearly demonstrates that the Internet became the major factor in virtually all businesses’ advertising and marketing efforts, and the duopoly dominates in digital advertising. Also, Google and Facebook might claim that they are technology companies or platforms and often deny they are media companies, but both are conduits for content that flows between advertisers and consumers – a medium as it were – and both are supported primarily by advertising, as most media companies are.
In 2007, the growth trajectory of the digital era veered in a new direction because of two innovations: (1) the iPhone and (2) programmatic buying and selling of digital ad inventory. The iPhone fueled Apple’s rise to becoming the most valuable company in the world in 2012 and almost every year since then. In mid‐2018 Apple exceeded a market valuation of $1 trillion, the first company in the world to reach that market‐cap valuation. Technology business analyst Ben Thompson, author of the Stratechery newsletter, calls the iPhone “the most successful product ever.”22 Also, the iPhone drove the phenomenal growth of smartphones and the Internet from being desktop, PC dominated to being mobile dominated, as approximately six billion global mobile phone users “have replaced the desktop and television as the dominant [advertising] platform.”23
Also, 2007 was the year that the first real‐time bidding (RTB) by Right Media occurred that “allowed advertisers to know in advance exactly whom they are presenting to and on exactly which site it will appear and at what time.”24 The ability to address specific individuals rather than broad audiences created the rapid growth of programmatic trading that has irrevocably changed media buying and selling practices (See Chapter 17: Programmatic Marketing and Advertising for more detailed information about RTB, programmatic, and automation). Furthermore, in 2007 Facebook shifted its focus from appealing just to college students to letting everyone join its popular social media platform, which gave its growth an atomic blast upwards to eventually become the second largest advertising platform.
Aggregation theory
In 2015 Ben Thompson in his “Stratechery” newsletter articulated aggregation theory, a concept that explained the phenomenal success of digital‐era companies such as Google, Facebook, Amazon, Netflix, Snapchat, Uber, and Airbnb. Thompson wrote:
First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre‐Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.
This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be aggregated at scale leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market‐makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. The result is the shift in value predicted by the Conservation of Attractive Profits.25
Previous incumbents, such as newspapers, book publishers, networks, taxi companies, and hoteliers, all of whom integrated backwards, lose value in favor of aggregators who aggregate modularized suppliers – which they don’t pay for – to consumers/users with whom they have an exclusive relationship at scale.26
Customers Versus Consumers
You have been reading about “customers” and “consumers,”
