Posted by Pablo Chavez, Director of Public Policy

Today we submitted comments with the Federal Trade Commission in reaction to the Staff Discussion Draft about the future of journalism in the age of the Internet.

We agree that the Internet has posed challenges as well as opportunities for publishers. Google works closely with publishers to find business solutions so journalism can thrive online, and we’re optimistic about the news industry’s future. But we strongly disagree with a number of policy recommendations set forth in the Staff Discussion Draft, such as the suggestion that Congress enact a federal hot news doctrine -- something that would not only hurt free expression, but also the very profession of journalism that the proponents of hot news say they support.

We appreciate the FTC's involvement in this matter and its effort to shed light on how news publishers can move forward in the digital era, and we're hopeful that our comments will help encourage policy makers to promote innovation and creativity rather than protectionist barriers.

Posted by Paul Feng, Group Product Manager

We’ve been talking with the Federal Trade Commission for the past six months about our planned acquisition of mobile advertising start-up AdMob, which we believe will bring new innovation and competition to mobile advertising. We’ve told the FTC about how new and highly competitive the mobile advertising space is, and the FTC has been talking to others in the industry about their views as well.

Some of those folks are sharing what they told the FTC. The developers of a mobile app called Wertago said they told the FTC that:

The internet and mobile technology sectors right now are perhaps the most (or among the most) competitive and fast-moving industries EVER TO EXIST. The web and mobile spaces have remarkably low barriers to entry. [...] And we think Google’s AdMob acquisition will have little if any effect on the competitiveness of the mobile advertising market space.

Wertago also talked about both the low entry barriers and non-existing switching costs in mobile advertising:

The crucial point here is 1) the marginal advertiser and the marginal developer, not the average or typical advertiser and developer, are who drive the competition, and there will always be a fight for them, especially because of the “long-tail” where lots of niche opportunities exist, and 2) the cost of switching ad networks in a mobile app is close to zero, and the cost of developing an ad network is not terribly high and easily bankrolled.

Industry analyst Greg Sterling also met with the FTC, and said that he told them:

I didn’t believe competition would be affected adversely and that advertising prices were not likely to go up. Indeed, mobile CPM prices have been falling in mobile. In short I said, yes Google becomes more powerful and effective but the deal doesn’t stifle competition. The market is dynamic and highly competitive, I told the FTC.

And:

I’m no laissez-faire capitalist but I think the mobile ad market is both very young and highly dynamic. It’s evolving quickly and definitely very competitive. If the objective of anti-trust law is to protect competition in the market then it is simply unnecessary for the FTC to intervene at this stage by blocking the AdMob deal.

Other analysts and observers have been weighing in too:

• Ad Age: Google Wins Industry Support for AdMob Deal
• eConsultancy: In case the FTC hasn't noticed, the mobile ad market is still anyone's game
• Paid Content: Why the FTC Should Allow the Google-AdMob Merger
• Wired: FTC Blocking of Google Mobile Ad Acquisition Would be Misguided
• Motley Fool: Why the FTC Should Keep Its Hands Off Google
• Tom Lenard, Technology Policy Institute: Google-AdMob: A Bad Precedent
• Ryan Radia, Competitive Enterprise Institute: FTC Should Green Light Google-AdMob Deal
• Silicon Alley Insider: The Real Reason Why the FTC Must Approve the Google-AdMob Deal Immediately

With Google and AdMob facing strong competition every day from businesses like Apple, JumpTap, Millennial Media, Microsoft, inMobi, Greystripe, Mobclix and many more, we agree that there’s vibrant competition in this space.

Update (5/5): Dow Jones asked a few players in the mobile industry yesterday what they thought about the deal:

Two of these people said the FTC staff didn't appear to be taking into account other companies like Millennial Media Inc., Greystripe Inc. and Jumptap Inc., all of which operate in-application advertising networks. By a broader definition, the mobile advertising market also includes corporate behemoths such as Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT), which serve ads displayed on mobile websites.[...]

Industry insiders and analysts said an FTC antitrust challenge would be problematic for a number of reasons. One industry source argued that it was a "flawed theory" to distinguish between ads that appear within mobile-phone applications and those displayed on mobile websites. This person said the mobile-advertising market is at such an early stage that it is impossible to predict which companies will emerge on top.

Michael Chang, chief executive at Greystripe, acknowledged that the combination of Google and AdMob would create a stronger rival, but he agreed that the market is too new and too dynamic to predict how it will evolve.

"It definitely creates a stronger competitor, but we're in the second inning and it's going to be a long game," said Chang.

Posted by Harry Wingo, Policy Counsel

Yesterday, I spoke at a panel with other tech companies about how small businesses can leverage the Internet to grow their business. The event was put on by the SBA and FCC through a program called SCORE, which, among other things, is seeking to accelerate small business growth through access to broadband. SCORE will create a comprehensive package of applications, training, and support to small businesses in the country's neediest areas.

One of the small business owners I met at the event, Emily McHugh of Casauri, spoke about how the Internet helped start and grow her business. Emily and her sister started their business in 1999 because they thought there weren’t enough good bags out there for tech gear. And they were right! With Emily’s business degree and her sister Helen’s design degree, Casauri took off. They’ve helped scale their business by leveraging the Internet. All of Casauri’s accounting, sales, and data storage is done online. This cloud computing approach makes their business more efficient and saves them money. But Emily cautioned, "the Internet doesn't mean anything to small business without access...dial-up doesn't count... it's all about speed!"

Emily and her sister are not alone. Lots of small businesses are tapping the Internet to grow their businesses and we believe SCORE will help boost digital literacy, online commerce capabilities, and usage of low-cost, cloud-based tools for small businesses across the country.

If you’re interested in learning about how to start a business or make it more efficient using low-cost or free online tools, you may want to take a look at our series of blog posts on entrepreneurship, which started yesterday on the Official Google Blog.

And, now, I’m going back to browsing all of Casuri’s great laptop bags.

Posted by Adam Kovacevich, Senior Manager, Global Communications and Public Affairs

Most policymakers are pretty familiar with how TV stations, magazines and newspapers sell advertising. Typically those organizations have a "rate card" with standard ad prices for a 30 second ad or a full-page print ad, and the advertiser pays the standard rate or negotiates a lower rate if they commit to buy ad space in bulk.

That's not how ad space on Google is sold. Instead, all advertisers -- big and small -- bid for their ads to appear when users search on Google for certain terms.

Admittedly Google's ad auction can be a bit difficult to understand because it differs so much from traditional ad models. That's why we have posted videos and tutorials on the AdWords Learning Center explaining how it works.

Now Wired Magazine's Steven Levy has a new article out in the June issue taking an even closer look ad the Google ad auction, and it's a must-read for policymakers who want to understand online advertising. Levy looks at how Google's auction model evolved, the role of algorithmic "quality scores" that ensure users see relevant ads, and how the "second price" auction means that advertisers don't overbid.

Check it out when you get a chance.

Graphic: Wired.com

Posted by Adam Smith, Director of Product Management, Book Search

Over the last few weeks we've heard a number of questions about the Google Book Search settlement and what it means for readers. Over the coming days, we'll attempt to answer some of those questions on this blog, but first, we think it's important to explain how exactly the settlement will help expand access to books in the United States. We'd also like to remind authors and publishers who have questions that they should visit the settlement Notice website.

Have you ever gone to your local bookstore looking for a book only to be told that it’s not there? You look for it on Amazon; they don’t offer it. You go to your local library and it’s not there. But you know that it exists because you read it your freshman year in college.

Or let's say you’re a second generation American interested in reading books in your parents’ native language, Greek. Try finding more than a few books in foreign languages in most town libraries or bookstores in the United States.

Or you're a graduate student who has been doing research on your thesis for years. You think you've read every book there is to read on your topic, but then you type your query into Google Book Search, and you suddenly discover a new original book or monograph that you weren't even aware of before.

Until now, we've only been able to show these users a few snippets of text for most of the in-copyright books we've scanned through our Library Project. Since the vast majority of these books are out of print, to actually read them you have to hunt them down at a library or a used bookstore. And if you can't find them -- because the only known copy is at a library on the other side of the country--you're unfortunately out of luck.

Under the settlement that will change for users in the U.S.:

• When you find the book you're searching for, you’ll be able to preview 20% of the book over the Internet from anywhere in the U.S. If you want to look at the whole thing, you'll be able to go down to your public library where there will be a computer station with access to the whole book for free. And if you don’t want to leave home or want a copy for yourself, you’ll be able to purchase access to an electronic copy of the book. As always, if the book is old enough to be in the public domain, you’ll be able to download the whole book for free.

• If you’re at a university, in addition to your libraries' free access points, your school can obtain an institutional subscription that gives you access to most books that we've scanned. And scholars and students who don’t keep the same study hours as the library will be able to look at any book, anywhere, any time.
  
  
• If you are vision impaired, the settlement will open a world of books to which you've never had access. Visually impaired people will be able to search for books through the Google Books interface and purchase, borrow, or read at a public library any of the books that are available to the general public in a format that is accessible to the vision impaired.
  
  
• If you want to read in foreign languages, you will have access to tens of thousands of more books than you have today. Books in Spanish add up to almost 10% of the books already scanned. If you account for the difference in numbers between books in Spanish and English, the usage per book in Spanish is more than three times what it is for books in English.

The settlement won't just expand access to out-of-print books, either. Because authors and publishers will have the ability to let users preview and purchase their in-print books through Google Book Search, readers will have even more options for accessing in-print books than they have today.

For users outside the U.S., the Google Book Search experience won't change unless rightsholders specifically authorize additional uses of their books outside the United States. And while the Google Book Search settlement will only allow for improved access in the U.S., we believe that this will constitute an unprecedented test bed for the development of similar services around the world.

As the discussion continues, it's important to understand what readers stand to gain.

Posted by Alexander Macgillivray, Associate General Counsel for Products and Intellectual Property

Last October, we announced a settlement agreement regarding Google Book Search that resolves class action lawsuits first filed in 2005 by the Authors Guild and the American Association of Publishers. Last Friday, along with the authors and the publishers, we submitted a letter to the court asking for permission to extend what's called the "notice period" for an extra 60 days.

So what exactly does "notice" mean? Notice is an important part of due process. It helps inform class members of their rights under the proposed settlement and gives them a chance to opt out if they wish to. If you've ever received a letter in the mail from a credit card company or product manufacturer informing you that you're entitled to compensation under a class action, then you get the idea of what "notice" is about.

It's pretty easy for credit card companies to contact their cardholders -- they send bills to them all the time. The world's authors, publishers and their heirs are much more difficult to find. So, as the New York Times recently reported, the plaintiffs hired notice campaign specialists Kinsella Media Group to tell them about this exciting settlement, and Google has devoted millions of dollars to fund this notice campaign. Kinsella started by launching a website for authors and publishers and a direct-mail effort. Beginning in January, Kinsella published ads in newspapers and other publications all over the world from Fiji to the Cook Islands to Greenland. And of course, they also placed ads right here at home in the U.S., in publications as diverse as Writer's Digest and USA Today.

The settlement is highly detailed, and we want to make sure rightsholders everywhere have enough time to think about it and make sure it's right for them. That's why we've asked the court for permission to extend the opt-out deadline for an extra 60 days.

Update as of 04/28/09: The court has to decided to extend the opt-out deadline until September 4, 2009.

Posted by Nicole Wong, Deputy General Counsel

In her post to the Official Google Blog this morning, Susan Wojcicki, VP of Product Management, announced that we are making interest-based advertising available in beta for our AdSense partner sites and YouTube. Interest-based advertising uses information about the web pages people visit to make the online ads they see more relevant. Relevant advertising, in turn, has fueled the content, products and services available on the Internet today.

Providing such advertising has proven to be a challenging policy issue for advertisers, publishers, internet companies and regulators over the last decade. On the one hand, well-tailored ads benefit consumers, advertisers, and publishers alike. On the other hand, the industry has long struggled with how to deliver relevant ads while respecting users' privacy.

Last month, the U.S. Federal Trade Commission released its principles for online advertising. Likewise, other organizations interested in consumer protection and privacy also recently issued guidelines: The Network Advertising Initiative released its 2008 Self-Regulatory Code of Conduct in December; the Center for Democracy and Technology released its Threshold Analysis for Online Advertising Practices in January; and the Internet Advertising Bureau in the U.K. announced its Good Practice Principles last week. There is a consistent message in all of these guidelines: Consumers need and deserve greater transparency and choice when it comes to online advertising.

As Google prepared to roll out interest-based advertising, we talked to many users, privacy advocates and government experts. By listening to them and by relying on the creativity of our engineers, we built a product that's not only consistent with industry groups' privacy principles, but also goes beyond their requirements. We are pleased that our launch of interest-based advertising includes innovative, consumer-friendly features to provide meaningful transparency and choice for our users:

• Transparency in the right place and at the right time. When users see online ads today, they often don't know what information is being collected, who provided the ad, and sometimes who the advertiser is. We already clearly label most of the ads provided by Google on the AdSense partner network and on YouTube. With one click on the labels, users can get more information about how we serve ads, and the information we use to show ads. This year we will expand the range of ad formats and publishers that display labels that provide a way to learn more and make choices about Google's ad serving.

• Meaningful, granular, and user-friendly choice. For the first time, people will have a say in the types of ads they see by using our new Ads Preferences Manager. With this tool, users can view, add and remove the categories that are used to show them interest-based ads (sports, travel, cooking, etc.) when they visit one of our AdSense partners' websites or YouTube. To provide greater privacy protections to users, we will not serve interest-based ads based on sensitive interest categories. For example, we don’t have health status interest categories or interest categories designed for children.

• Tools that respect users’ choices. With one click in the Ads Preferences Manager or in the advertising section of our Privacy Center, users can opt out of interest-based ads altogether, although it means they will probably see advertising that's less relevant and useful on our partners' websites or YouTube. The opt-out is achieved by attaching an "opt-out cookie" — a small file containing a string of characters that stores a preference for opting out — to a user's browser. Opt-out cookies in the industry, however, have traditionally not been permanent. So Google's engineers also developed tools to make our opt-out cookie permanent, even when users clear other cookies from their browsers.

• Transparency beyond privacy policies. With interest-based advertising, we’re continuing to explore new ways of communicating with our users on privacy. We've revamped the advertising section of our Privacy Center. And the Ads Preferences Manager features a video, embedded below, that explains in plain language how interest-based advertising works. All of the videos on the Google Privacy Channel on YouTube are open for comment and we look forward to hearing feedback from our users.

We’ve built our business by earning and keeping the trust of our users. And we’ll continue our dialogue with them and with other stakeholders as we develop new products to make the ads we show our users more relevant and useful.

Posted by David Drummond, Senior Vice President, Corporate Development and Chief Legal Officer

In June we announced an advertising agreement with Yahoo! that gave Yahoo! the option of using Google to provide ads on its websites (and its publisher partners' sites) in the U.S. and Canada. At the same time, both companies agreed to delay implementation of the agreement to give regulators the chance to review it. While this wasn't legally necessary, we thought it was the right thing to do because Google and Yahoo! have been successful in online advertising and we realized that any cooperation between us would attract attention.

We feel that the agreement would have been good for publishers, advertisers, and users - as well, of course, for Yahoo! and Google. Why? Because it would have allowed Yahoo! (and its existing publisher partners) to show more relevant ads for queries that currently generate few or no advertisements. Better ads are more useful for users, more efficient for advertisers, and more valuable for publishers.

However, after four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long term interests of Google or our users, so we have decided to end the agreement.

We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on. Google's continued success depends on staying focused on what we do best: creating useful products for our users and partners.

Posted by Andrew McLaughlin, Director of Public Policy and Government Affairs

(Cross-posted from the Official Google Blog)

In a world where governments all too often censor what their citizens can see and do on the Internet, Google has from the start promoted global free expression and taken the lead in being transparent with our users. We've pressed governments around the world to stop limiting free speech and made it possible for dissidents, bloggers and others to have their voices heard.

As part of those ongoing efforts to promote free expression and protect our users' privacy, today we're announcing Google's participation as a founding company member of a new program called the Global Network Initiative. (The site, at globalnetworkinitiative.org, will be live within a day or so.)

This initiative is the result of two years of discussions with other leading technology companies, human rights organizations, socially responsible investors and academic institutions. Thanks to hard work and cooperation from all parties, the Initiative sets the kinds of standards and practices that all companies and groups should use when governments threaten internationally recognized rights to free expression and privacy.

The Global Network Initiative also offers an important commitment from all parties to take action together to promote free expression and protect privacy in the use of all information and communication technologies. We know that common action by these diverse groups is more likely to bring about change in government policies than the efforts of any one company or group acting alone.

Companies that join the Initiative commit to putting into effect procedures that will protect their users by:

• Evaluating against international standards government requests to censor content or access user information
• Providing greater transparency
• Assessing human rights risks when entering new markets or introducing new products
• Instituting employee training and oversight programs

These are things that Google does now, but joining the Initiative will help us refine our methods and maintain our leadership position. Down the road companies will be assessed on how they're doing in implementing the principles and the Initiative will report those results.

This Initiative is by no means a silver bullet or the last word, but it does represent a concrete step toward promoting freedom of expression and protecting users' privacy in the 60th anniversary year of the Universal Declaration of Human Rights. Now we're actively recruiting more companies and groups to join the Initiative and advance these critical human rights around the world.

Posted by David Drummond, Senior Vice President, Corporate Development, and Chief Legal Officer

(Cross-posted from the Official Google Blog)

Google was built on the principle of making the world's information more accessible and useful. Before the company was even founded, Larry and Sergey imagined a way to make it easier for anyone, anywhere, to access the information held within the world's books. Search simply isn't complete without that content, and providing more access to more books is a vision Google has never lost sight of.

Four years ago, almost to the date, we first announced Google Book Search. Since we launched the service, we've heard countless stories about Book Search helping readers all over the world find books in over 100 languages on topics as diverse as The Physics of Star Trek and the history of Wood Carvings in English Churches. We've seen millions of people click to buy books or find them in a library, and more than 20,000 publishers have joined our Partner Program to allow readers to preview the books they find before buying them.

While we've made tremendous progress with Book Search, today we've announced an agreement with a broad class of authors and publishers and with our library partners that advances Larry's and Sergey's original dream in ways Google never could have done alone.

This agreement is truly groundbreaking in three ways. First, it will give readers digital access to millions of in-copyright books; second, it will create a new market for authors and publishers to sell their works; and third, it will further the efforts of our library partners to preserve and maintain their collections while making books more accessible to students, readers and academic researchers.

The agreement also resolves lawsuits that were brought against Google in 2005 by a group of authors and publishers, along with the Authors Guild and Association of American Publishers (AAP). While Google, the Authors Guild and the AAP have disagreed on copyright law, we have always agreed about the importance of creating new ways for users to find books and for authors and publishers to get paid for their works.

To date, Google has worked with libraries all over the world to make more than 7 million books searchable through Google Book Search, and we're just getting started. We believe that ultimately we'll provide access to many times that number, and if approved, this agreement will unlock access to millions of these texts and make the Google search experience even more comprehensive.

With this agreement, in-copyright, out-of-print books will now be available for readers in the U.S. to search, preview and buy online -- something that was simply unavailable to date. Most of these books are difficult, if not impossible, to find. They are not sold through bookstores or held on most library shelves, yet they make up the vast majority of books in existence. Today, Google only shows snippets of text from the books where we don't have copyright holder permission. This agreement enables people to preview up to 20% of the book.

What makes this settlement so powerful is that in addition to being able to find and preview books more easily, users will also be able to read them. And when people read them, authors and publishers of in-copyright works will be compensated. If a reader in the U.S. finds an in-copyright book through Google Book Search, he or she will be able to pay to see the entire book online. Also, academic, library, corporate and government organizations will be able to purchase institutional subscriptions to make these books available to their members. For out-of-print books that in most cases do not have a commercial market, this opens a new revenue opportunity that didn't exist before.

It's important to note this agreement doesn't change our Partner Program, which currently includes more than 20,000 publishers around the world, but it does add a new way for those publishers to sell access to their works. For in-print books not in our Partner Program, we'll continue to scan these books through our Library Project and make them full-text searchable, but we won't show any portion of the book. As for books in the public domain, this agreement doesn't change how we display them: We'll make out-of-copyright works freely available on Google Book Search for people to read and download.

As part of the agreement, Google is also funding the establishment of a Book Rights Registry, managed by authors and publishers, that will work to locate and represent copyright holders. We think the Registry will help address the "orphan" works problem for books in the U.S., making it easier for people who want to use older books. Since the Book Rights Registry will also be responsible for distributing the money Google collects to authors and publishers, there will be a strong incentive for rightsholders to come forward and claim their works.

In addition to expanding the commercial market for these books, Google, the authors and the publishers have worked hard with our library partners at Stanford, the University of Michigan, the University of California and the University of Wisconsin-Madison to ensure this agreement advances libraries' efforts to preserve, maintain and provide access to books for students, researchers and readers. The agreement gives public and university libraries across the U.S. free, full-text viewing of books at a designated computer in each of their facilities. That means local libraries across the U.S. will be able to offer their patrons access to the incredible collections of our library partners -- a huge benefit to the public.

The agreement also authorizes Google and the libraries to create new services that will help people with disabilities such as visual impairment better experience these books. We are grateful to our library partners for investing so much painstaking effort over so many years to maintain their book collections, and we are excited at the prospect of their participation in this landmark project.

Because the agreement is the result of a U.S. lawsuit, all of these services will be available to readers who access Google Book Search in the United States. Outside the U.S., the user experience with Google Book Search will be the same as it is today. In other words, people will be able to search the full text of books and may see snippets of in-copyright works, but they will not be able to preview or purchase access to books online, unless these services are authorized by the rightsholder of a book. It is important to note that the agreement does not affect users outside the U.S., but it will affect copyright holders worldwide because they can register their works and receive compensation for them. While this agreement only concerns books scanned in the U.S., Google is committed to working with rightsholders, governments, and relevant institutions to bring the same opportunities to users, authors, and publishers in other countries.

As you can imagine, we're all ready to get moving, but this project will take some time. First and foremost, the settlement administrator will be reaching out to educate authors and publishers worldwide about the agreement and their rights under it. The agreement also must be approved by the court. Once it's approved, we'll be ready to begin delivering these services. In the meantime, if you own or think you may own a U.S. copyright interest, there is more information about the agreement at this website. And Google Book Search users can find more information here.

Posted by Hal Varian, Chief Economist

(Cross-posted from the Official Google Blog)

There's some interest in how and why "quality scores" are used in search engine ad auctions. In this post, we will try to describe "why" we use quality scores; a later post will go into "how," including more information about bids.

When a user types a query into a search engine, it will typically return both natural search results and advertisements. Google and other major search engines use an ad auction to determine which ads are shown and how much advertisers pay for them.

In the auctions, advertisers enter bids that reflect how much they are willing to pay for a click on their ad -- this is called their maximum cost per click (CPC). Ads are then ordered by the product of the bid that is entered and the estimated ad quality score. People often ask why ad quality enters the formula -- isn't the bid per click enough? Why can't advertisers just buy their way to to the top ad position? To see why both components are important, let us look at a simple example.

Suppose that two advertisers are bidding on the keyword "jet airplane." Joe's Jets is selling actual jet airplanes, while Moe's Models is selling models of jet airplanes. Since jets are expensive, Joe is willing to pay a lot per click. But not many people can afford to buy jets, so Joe won't get many clicks. Moe, by contrast, is willing to pay a lot less per click, but he will also get many more clicks.

Which ad should be listed higher in the "sponsored links" section of the search results page?

What matters in this decision is not simply an advertiser's value for a single click -– the maximum CPC that the advertiser is willing to pay -- but rather the total estimated value of showing that ad: the value per click times the number of clicks that the ad is likely to receive.

The number of clicks that the ad is likely to receive depends on the historical clickthrough rate, which is an important component of the ad quality score. Thus the bid per click times the quality score gives us an estimate of the total value of displaying an ad over time. Joe's ad may have a higher value for a single click, but if Moe's ad gets a lot more clicks over time, it could easily have a greater total value. In that case, Moe's ad will be shown in the more prominent position. (Click on the image to view larger.)

The quality score gives search engines a way of aligning the incentives of the buyers, the sellers, and the viewers of ads. The search engine wants to sell ad impressions, but advertisers want to pay for clicks. The solution is for advertisers to bid on a cost-per-click basis, while the search engine estimates the total value of the ad over time: bid per click times the expected number of clicks.

This is a neat way to align incentives, but it has a problem: since the advertiser only pays on a per click basis, it may as well seek as many ad impressions as it can so that as many users as possible will be exposed to the ad. Joe might well want to buy the keywords "rocket ship" even if he only has jets to sell. Why not? Joe only has to pay if someone actually clicks on the ad.

This is where another distinct, but related quality issue arises: an ad that gets very few clicks shouldn't really be shown. It is just distracting from the viewpoint of users. The advertisers may not care much about annoying users but the search engine certainly does. Why? Because if it shows a lot of irrelevant ads, people will likely stop looking at or clicking on ads. They may develop a terrible affliction known in the trade as "ads blindness." Better ad relevance leads to a better user experience.

So search engines often apply a "disabling rule" that inhibits ads with very low clickthrough rates for a given query from being shown. Or they might set a relatively high minimum cost per click for ads that don't attract much interest from users as a way to discourage advertisers from showing ads that annoy users and deliver few clicks. A high cost per click can easily be consistent with a low cost per impression when clickthrough rates are low.

So why are quality scores important? Answer: they lead to a better auction by allowing advertisers to buy clicks, publishers to sell impressions, and users to see relevant ads.

Posted by Tim Armstrong, President, Advertising and Commerce, North America

Yesterday I wrote about the impact of our recent advertising agreement with Yahoo! on advertising prices. There have also been some questions posed about the deal's impact on competition in the online advertising industry. Here are the facts:

Question: Is this agreement bad for competition?
Answer: Just the opposite. This agreement - unlike Microsoft's proposed acquisition of Yahoo! - means that Yahoo! will remain an independent company in the business of search and advertising. Yahoo! has stated that it will reinvest the additional revenue from this agreement into improving its user services and competing vigorously against Google, Microsoft and other companies. This is similar to other standard business practices where competitors share components. In addition, the agreement is non-exclusive, meaning Yahoo! could make a similar deal with another company.

Question: Some claim that Google and Yahoo! will have a combined 90% of the search advertising market. Is this true?
Answer: No. This agreement is not a merger. This is about expanding the pie, not dividing it differently. Yahoo! will continue to run its own search engine and advertising system. Yahoo! will benefit from Google ads in areas where they have low ad inventory and maintain control over how much and what inventory they make available to Google. Yahoo! will invest additional revenue in remaining a viable competitor in advertising.

Question: Will Google benefit from access to Yahoo!'s user data?
Answer: No. We have taken steps in the Yahoo! agreement to make sure that neither company has access to personally identifiable user information from the other company.

Question: Over time, will Yahoo! just outsource more and more of its ads to Google and cease to exist as an independent ad platform?
Answer: Yahoo! has made clear that it will still use its own system to serve ads, and it will use extra revenue from this deal to improve its ad platform. The arrangement only covers the U.S. and Canada, and does not cover the fast-growing mobile segment. Yahoo! also has a strong economic incentive to keep serving as many of their own ads as possible, since they get to keep all of the revenue from those ads, while Yahoo! will only receive a part of the revenue from ads served by Google. In addition, Yahoo! has a leading position in display advertising, and will be able to offer advertisers a unique combination of advertising opportunities.

Question: Once the deal is implemented, why would advertisers keep advertising on Yahoo!?
Answer: Yahoo! will make the sole decisions about when to use Google ads. They have stated that their plan is show them primarily on pages where few or no ads currently appear. The only way for an advertiser to guarantee placement for their ads on Yahoo! is to advertise through the Yahoo! platform itself.

The online advertising space is a competitive environment, and we believe that this agreement only furthers that competition. Consumers will see more relevant ads, advertisers will have new ways to reach customers more efficiently, and website publishers will benefit from our ad matching technology.

Update (9/19): This post was updated to remove an analogy that we have learned is incorrect.

Posted by Tim Armstrong, President, Advertising and Commerce, North America

As Hal Varian wrote earlier this week, there's been some recent discussion about the impact of our recent advertising agreement with Yahoo!. While Hal addressed a recent study about the deal's potential impact, today I wanted to address of a few of the questions that advertisers and others have raised about the deal's impact on ad prices. Here are the facts:

Question: Will the Google-Yahoo! agreement raise ad prices?
Answer: Neither Google nor Yahoo! set ad prices. Ads are priced by an auction where an advertiser only bids what an ad is worth to them. Furthermore, ad price is only one part of the story. A more important measure for advertisers large and small is the return on investment of their advertising dollar. The Google-Yahoo! agreement will help advertisers convert more clicks into customers by showing more relevant ads on Yahoo!, giving advertisers a better return for every dollar they invest.

Question: Yahoo! claims they will make an extra $800 million from this deal. Does that money come out of advertisers’ pockets?
Answer: There are two main reasons Yahoo! is likely to earn more revenue. One, the deal will allow Yahoo! to show more ads on pages where they previously showed no ads or only a few ads. Two, advertisers will get more clicks on ads because the quality and relevance of those ads will be better. As is true today, advertisers are ultimately in control of how much they spend because they only pay what an ad is worth to them. So consumers will see more relevant ads and advertisers will attract more customers as a result.

Question: Can Yahoo! pick whose ads to show based on who has the highest price?
Answer: No. Under the terms of our agreement Yahoo! won't be able to see the current auction prices for Google ads, and Google won't be able to see Yahoo!'s prices.

Question: Can Google and Yahoo! use minimum bids to set a unified price floor for ads?
Fact: No. Google and Yahoo! will continue to set minimum bids in their auctions independently. Google uses minimum bids to help advertisers know what they need to bid in order to have a realistic hope of having their ads shown. Minimum bids also help deter low quality spam ads. Google has never based minimums on what competitors are doing and this agreement won’t change our approach to minimum bids in any way.

Question: Does Google's quality score effectively raise prices for ads?
Facts: A quality score helps ensure that users see the most relevant ads not just the most expensive. All the major search engines, including Yahoo! and Microsoft, assign quality scores. Quality score is a formula that reflects which ads consumers prefer based on how they respond to the ads. By including quality score in our advertising system, smaller companies can more effectively compete with larger businesses by creating highly relevant ads and websites.

Tomorrow we'll address some of the questions and misconceptions about the deal's impact on competition.

Posted by Michael Terrell, Google.org

(Cross-posted from the Official Google Blog)

Today we announced that we're joining forces (PDF file) with GE to use technology, information and corporate resources to drive the changes necessary to empower consumers with better energy choices. We will focus on improving power generation, transmission and distribution – a combination of technologies that could be known as the "smart grid." (It would be fair to refer to electricity technologies in common use today as a "grid of only average intelligence.")

The existing U.S. infrastructure has not kept pace with the digital economy and the hundreds of technology opportunities that are ready for market. In fact, the way we generate and distribute electricity today is essentially the same as when Thomas Edison built the first power plant well over one hundred years ago. Americans want to drive more fuel efficient cars – or even electric cars - and manage their home energy use to reduce costs, and buy power from cleaner sources, or even generate their own power for sale to the grid.

We all receive an electricity bill once a month that encourages little except prompt payment. What if, instead, we had access to real-time information about home energy use? What if our flat screen TVs, electronic equipment, lights and appliances were programmed to automatically adjust to save money and cut energy use? What if we could push a button and switch the source of our homes' electricity from fossil fuels to renewable energy? What if the car sitting in our garage ran on electricity – the equivalent of $1 per gallon gasoline – and was programmed to charge at night when electricity is cheapest?

This vision is what unites Google and GE. We’ll start by working together in Washington, D.C. to mount a major policy effort to enable large-scale deployment of renewable energy generation in the United States. We’ll also work on development and deployment of the “smart” electricity grid that will empower consumers, utilities, and technology innovators to manage electricity more efficiently and lower their carbon footprint. Finally, we'll collaborate on advanced energy technologies, including technologies to enable the large-scale integration of plug-in vehicles into the grid and new geothermal energy technologies known as enhanced geothermal systems (EGS).

Eric Schmidt with GE's CEO Jeff Immelt at Google's Zeitgeist conference

(We'll update the post later with a video of their talk.)

Posted by Hal Varian, Chief Economist

There has been some recent discussion in the press about the potential impact of our advertising agreement with Yahoo! on ad pricing, and we wanted to help clear up a few misconceptions.

Some of those misconceptions appear to be based, in part, on a July report by SearchIgnite that concluded, among other findings, that once the agreement is implemented, keyword prices on Yahoo! might increase by an average of 22%.

After taking a close look at the study, I believe it makes several flawed assumptions and uses questionable methodology. The paper suggests that advertisers will be getting the same performance from the same ads, just at higher prices. We believe that advertisers will be getting significantly better performance at prices that reflect that improved performance.

Let's take a look at some problems with the SearchIgnite report.

First and most importantly, the report fails to acknowledge that ad prices are not set by Yahoo! or Google, but by advertisers themselves, through the auction process. Since advertisers set prices themselves via an auction, the prices must ultimately reflect advertiser values. That process will remain completely unchanged by our agreement.

Second, the report mistakenly claims that for any given keyword, Yahoo! will have the ability to see whose ads are priced higher -- Yahoo's or Google's -- and then decide which ads to serve. In fact, under our agreement Yahoo! won't be able to see the current auction prices for Google ads, just as Google won't be able to see Yahoo's prices.

Third, the report mistakenly assumes that Yahoo! will serve Google ads for as many of its search queries as possible. This contradicts Yahoo's own statements that their plan is to serve Google ads on search results pages where they have few relevant ads to serve. Yahoo! also has a strong economic incentive to keep serving as many of their own ads as possible, since they get to keep all of the revenue from those ads, while Yahoo! only receives a part of the revenue from ads served by Google.

Fourth, the report includes a misplaced focus on cost per click (CPCs) rather than the more important measure for advertisers -- return on investment of their advertising dollar. One of the reasons Google's ad system has performed so well for advertisers is that our ads tend to be highly relevant to user queries, which makes it more likely that a user will click on an ad and purchase the advertiser's product. We have found that advertisers are generally willing to pay more per click so long as those clicks result in more sales. We anticipate that our agreement with Yahoo! will bring more relevant ads to Yahoo! users -- which is better for both advertisers and users.

Finally, the report suffers from a number of methodology flaws. For one, the study fails to take into account that fact that Yahoo! shows significantly more ads per page than Google. Since both search engines tend to show higher cost-per-click ads in higher positions, showing more ads automatically tends to reduce the average cost-per-click. Also, the study's terms are vaguely defined. Its authors discuss "head" and "tail" keywords, for example, but never clearly define what they mean. Are those terms that appear less often than once a day? Or once a week? There's a big difference.

As we have said before, Google doesn't set advertising prices -- advertisers do. Prices must reflect how much a sale is worth to an advertiser, and that will continue to be the case after our agreement with Yahoo! is implemented.

Posted by Johanna Shelton, Policy Counsel

With all the twists and turns in the online advertising space since the beginning of this year, it's no surprise that Members of Congress would be interested in looking at the issue of competition in that space.

Today, our Senior VP for Corporate Development and Chief Legal Officer David Drummond, will join officials from Yahoo and Microsoft, as well as advertisers, publishers and others, for a morning hearing in the Senate Judiciary Committee, followed by an afternoon hearing in the House Judiciary Committee. These hearings will focus on competition in online advertising -- an arena that we believe is competitive, robust and dynamic -- and our recent advertising agreement with Yahoo.

Because of its founding principles of openness and interoperability, the Internet is an extraordinarily competitive environment, where competition and choice are only a click away. Our advertising agreement with Yahoo! will maintain and expand that competition. Among the key points David will make today are:

• This agreement will be good for Internet users (who will see ads that are better targeted to their interests); advertisers (whose ads will be better matched to users' interests, allowing them to reach potential customers more efficiently), and website publishers (who will see increased revenue from better-matched ads on their websites).
  
  
• Google and Yahoo! will remain vigorous competitors, and that competition will help fuel innovation that is good for users and the economy. As we've said before, commercial arrangements between competitors are commonplace in many industries. Antitrust regulators in the US have recognized that consumers can benefit form these arrangements, especially when one company has technical expertise that enables another company to improve the quality of its products.

• Our agreement will not increase Google's share of search traffic, because Yahoo will continue to run its own search engine and compete in online search.
  
  
• We're particularly excited that as part of the agreement, Yahoo! will make its instant messaging network interoperable with Google's. This will mean easier and broader communication among a growing number of IM users, and enable users to choose among competing IM providers based on the merits and features of the services.
  
  
• We have taken a number of steps in the Yahoo! agreement to protect user privacy. As Google supplies ads to Yahoo! and its partners, personally identifiable information of individual Internet users will not be shared between the companies. Yahoo! will anonymize the IP address of a searcher's computer before passing a search request to Google.
  

Here is some additional resources about our agreement with Yahoo:

• David Drummond's prepared Senate testimony
• Our blog post and press release announcing the agreement
  
• Advertisers and online publishers' support for the agreement
• What experts have been saying about the agreement

UPDATE: Check out video of David's testimony below.



UPDATE (7/16): Here's some additional video of David contrasting the competitive effects of our agreement with a possible Microsoft-Yahoo acquisition:

Posted by Omid Kordestani, Senior VP, Global Sales and Business Development

(Cross-posted from the Official Google Blog)

Today, we announced a non-exclusive advertising agreement that will provide Yahoo! with access to our AdSense for search and AdSense for content advertising programs on their U.S. and Canadian web properties. In addition, we will work to enable interoperability between our respective instant messaging services allowing users better, broader communication online.

We are proud of the advertising technologies we have built, which show users a relevant ad whether they are searching for a specific item or browsing the internet. This arrangement extends those benefits to Yahoo! and its many users, advertisers and publisher partners. We currently provide similar services to sites like AOL and Ask.com as well as many other partners, and we work closely with all of our partners to ensure that our partnership drives their long term success.

Why did we make this agreement? Quite simply, we think it is good for users, advertisers and publishers. By offering Google's industry-leading technology to Yahoo!, the whole system becomes more efficient, and everyone benefits:

• Consumers will see more relevant ads when they are looking for information and browsing the web. And with interoperability between IM services, users will have easier access to even more of their contacts.
  

• Publishers currently in the Yahoo! Publisher Network will benefit from Google's advertising technology, potentially increasing the revenue they earn from their sites.

• Advertisers will have new ways to reach their target customers online more efficiently.
  

We also think this is good for competition. The truth is, this kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition. Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market. Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users.

It is important to say what this agreement is not:

• This is not a merger. Rather, we are merely providing access to our advertising technology to Yahoo! through our AdSense program.
  
  
• This does not remove a competitor from the playing field. Yahoo! will remain in the business of search and content advertising, which gives the company a continued incentive to keep improving and innovating. Even during this agreement, Yahoo! can use our technology as much or as little as it chooses.
  
  
• This does not prevent Yahoo! from making similar arrangements with others. This arrangement is not exclusive, meaning that Yahoo! could enter into similar arrangements with other companies.
  
  
• This does not increase Google's share of search traffic. Yahoo! will continue to run its own search engine and advertising programs, and the agreement will not increase Google's share of search traffic.
  
  
• This does not let Google raise prices for advertisers. Google does not set the prices manually for ads; rather, advertisers themselves determine prices through an ongoing competitive auction. We have found over years of research that an auction is by far the most efficient way to price search advertising and have no intention of changing that.
  

We have been in contact with regulators about this arrangement, and we expect to work closely with them to answer their questions about the transaction. Ultimately we believe that the efficiencies of this agreement will help preserve competition.

The Internet is a healthy, competitive environment where content creators, advertisers and users come together to access information, communicate and create new business opportunities. We think this deal extends these benefits -- it's good for users, advertisers and publishers and good for the industry.

Posted by Adam Kovacevich, Senior Manager, Global Communications and Public Affairs

Some people think that Google manually controls prices for the ads that appear on our site. But Google -- like all the major search engines -- actually uses auctions to price ads, meaning that prices are determined by advertisers. Check out our chief economist Hal Varian's explanation over on the Official Google Blog of why it would be impossible for Google to set all these prices by hand.

Posted by David Drummond, Senior Vice President, Corporate Development and Chief Legal Officer

(Cross-posted to the Official Google Blog)

Earlier today, the U.S. Federal Trade Commission (FTC) cleared our acquisition of DoubleClick. This is obviously excellent news for both companies, and I would like to comment on its significance and what it means for us going forward.

Perhaps most importantly, the FTC’s decision publicly affirms what we and numerous independent analysts have been saying for months: our acquisition does not threaten competition in what is a robust, innovative, and quickly evolving online advertising space. In fact, we firmly believe the transaction will increase competition and bring substantial benefits to consumers, web publishers, and online advertisers.

Looking at the FTC's clearance statement, a few key points jump out as noteworthy:

• Transaction was cleared with no conditions. The FTC cleared the acquisition unconditionally, without demanding any changes in or commitments concerning the companies’ business practices. This will allow us to remain flexible as we continue to innovate and provide the best services to our customers and users.
  
  
• Google and DoubleClick are not competitors. The FTC stated that its "thorough analysis of the evidence showed that the companies are not direct competitors in any relevant antitrust market." Furthermore, the FTC concluded that the merger would not eliminate beneficial potential competition, writing that "it is unlikely that the elimination of Google as a potential competitor in the third party ad serving markets would have a significant impact on competition." We agree with both of these findings. Google and DoubleClick provide complementary services, and competition between the companies was not necessary to create benefits for consumers. To the contrary, consumers will benefit from the two companies working together and combining our resources.
  
  
• Third party ad serving markets are highly competitive. The FTC noted that "the evidence shows that the third party ad serving markets are competitive," and said that "the evidence also shows that firms can and do switch ad serving firms when it is in their self-interest to do so." This is an important finding, because it means that ad serving customers will continue to benefit from innovation and product development by the many players in this space, and that they can always select the ad serving provider that offers them the best services.
  
  
• Privacy not a part of the merger review. Though we strongly believe in protecting our users' privacy, the FTC clearance decision reaffirmed the law by noting that privacy concerns played no role in its merger review. This is an important principle, as privacy issues need to be addressed on an industry-wide basis, and not on a company-by-company basis. The FTC wrote, "although such issues may present important policy questions for the Nation, the sole purpose of federal antitrust review of mergers and acquisitions is to identify and remedy transactions that harm competition. Not only does the Commission lack legal authority to require conditions to this merger that do not relate to antitrust, regulating the privacy requirements of just one company could itself pose a serious detriment to competition in this vast and rapidly evolving industry." The FTC also noted, however, "that the evidence does not support a conclusion" that this particular transaction will harm consumer privacy.
  
  
• Data combination wouldn't pose problems. The FTC rejected the suggestion from competitors that Google would combine user information with DoubleClick's customers' data to obtain an advantage in the market, writing that the data is owned by DoubleClick’s customers and that "at bottom, the concerns raised by Google’s competitors regarding the integration of these two data sets -- should privacy concerns not prevent such integration -- really amount to a fear that the transaction will lead to Google offering a superior product to its customers." Moreover, "a number of Google’s competitors have at their disposal valuable stores of data not available to Google. For instance, Google’s most significant competitors in the ad intermediation market, Microsoft, Yahoo!, and Time Warner have access to their own unique data stores."
  
  
• Advertisers and publishers aren't concerned. The FTC noted that "the clear majority of third parties expressing [competitive] concerns [about the deal] were Google’s current or potential competitors." Additionally, Commissioner Jon Liebowitz noted in his concurring opinion that "my staff and I independently spoke with publishers and advertisers potentially affected by this deal and, somewhat surprisingly, they raised few anticompetitive concerns. In fact, many seem unruffled by the alternatives in the post-merger market." It is telling that while our competitors tried hard to come up with theories of how our customers and partners could be harmed by the deal, those customers and partners themselves did not agree with those theories. In fact, we know that many of these advertisers and publishers are excited about the transaction and look forward to benefiting from it.
  
  

But as I said at the outset, perhaps the most important aspect of the clearance decision is its recognition of the fact that both Google and DoubleClick do business in a competitive and rapidly evolving arena. Indeed, as the FTC noted, all of the recent acquisitions that have occurred in the online advertising space have confirmed this. "The entry and expansion of...well-financed competitors has transformed the ad intermediation marketplace over the last six months," the FTC wrote. "All of these firms are vertically integrated, and all appear to be well-positioned to compete vigorously against Google in this new marketplace."

I should also note that, separate from its clearance decision, the FTC this morning released some suggested principles to guide online companies engaging in online advertising. We support the FTC's effort to develop industry-wide standards in this area, and we are studying these proposals carefully.

Receiving clearance from the FTC is of course an important step forward, but it does not mean that we can now close the acquisition. For that, we must also receive clearance from European Commission (EC), which is still conducting its review. We are cooperating fully with the EC and are hopeful that they will soon reach the same conclusion as their U.S. counterparts.

Posted by Pablo Chavez, Policy Counsel

Later today David Drummond, our Senior VP for Corporate Development and Chief Legal Officer, will take to Capitol Hill to testify before the Senate Judiciary Committee about the latest developments in the online advertising industry, including our acquisition of DoubleClick. You can read David's complete testimony here.

David will tell the committee about some of the benefits of online advertising generally:

"The online advertising business is complex, but my message to you today is simple: Online advertising benefits consumers, promotes free speech, and helps small businesses succeed. Google’s acquisition of DoubleClick will help advance these goals while protecting consumer privacy and enabling greater innovation, competition, and growth."

"In our experience, our users value the advertisements that we deliver along with search results and other web content because the ads help connect them to the information, products, and services they seek. Simply put, advertising is information, and relevant advertising is information that is useful to consumers. The advertising we deliver to our users complements the natural search results that we provide, because our users are often searching for products and services that our advertisers offer. Making this connection is critical. In fact, we strive to deliver the ads that are the most relevant to our users, not just the ones that generate the most revenue for us."

He'll also talk a bit about the competitiveness of the online ad space:

"Some have asked whether this acquisition raises competition concerns. We are confident – and numerous independent analysts have agreed – that our purchase of DoubleClick does not raise antitrust issues because of one simple fact: Google and DoubleClick are complementary businesses, and do not compete with each other. DoubleClick does not buy ads, sell ads, or buy or sell advertising space. All it does is provide the technology to enable advertisers and publishers to deliver ads once they have come to terms, and provide advertisers and publishers statistics relating to the ads."

"The simplest way to look at this is by way of analogy. DoubleClick is to Google what FedEx or UPS is to Amazon.com. Our current business involves primarily the selling of text-based ads – books in our analogy. By contrast, DoubleClick's business at its core is to deliver and report on display ads."

"Our acquisition of DoubleClick does not foreclose other companies from competing in the online advertising space. Rather, the transaction is just one of several that underscore the strong competition in the online advertising space...Each of the acquisitions following our purchase of DoubleClick demonstrates that there are many sophisticated, well-financed, and competitive companies that believe that the online advertising space merits more investment and remains open to strong competition."

And since some have raised questions about privacy in connection with this acquisition, he'll address those issues as well:

"Google's bottom line is this: We believe deeply in protecting online users’ privacy, and we have a strong track record of doing so. We are constantly working to innovate in our privacy practices and policies. Some have asked questions about privacy protections in connection with the DoubleClick acquisition, but for us privacy does not begin or end with our purchase of DoubleClick. Privacy is a user interest that we've been protecting since our inception."

"We make privacy a priority because our business depends on it. If our users are uncomfortable with how we manage the information they provide to us, they are only one click away from switching to a competitor’s services. If you don't believe me, recall that before Google, users clicked on an earlier generation of search engines like Excite, Altavista, Lycos, and Infoseek – each extremely popular in its time. User interests effectively regulate our behavior, and user trust is a critical component of our business model."

You can read more about why we decided to buy DoubleClick, some of the recent steps we've taken to strengthen privacy, and the recent flurry of online ad acquisitions. Here's also some background on the acquisition, and comments that newspapers, independent analysts, and advertising industry leaders have made about this acquisition. Watch this space later for video from the hearing.

UPDATE (6:17 p.m. ET): Check out video below of David Drummond's testimony: