Adwords and Declining Profitability

A recent blog got quite a lot of attention recently when it decried the declining profitability of Google Adwords.  We’ve been predicting this for a while, but we believe there’s hope on the horizon.

Why has profitability been declining?  In short- Google’s usage of auctions to sell keywords.  We’re in the Marketing ROI business, and we routinely hear from our clients that they aren’t surprised that their Search Engine Marketing is the highest ROI.  They had guessed as much already, but the reason they aren’t spending more is that they’ve simply run out of inventory.  They literally can’t find a place to spend their dollars- so of course they’re willing to bid up prices in the auctions.  And this will squeeze smaller or less-profitable competitors out of the market.

So why is there hope on the horizon?  As the CEO of a Fortune-20 retailer once asked me, “What good is being in a duopoly if you can’t keep prices high?”  Of course the answer is that it simply doesn’t stay a duopoly.  High prices and low supply creates an awfully large incentive for more players to enter and create more inventory.  The industry moves so fast, it would be folly to think that Google will look and act the same way it does today in 20, 10, or even 5 years.