It's the world’s biggest and fastest auction, it handles more micro-payments than all of the world’s stock exchanges and it was deemed fairly risky when it was launched almost exactly ten years ago, both by those responsible for coming up with it and by others. So bow down and give praise to (or, if you're in the newspaper business, swear at) the game changing advertising system known as AdWords, a system built by a team of Google engineers and salespeople who bet big on a few core insights and won.
The early years
When Larry Page and Sergey Brin started Google in 1998, it was common practice for other search engines to include paid listings from advertisers within the 'natural' search results. The pair viewed ads differently, however, and thought of them as a way to deliver useful commercial information to users who were looking for information on products or services. They felt the ads had to be clearly marked as ads (called 'sponsored links') and they couldn't be flashy or intrusive. Remember how many pop-up and pop-under ads you saw ten years ago? You probably didn’t click on many of them because they weren’t particularly relevant. But Google changed all that by adding relevancy and therefore increasing the number of clicks.
AdWords is born
Google started offering ads as four lines of text next to relevant search queries in 1999. In 2000, it launched a new system called AdWords Select. The first of these ads ran in 2000, when Google engineers ran a test showing a link to a small percentage of Google users. Within minutes, the first customer that sold live mail-order lobsters signed up online. These guys had never considered using online marketing before, but decided to get involved when they realised they could just do it themselves right then and there.
Auctions and quality scores
The next big breakthrough was realising that auctions can price thousands of ads better than humans. The Google team realised pretty quickly they couldn’t manually set the price for every keyword, so decided to run an auction to set the price of ads instead. Advertisers would bid on keywords, but instead of bidding on the price per impression, they would bid on the price they’re willing to pay each time a user clicks on their ad. The auction would run every time an ad is served, and winners would be determined algorithmically in a fraction of a second.
Google also learned that auctions should include a measure of the ad’s relevance to the search query, called the quality score. Without quality score, advertisers could pay their way to the top of the search results page and users would see ads that aren’t useful. Imagine you do a search for concert tickets and see ads for fast food, or you see ads for diet products every time you search. Quality score injected the voice of the user in Google’s advertising system and made sure that ads could become truly useful.
Google is testing a variety of new ad formats that make search ads richer, more mobile and more local, listening closely to users and advertisers to improve search ads that make AdWords more relevant for users and more effective for advertisers.
By experimenting with new ad formats (check out the 'Watch This Space' campaign for display ads) that go beyond four lines of text, Google’s goal is to discover the 'perfect' ads that match your query perfectly, delivering the right information at the right time for users and the right price and performance for advertisers.
As search becomes the go-to system for consumer information, companies increasingly need to be in this space and they're spending plenty of money on AdWords already, as these leaked documents about the US companies that are—and aren't—stumping up for the auctions show.