The fact that Google has a chief economist is unusual for a media or technology company. That it has over 100 statisticians crunching numbers is even more rare. But, as the search giant famously stated in the “founders letter” that accompanied its IPO filing in 2004, “Google is not a conventional company.”
Hal Varian, Google’s chief economist and author of a textbook still used at many universities worldwide, is tasked with perfecting the core of Google’s money machine: its paid search auction.
Varian joined the company in 2002 after Google CEO Eric Schmidt asked him to look into something. “He said to me, ‘Why don’t you look into this auction thing. It might make us some money,'” Varian recalled.
The paid search auction, which was actually pioneered by Overture founder Bill Gross, has made Google plenty of money by matching consumers and advertisers in a more efficient manner. It has created a virtuous cycle for the company: the more advertisers Google gets into its system, the better it can target ads and the more money it can charge per click.
Now, following the acquisition of DoubleClick and forays into print and TV, Google is looking at how far the auction can expand across all media.
“The biggest problem in advertising has been the performance measures,” said Varian. “In search engine advertising, you have the click and the conversion. It makes it much more easy. In brand advertising, the difficult part is the measures are much more diffuse. We hope to use math to bring more clarity to that.”
What does that mean for the future of the agency business? Varian believes advertising will come to resemble the financial-services sector, which also went through a technology revolution more than two decades ago. While the relationship aspect remains, technology made it more efficient to match up supply and demand.
“Marketing is the new finance,” Varian said. “Just as finance has become more quantitative because of what happened in the 1970s, you’ll see marketing do that.”
Agencies that embrace quantitative tools and ad platforms will thrive, he believes, but those that are only intermediaries in transactions will struggle. One area in which Google has no interest: creative.
“If you’re adding a lot of value, those jobs are good,” Varian said. “Computers are good at doing non-creative tasks.”
The biggest opportunity for Google: TV advertising. All TV ad spending in 2007 (network, cable, spot and syndicated) totaled almost $77.5 billion, per Nielsen Monitor-Plus. Google sees TV as a market ripe for disruption, since ads are poorly targeted and difficult to measure.
“TV will come into the 21st century,” Varian said. “It’s going to be a lot easier to measure response and target than it is today.”