GOOGLES ADOPTION OF PAY-TO-RANK FOR SHOPPING: SURVEY AND ANALYSIS

Executive Summary
In a shift carefully timed for the holiday shopping season, Google recently began determining search results in its Google Shopping vertical based on whether a merchant pays for the privilege of a high ranking. An in-depth analysis of the new auction-based system indicates that it is designed to provide greater benefits to merchants at the expense of consumers. Google says that how much a merchant bids is not the only determinant in ranking search results, which are also based on relevancy. But a lack of clear information from Google makes that statement impossible to verify. While most other search engines also do not disclose the algorithms that determine their results, those sites have policies against accepting payments in exchange for better organic search result rankings. Refusing to discuss the factors a search engine uses to determine search ranking becomes much more problematic when the only publicly known criteria is how much a company is willing to pay to get high rankings. This research paper is based on Google Shopping marketing presentations prepared for the e-commerce retail industry and an analysis of several hundred Google Shopping test searches covering hundreds of items in several different categories including flat-screen televisions, laptops, mobile phones, movies, books, and various popular holiday gift items. While each category of the test searches produced unique results, some broader trends were evident across all categories. Among them: placement in the results has no relation to lower price; some heavyweight retailers are absent from the top results across all categories (as with Amazon), but others are missing only from specific categories (such as Wal-Mart); and the top results are often skewed toward obscure smaller retailers. Google critics and competitors contend that in recent years, Google has gradually and at times surreptitiously moved away from its original business model, which held that purely organic search results were the key to popular appeal and marketplace credibility.1 But the adoption of a pay-to-rank scheme for the top search results in Google Shopping is the starkest abandonment to date of the original principles for search voiced by Googles founders. Googles adoption in recent years of other practices that appear to limit consumer choice in important e-commerce areas, such as travel reservations, have sparked a series of regulatory inquiries. The staff of the Federal Trade Commission is close to recommending charges against Google, the New York Times reported in October, and state consumer protection authorities and foreign antitrust regulators are also investigating whether Google uses its market dominance in search and search advertising to favor its own commercial services like travel reservations over those of competitors such as Expedia.2 The research and analysis
http://online.wsj.com/article/SB10001424052702303830204577448792246251470.html http://www.nytimes.com/2012/10/13/technology/ftc-staff-prepares-antitrust-case-against-google-oversearch.html?pagewanted=all
1 2

1 December 5, 2012

conducted for this study indicate that Google Shopping is another way for Google to exploit its dominance over search traffic, and results in less choice and higher costs for consumers. Many economists believe (and the FTC and EU Commission have found) Google holds a monopoly in search and search advertising. In October 2012 alone, Google ranked first among major search engines with 11.8 billion in explicit core searches, according to a comScore analysis.3 Microsoft-owned sites ranked a distant second with 2.8 billion searches, giving Google a dominant 66.9 percent stake in the search engine market. As the undisputed supreme power in the market, Google also has the ability to shut out or otherwise punish vendors it sees as uncooperative or as competitors a market power augmented by its carefully planned new pay-to-rank policy. With the recent final implementation of the policy, non-paying vendors are now barred from Google Shopping. It is axiomatic that this policy will limit consumer choice. For that reason, it is surprising that Google is making these changes at a time when it is under scrutiny by regulators in the U.S. and abroad for potentially misusing its monopoly power in search and search advertising to favor its own products over competitors in ways that hurt consumers. In addition to providing a new way for Google to exploit its dominance over search traffic, Google Shopping could also enhance Googles already considerable power as an e-commerce kingmaker, another issue of concern for regulators. The seemingly deliberate effort by Google to blur the line between objective or organic search and paid ranking concerns what is now one of the most important components of search and a service that millions of shoppers turn to for reliable information during the holiday season. This is such a striking departure from Googles oft-stated principles that it could raise questions with consumers about the integrity of Googles other search services, causing users to question whether commercial considerations may also influence the objectivity of the results in Googles primary search service. In the shorter term, Googles dominant position in the search engine market amplifies the consequences of its shift to a pay-to-rank policy for online shopping. Given the lack of awareness among consumers that the rules of the game have changed on Google Shopping (and the widely held belief that Google search results are uninfluenced by commercial considerations), many consumers are likely to make purchases this holiday season on Google Shopping without realizing their choices are being limited in new ways. More subtly, the changes at Google Shopping could also end up inflating prices for all online consumers. Thats because the reduction or elimination of price competition at Google Shopping is likely to reduce pressure for discounting among many Google Shopping merchants, leading to an overall decrease in price competition in online shopping. These developments are particularly significant with more and more consumers doing their holiday shopping online. For the 2012 holiday season-to-date, comScore found that $13.7

http://www.comscore.com/Insights/Press_Releases/2012/11/comScore_Releases_October_2012_U.S._Sear ch_Engine_Rankings

2 December 5, 2012

billion has already been spent online, marking a 16 percent increase over last year.4 Online sales on this years Black Friday traditionally a boom day for offline shopping at stores rose to $1.042 billion, up 26 percent from the same day last year and surpassing $1 billion for the for first time in history.5 This paper was by commissioned by Bing from Fusion GPS, a research firm based in Washington, D.C. Under the terms of the assignment, Fusion retained authority over the findings of this paper. Additional background information is located at the end of the paper.

The Search Principles of Googles Founders

Google founders Sergey Brin and Larry Page posited in their Stanford thesis that advertising income often provides an incentive to provide poor quality search results, and that the payment for placement in search results is much more insidious than advertising, because it is not clear who "deserves" to be there, and who is willing to pay money to be listed.6 Google has long defended the purity of it search results. In 2004 the company went so far as to infer that allowing commerce to influence search content was evil. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating, Google declared it its famously unconventional 2004 registration statement with the Securities & Exchange Commission. Google likened itself to a reputable newspaper, where the advertisements are clearly marked and the content of the articles bears no relation to who buys ads: We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see.7 While undoubtedly sincere, the trumpeting of these principles was also great marketing. To a large extent, the rise of Google was fueled by consumer dissatisfaction with existing search services such as Alta Vista that allowed companies to obtain a high position in search results by paying for it. Because the practice was not clearly disclosed, it was often derided by critics as a cyber-age equivalent of payola, the corrupt practice from the age of radio whereby

http://www.comscore.com/Insights/Press_Releases/2012/11/Black_Friday_Billion_Kick-Off_to_Brickand-Mortar_Shopping_Season_Surges_Past_1_Billion_in_E-Commerce_Spending_for_the_First_Time 5 http://www.comscore.com/Insights/Press_Releases/2012/11/Black_Friday_Billion_Kick-Off_to_Brickand-Mortar_Shopping_Season_Surges_Past_1_Billion_in_E-Commerce_Spending_for_the_First_Time 6 http://infolab.stanford.edu/~backrub/google.html#a 7 http://www.sec.gov/Archives/edgar/data/1288776/000119312504142742/ds1a.htm

4

3 December 5, 2012

music promoters paid radio stations to give airtime to songs they wanted to make into hits.8 Google went to great lengths to distance itself from search payola including in its shopping search site, which at the time was called Froogle. Because we do not charge merchants for inclusion in Froogle, our users can browse product categories or conduct product searches with confidence that the results we provide are relevant and unbiased, Google told the SEC.

The Importance of Shopping Search Engines to Consumers

When Froogle was first launched, the web played a minor role in shopping primarily as a place to locate items that could not be found at the local shopping mall. In 2012, the web has become the primary shopping mall for tens of millions of consumers, and search is the biggest window display. According to new data from Experian, search engines are the upstream source for just under half of all digital traffic to the top 500 retail sites. That figure dwarfs even the booming social networking sites.

While Google has benefited enormously from the growth of online shopping, some key trends are not working in its favor as digital shopping continues to explode. According to
8

http://slashdot.org/story/02/02/28/1833213/search-engine-payola

4 December 5, 2012

comScore, the proportion of digital sales traceable to a search engine has been shrinking rapidly from 25% to 13% between 2009 and 2011. Meanwhile, searches on shoppingcentric sites such as Amazon are skyrocketing.9

Google Shopping Launches Pay-to-Play For Search Results

On May 31 of 2012, Google announced that its Google Product Search feature would transition to a purely commercial model built on Product Listing Ads.10 Under the new model, Ranking in Google Shopping, when the full transition is complete this fall, will be based on a combination of relevance and bid price This will give merchants greater control over where their products appear on Google Shopping. The idea once put forth by Brin and Page that financial influence on search produces an inherently inferior consumer service was turned on its head: We believe that having a commercial relationship with merchants will encourage them to keep their product information fresh and up to date. Higher quality datawhether its accurate prices, the latest offers or product availability should mean better shopping results for users, which in turn should create higher quality traffic for merchants. We were unable to locate a similar announcement in Googles SEC filings. However, we did discover a presentation regarding the Google Shopping changes on the site of one of its partners, Channel Advisor. The presentation is marked Google Confidential and Proprietary, but was publicly accessible as of November 20, 2012.11 One of the slides shows the milestones of Google Shoppings transition to a pure pay-to-play system for search. As of October 1, if a company isnt paying Google, it is not in the results.

http://www.forbes.com/sites/petercohan/2012/09/10/is-google-shopping-funneling-its-customers-toamazon/ 10 http://googlecommerce.blogspot.com/2012/05/building-better-shopping-experience.html 11 http://www.channeladvisor.com/webinars/slides/2012-Introducing-GoogleShopping.pdf?mkt_tok=3RkMMJWWfF9wsRonuK%2FAcu%2FhmjTEU5z16e0tWaexgIkz2EFye%2BLIHE TpodcMTcZnPbrYEhcSI4JkxgVAR%2BOdfY5O%2F%2FlcD1e7SzTt

9

5 December 5, 2012

While other sites may allow merchants to pay to be included, no other search engine returns exclusively paid listings and simultaneously allows pay to influence rankings. Others search engines return a mix of paid and free results and have a policy of not allowing payment to influence ranking. What the slide presentation makes clear is that all existing participants in Google Shopping were gradually herded into its new bidding program for placement in search results. There is no way to opt out of the bidding process without leaving Google Shopping altogether. Such a program has important differences with other methods used by internet shopping sites to generate revenue from merchants. Many popular shopping sites charge merchants a fee in exchange for the right to contribute product offers to their system, and some also offer to increase the visibility of a paying merchants product when it appears in search results, typically by using enhanced graphics. But such practices do not influence the order of the search results. On Bing Shopping results pages, paid product offers can obtain higher visibility but are marked as Sponsored Offers. Although Bing does include some paid offers from paid aggregator partners (such as Shopping.com), those offers are ranked by only by relevance. Bing executives stated unequivocally to Fusion GPS that Bing does not have any systems where a merchant can improve or otherwise influence their place in these search result rankings by paying more money. The executives said shopping comparison engine Shopping.com, a Bing partner, does not have control over the ranking of Bing Shoppings results. Shopping.com merely provides a data feed to Bing Shopping that may be included in its search results. 6 December 5, 2012

Consumer Rights Issues

Perhaps the biggest question about Google Shopping is what exactly Google means by a fully commercial experience on Google Shopping. When a consumer searches for a product on Google Shopping, a cryptic three-word question appears in blue type next to the results: Why these products? The question might seem self-explanatory to the average Google loyalist who is familiar with its famous PageRank algorithms, but clicking on the question produces the following:

In some cases, for general searches like frying pans, printers, or cameras, the last sentence claiming payment is one of several factors used to rank these results is dropped completely from the disclosure. (Other searches for shirts or hammers do appear to include this sentence.) Users who make it to the very bottom of the page get a similar message in small type:

These disclosures sound similar to the announcement Google made back on May 31, but in fact they oversimplify the way the system works. Foremost, there is no real disclosure of the fact that retailers who refuse to pay have been completely banished from Google Shopping, not just reduced to a lower ranking. The disclosure also makes only vague reference to the auction process that Google has informed merchants now helps determine search results. As Google disclosed in May, Ranking in Google Shopping, when the full transition is complete this fall, will be based on a combination of relevance and bid price[emphasis added]. In other words, Google is willing to tell consumers that companies must pay a fee to be 7 December 5, 2012

included in the top-ranked results, but it is not telling consumers that the top spots in the results are actually auctioned off by Google to bidders, who are apparently then further sorted by a secret relevance formula. There is of course much less subtlety in Googles communications with merchants, who are led to believe theres not much chance that a product of theirs will make it into the top rankings without a big bucks bid no matter how relevant it might otherwise be. What are the other factors used to rank the results when searching on the default setting of relevance? Google is not saying. Based on hundreds of searches, we conclude that the price of the product is not a major factor in the rankings, although it could be a minor component of the formula. Geographic proximity to the consumer does not appear to be a factor at all, although again, its possible it is included but lacks significant weighting. The only other potential factor of which we are aware seems to be whether a vendor has been certified by Google as a Trusted Store, a new program it launched in tandem with Google Shopping that appears designed at least in part to compensate for the absence of major retailers from some product categories. The opaque nature of Google Shoppings ranking process appears to be at odds with the longstanding recommendations of the Federal Trade Commission, which in 2002 wrote to search engine companies that the agency staff recommends that if your search engine uses paid inclusion programs that may distort rankings or placement criteria, you clearly describe how sites are selected for inclusion in your indices.12 These days, sites often use hyperlinks to make such disclosures. The FTC has issued an 83page booklet, Dot Com Disclosures, explaining what the agency means by demanding clear and conspicuous notices about e-commerce practices in hyperlinks:

Danny Sullivan, a well-known commentator on the search industry, in recent months has written two letters to the FTC asking it to revisit the issue of whether search engine companies are adequately disclosing how exactly they determine their rankings. He has specifically raised the disclosure concerns that arise when one factor a search engine uses is how much companies pay to get a top ranking, citing the case of Google Shopping.13

http://searchengineland.com/after-a-month-silence-from-the-ftc-on-search-engine-disclosure-127321; http://searchengineland.com/a-letter-to-the-ftc-regarding-search-engine-disclosure-124169
13

8 December 5, 2012

While Bing discloses that it accepts fees from merchants to enhance their visibility in Bing Shopping results in areas identified as Sponsored Offers, it states that payment is not a factor used to rank search results.

Analysis of Search Results

Amazon, Wal-Mart and Best Buy Amazon has been largely mum about Google Shopping, which is widely seen as an attempt by Google to seize some of the revenues Amazon gets from merchants for displaying their products. While it does not participate currently, the New York Times has reported that Amazon wont rule out eventually paying to participate in Google Shopping.14 Our basic findings were in line with the slide above. The clearest example concerns Amazon.com. Over the course of hundreds of searches, we never received a result showing a product available for sale on Amazon.com. The refusal of Amazon to pay Google was pointed out by the New York Times in September and was the subject of a lengthy post by search engine expert Danny Sullivan on Nov. 6.15 More common is the case of Wal-Mart, which apparently has decided its worth it to pay Google for inclusion in certain categories of search results but not in many others. We found no listings for Wal-Mart in the top results of searches for popular mobile phones made by Samsung, Apple, and Nokia. While it is conceivable that some Wal-Mart phones are listed at the very bottom of some search results, we were able to find only a few such examples. Intriguingly, however, we did find that WalMart was a top result for a few Nokia pre-paid phones. We also found no listings in the top results for Wal-Mart in searches for printers made by Canon, Epson and Brother. Likewise, there were no listings for Prince or Wilson Tennis racquets, nor Coleman or Wenzel tents. However, Wal-Mart was a frequent result in searches for Schwinn bikes, various toys, and certain books (see below). Best Buy, meanwhile, was a major player in flat-screen televisions but seemingly nowhere in movies. What explains these patterns? The most likely answer is Google Shoppings steep new tilt toward serving merchants and away from serving consumers. As explained in a revealing case study that Google Shopping and its paid-search partners recently published, one of the biggest benefits of a search system that allows merchants to pay for higher placement in the search results is that it allows the merchants to maximize ad dollars toward sales of their most profitable products while spending little or nothing on their less important offerings often the ones that present the best deals for consumers rather than merchants. Case in point: ToolKing.com, which sells more than 120,000 products online and began using Google Shoppings new Product Listing Ads (PLA) system to capitalize on every advertising opportunity, according to a Google case study available at http://services.google.com/fh/files/misc/toolkingstudy.pdf
http://www.nytimes.com/2012/09/10/technology/google-shopping-competition-amazon-chargingretailers.html?_r=0 15 http://searchengineland.com/the-mess-that-is-google-shopping-139112
14

9 December 5, 2012

ToolKing only began using the PLA system after it learned that Google would require it to do so or leave Google Shopping, the study states. But the company soon discovered that the company could increase its profits by feeding data on all of its 120,000 products to Google Shopping and performing tests to find out which searches brought in the most when ToolKing bought a high-up placement in the search results. After testing, the company lowered many PLA bids, so that non-performing items appear low in search-query results or dont appear at all, the case study reports. In other words, Google Shopping allows some merchants to essentially do away with the loss leader, the low-margin, no-margin, or loss-making products that are featured in ads in order to bring customers into the store be it a virtual one or the bricks and mortar variety. While its easy to see why some merchants love this, its obviously a loss to bargain-hunting consumers who scan their newspapers and the Internet for just such deals. Its also easy to see from this example why Amazon famous for its loss leaders -- is no fan of Google Shopping. And the likely explanation for why Best Buy doesnt sell videos on Google Shopping now becomes clear as well: Their ultra-low video prices are such a good a deal for the consumer that Best Buy only wants to offer them to consumers who make the trip to their stores or visit Best Buys own website -- without help from Google Shopping. Likewise, Wal-Mart is happy to pay Google to promote its prepaid Nokia phones because theyre much more profitable for Wal-Mart than the traditional variety. 1. Televisions Best Buy is the principal retailer for televisions according to Google Shopping searches, appearing at the top or near the top of a majority of the televisions for which we searched. This happens across different brand names, from Panasonic to LG to Samsung. Sears and Wal-Mart also appear regularly. There are also a handful of smaller retailers, some of which concentrate only on televisions: All-Time TVs and East Coast TVs are two such examples. Another retailer that makes a big imprint not only in TV searches but in all electronic product searches is Newegg. 2. Movies The searches for DVD and Blu-Ray movies slanted heavily toward mid-level and smaller retailers. Buy.com and Overstock.com were two of the principal retailers that emerged over the course of nearly 100 movie searches. Two other retailers whose names appeared regularly were iNetvideo.com and Newegg. These four vendors popped up repeatedly, across different genres and for both new and older features. Turner Classic Movies is also frequently among the top results, as is ValoreBooks.com. Target and Wal-Mart also appear frequently, though not as often as one might expect given their role in the industry. However, one of the more surprising aspects of the movie search is that Best Buy does not appear at all. This is odd not only in light of Best Buys notoriety as a vendor of DVDs and Blu Rays, but also given that in other shopping realms, Google seems to favor Best Buy. 3. Books 10 December 5, 2012

Book searches lean heavily toward smaller, lesser-known companies. Among the most prominent is an e-retailer called ValoreBooks.net. Some of the most prominent book retailers, in contrast, have a very small or even nonexistent footprint. Amazon, for instance, is never listed. Barnes and Noble is often left off the search lists, despite its growing eretailing business and its status as the largest physical bookseller in the country. Books-amillion is likewise largely absent. Wal-Mart appears in book searches for specific authors, typically prominent contemporary novelists. Among them: Cormac McCarthy, Mario Vargas Llosa, and Ian McEwan. 4. Mobile Phones Of the major retailers, Target is the one that appears most often in cell phone searches, across a wide variety of brand names. (They do not, however, appear as a primary source for Motorola phones, although Target carries Motorola products.) Best Buy and Buy.com also appear regularly. Wal-Mart, however, does not; in scores of searches of Apple, Samsung, Motorola, and Nokia phones, it appears just twice. In general, cell phone sales are more biased toward smaller, lesser-known retailers than many of the other products. Many of them appear repeatedly, such as cell2get.com. Others, however, pop up just once or twice. 5. Laptops The major sources of laptops in Google Shopping are Best Buy and Buy.com. Another vendor whose name is frequently among the top vendors in product searchesfor cell phones as well as several other productsis Newegg. Wal-Mart appears only occasionally, while Target almost never does. The results vary from product to product. In the case of Apple laptops, for instance, Best Buy is the first result and the Apple Store the second every time. For HP Pavilion products, a company known as ESGN is frequently among the top vendor, but the same seller never appears for other products. In general, lesser-known laptop brand names, such as Asus, have a much higher proportion of unknown retailers. 6. Most Popular The search also examined a series of gifts that were labeled among the most popular ahead of the coming holiday season. The gifts were broken down by gender, and included (among various others): a Dewalt electric drill; a Braun electric shaver; a Spyder paintball rifle; a Timex watch; a Garmin runners GPS locator for men; and, for women, a Bulova watch, a Hello Kitty toaster, a Wildkin laptop bag, a Michael Kors purse, and a Kindle Fire. Some of the same patterns visible in looking at specific product lines were also evident in the search for gifts. Most of these, despite being available at major retail chains, generated few hits for places like Target. Furthermore, despite being an Amazon product, the retailer appears nowhere in the Kindle Fire results.

Conclusion
11 December 5, 2012

The recent changes to Google Shopping to make it a purely commercial system give merchants new power at the expense of consumers. In the short term, the move is likely to cause many consumers to pay more during this holiday shopping season than they otherwise would have needed to pay. Over the longer term, the changes could undercut image as a user-oriented company. However, it is also possible that the changes will reorder the landscape of web shopping, giving merchants more clout and consumers less.

Methodology
This paper was researched by the staff of Fusion GPS, a strategic consultancy in Washington, D.C. that compiles specialized information products for corporations, trade associations, law firms, nonprofit organizations, and the US government. Fusion selected six product categories: books, movies, laptops, mobile phones, toys, and popular gifts for men and women. For each category, twenty to forty searches were conducted in Google Shopping for specific products or brands on select days in November, 2012. The results were reviewed by three analysts to arrive at a consensus of reliable and consistent observations regarding such aspects as price, retailer, and geography. Selected follow-up searches were conducted to confirm key observations. Bing had no input into the search process or the findings from the results of the search process. Some basic introductory background material from media reports and other public statements was initially provided by Bing along with other limited feedback. However, Fusion retained final editorial control of the paper. A large quantity of additional public information was collected by Fusion GPS during the course of the research. The paper was written by Glenn R. Simpson, founder and president of Fusion GPS. Simpson was an investigative journalist for 20 years, the last 14 at The Wall Street Journal. From 1998 to 2001, he covered the Federal Trade Commission and the technology industry. During his years at the Journal, Simpson published critical articles on the business practices of Microsoft, Cisco Systems, and Apple, among other technology firms. Simpson was part of a Journal team that won the Scripps Howard Foundation's National Journalism Award for 2008 and received the top award from the Society of American Business Writers & Editors for 2004.

12 December 5, 2012