Exclusive Outside of Google, no one really knows how the company makes its money. We know that most of Google's billions come from AdWords, its search advertising system. But no one really knows how AdWords works. By design, AdWords is a black box. If the world knew how it worked, Google says, unscrupulous advertisers would game the thing.
That may be true. But the black box also makes life difficult for legitimate advertisers. And with Google's search engine now controlling 85 per cent of the market — according to one research outfit — there's an added conundrum: How do you really know if AdWords deserves antitrust scrutiny? Google says that it doesn't control prices on the ad platform, that AdWords is an auction where prices are set by advertisers. But AdWords pushes the boundaries of the traditional auction, and we have no way of knowing just how far it pushes.
The best we can do is ask Preston McAfee.
Preston McAfee is Yahoo!'s chief economist. Overseeing the company's microeconomics and social-sciences research group, he's among those who drive Yahoo!'s "Panama" search-ad system — an attempt to mimic Google AdWords — and he helped rebuild the company's display-ad exchange with an auction-like real-time pricing system. Yahoo! CEO Carol Bartz owns a sweat shirt emblazoned with his math.
McAfee joined Yahoo! in 2007, after 28 years as a professor of economics at the California Institute of Technology and the University of Texas at Austin. Auctions were his speciality. In the early 90s he helped build the simultaneous ascending auction, which governments across the globe have since used to license over $100 million in wireless spectrum. But he was also an authority on mergers and antitrust. He testified as an expert witness in the FTC v Rambus case, in which the Federal Trade Commission charged Rambus with violating antitrust laws, and USA v Oracle, in which the government sued to stop Oracle's acquisition of Peoplesoft over antitrust concerns.
"I've worked on pricing and auctions and antitrust. So when I came to Yahoo!, I thought 'This will pretty much cover everything I've done, except for antitrust,'" he told The Register in an interview earlier this year, before a sly acknowledgement that antitrust eventually came into play as well: "Little did I know."
In 2008, as Microsoft attempted a forceful takeover of Yahoo!, McAfee's company inked a search pact with Google. But Mountain View eventually pulled out of the deal when the Department of Justice threatened an antitrust suit. Microsoft never did acquire Yahoo!, but the two companies eventually signed a search pact of their own. Microsoft Bing now underpins Yahoo!'s organic search, and soon, Redmond's AdCenter will drive Yahoo!'s search ads as well, replacing Panama.
In objecting to the Google-Yahoo! pact, Microsoft said that the deal would give Google more than 90 per cent of search-advertising market. But according to one source familiar with Mountain View's internal data, Google was approaching 90 per cent of the market even without Yahoo!, and with preliminary investigations underway in the European Union and in Texas over AdWords as well as Google's "organic" search results, the antitrust questions still linger.