Google is in the news again today as its share price falls following some negative commentary by analysts and a report that PPC revenue was flat in January. See this NY Times article for the full story:

Highflier loses Altitude as Google’s Clicks Go Flat

This story focuses mainly on the impact on Google of the slowdown in the US economy and upon various changes that Google has made in its PPC program which may (or may not) provide long term benefit to the company.

However, in the legal space, there may be a longer term problem with Google’s business model for PPC. As you know, Google’s model is basically an auction under which advertisers compete for prime advertising space by bidding higher and higher on keywords that might generate a chargeable click. This model works great for Google but in the long term it can hardly be seen as beneficial for the advertisers who simply ratchet up the costs for everybody by competing against each other. Every new entrant to the space has to compete with the existing advertisers which pushes the costs up ever higher. There is no moderating effect on price other than by advertisers simply folding their cards and either leaving the game or downgrading their campaign.

As a result, and in theory, the price per click should get pushed up to the maximum cost that will still produce some minimal ROI. When Google started AdWords, pretty much all the available spaces were bargains and clicks were available for mere cents. However, now that the market has matured, clicks have become expensive. In some areas, for example for personal injury lawyers, clicks have become really expensive and it is easy to spend thousands of dollars a month on a campaign. At the moment, those campaigns are still producing some decent returns but if costs keep going up, it may reach a point where the value is marginal and Google’s attractiveness as a medium starts to erode.

Imagine if the Yellow Pages did the same thing. They have an auction for the “lawyers” section of the YP and everybody bids for the space with the highest bid getting the first double-spread ad in the section. Next year they do the same but the bidding for that first ad starts at last year’s highest price. And then again the next year. It is easy to see that prices would quickly get too high and advertisers would start abandoning the top end of the auction and/or downscaling their ads.

Technically, the problem with auctions is that they assume that everyone is always acting rationally when they make a bid and that they have carefully considered the costs and returns. In fact, if you have been to a live auction, you will know that people frequently do not act rationally and often overbid for items. The problem with Google’s model is that once the bid gets too high, it is difficult for it to come back down.

I am just speculating here but maybe this will start to cause some problems for Google as the prices spiral ever higher and higher. Theoretically, there could be price adjustments if all advertisers in the space act collectively … but that type of conspiratorial action is unlikely. It seems more likely that the bid price will reach a level where advertisers will not want to bid for top spot … they will then satisfy themselves with lesser spots which may produce unsatisfactory results. Maybe Google’s fabulous business model will price itself out of certain markets? Just some thoughts …