Guglonomika Secrets

In the midst of a financial apocalypse, the fathers and gurus of the global market in the broadest sense of the word, came together in the conference room of the Hilton Hotel, located in San Francisco, for the annual meeting of the American Economics Association. You can imagine the atmosphere of such a meeting, but, oddly enough, a person who everyone is waiting for will not talk about toxic emissions, investment or unemployment.

“I want to tell you about online auctions,” says Hal Varian , first on the podium with a microphone in hand. Varian is 62 years old and he is a professor at the School of Business and the School of Information at the University of Berkeley, but now this person is much better known around the world as the chief economist of Google. And the audience sitting in front of him did not come to listen about the decline of the credit world - they all are much more interested in the recipe for making the secret Google sauce.

Hal Varian is perhaps the best expert in one of the most successful business ideas in the modern world - AdWords, the unique technology of the advertising giant. AdWords analyzes each search query in order to “understand” where it is more advantageous to locate and to whom it is more effective to display advertising offers. This is without doubt the largest in the world, the fastest, endless, automated and self-sufficient auction. Which, according to Mr. Varian, begins to bid every time you ask for something from the search line. However, Khal himself has never mentioned how much money a business brings in which he is so well versed. However - none of him pull out this information and did not, because Google is an open company and anyone can look at the figure with their own eyes in the annual financial report. Last year it was a fantastic 21 billion dollars.

Speech Varian quickly acquires technical details. Where is the difference between a classic auction model and an alternative like the Vickrey-Clarke-Groves model and which one is more applicable? Next in line are game theories and here the “god of the economy of Google” already talks about the “Nash equilibrium”. This whole theoretical salad is generously seasoned with the words with the English letter “c”, as in the word click: clickthrough rate, cost per click, supply curve of clicks (you just think: “clickstart curve of clicks”). The audience is admired.
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During the traditional “question-answer” skirmish, a half-skeptical, half-suspicious person took the word: “Do you say that this very auction happens every time someone searches for something?” It means millions of times a day! ”Hal Varian smiles:“ Millions ... you greatly underestimate the situation. ”

So why does Google need a chief economist? The answer is simple: the company is the economy in itself. The promotional auction, marinated in a special sauce, is a forensic laboratory, whose clients vary from giant multinational companies to individual entrepreneurs who have not yet changed a room in a university dormitory. And all of them, one and all, are serviced by the world's largest micropayment system.

Google depends entirely on the economic principles perfected on a search tool that has selected more than 60% of Internet users and the company uses the theory of the auction in order to "lubricate the skis" of their own operations and algorithms. All these calculations require an army of mathematical geeks and Srinivas Ramanujan level equations.

Well, Hal Varian, sitting in his office at the Googleplex, located in the town of Mountain View, California, looks like a modern Adam Smith. With the only difference that the first serves the right cause of Google Electronics. His job is to create a theoretical framework for the company's business practice. And this is not easy in a place where most of the working team are engineers who need to be disciplined in the way that is needed to get an effective result. The size of which I mentioned in the third paragraph.

In fact, the whole Googlephone is served in two forms: micro and macro. The macroeconomic side includes some of the company's altruistic steps, which attract enormous public attention. Why does Google need to distribute free products such as mail, browser, web apps, Android mobile OS? “Everything that expands and increases the Internet itself makes us richer,” says Varian. Well, since using the Internet today, without using Google like calling McDonalds without ordering a burger, an increasing number of people on the network directly affect the company's revenues.

Google's microeconomics is more complex. Selling advertising brings not only profit, but also huge amounts of information about the habits and preferences of users - information that Google carefully protects and processes, hoping in this way to predict the behavior of each individual user, find ways to improve their products and, of course, sell even more advertising. This is the heart and soul of all Googlemonics. and besides, the system of constant introspection, because the information response determines not only the style of Google, but also almost any company that conducts its activities in the network.

And next year, when the American Economic Association reconvenes for a meeting, the financial crisis may still be the hottest topic. However, one of the key speakers has already been chosen - Guglonomist Hal Varian.

Ironically, in the early years of its existence, Google was quite far from paying close attention to its economy. After Larry Page and Sergey Brin founded the company in 1998, they focused their efforts on improving, first of all, the search, and gave the financial part to the 22-year-old Stanford graduate Salan Kamangar , the 9th employee, who had been hired. Early conclusions were that, perhaps, advertising could be a good way to make money, but licensing the search technology and selling servers (and corporate services) would bring a lot of money. Kamangar for a couple with another early Google researcher, Eric Wich (Eric Veach), were engaged in precisely this vein, besides, none of them had education directly related to business, management or economics - Kamangar biologist, Vich is a computer specialist.

Google advertising has always been visually the way we see it today - bright blocks of text advertising, one way or another connected with search queries. But, first, there were two types of it: the blocks at the top of the page were sold in a classic manner, by a team of people sitting at headquarters in New York. The “sellers” told about all the charms and advantages of such advertising at dinner in an expensive restaurant, explaining in passing what “keywords” are and what prices are expected by advertisers. After that, they also received an account in which the final amount was formed based on the views of the ad unit, regardless of whether anyone clicked on an advertisement at all or not. Below was an advertisement that a small business could buy directly. The first such advertisement, which spoke of “ postal orders of lobsters ”, was sold in 2000, minutes after the “golden” link SEE YOUR AD HERE appeared on the page.

But over time, both Kamangar and Wich came up with a good idea to sell ads on the side of the page through an auction. The auction is not in the style of eBay, where the sale process lasts minutes or days, depending on the preferences of the seller and the rates of those who buy, but of a huge virtual market, where the rates are “ahead of the curve” and processed by the algorithm in seconds. It was then that Google realized and began to hope for the simple fact that millions of small and medium-sized businessmen will start participating in this auction, therefore another condition was necessary - complete self-sufficiency of such a market. Advertisers made bets based on keywords or search terms, but instead of paying “for the impression”, it was suggested to pay for each click on advertising, leading the user to the page of the entrepreneur himself. The new system was named AdWords Select , while the ads at the top of the page, whose price was still determined by the guys from New York, were called AdWords Premium.

A very important and practically key innovation was that all side slots were sold as a result of a single auction. If we compare this tactic with another online advertising pioneer, Overture, then there were stakes for a single block. However, there was also a problem with a solid sidebar - advertisers could underestimate bids in order not to fall into the trap of a loser, when the “bottom” guy paid an order of magnitude less than “we”. ” Then, Google decided to do this: the winner of each auction will pay the principal amount (plus tax) from the advertiser's rate of the next highest bid. So, if Vanya puts 10 bucks, Alain puts 9 bucks, and Fedya puts 6 bucks, then Vanya gets the top slot and pays 9.01 dollars. Alena gets the next slot for $ 6.01, and so on. Since at that moment all advertisers realized that the opportunity to “stay in the cold” was practically absent, the result was obvious - the size of the bids increased significantly.

“Eric Vich did independent computations,” says Kamangar, “We concluded that second bid auctions existed in different forms at different times, once such a scheme was used in the sale of confiscated property in the treasury.”

Google’s home-grown solution turned out to be so successful that one of Stanford economists, Paul Milgrom , who for auction theory is the same as Pavlov for dogs, wrote: “I began to realize that Google, somehow, stopped at simplified auction level, which has never happened before. " And the similar theory of the “second bid” gave not just a theoretical advantage: “Google immediately began to receive much bigger bids than, for example, Overture”.

But back to the person of our story. Varian was hired in May 2002, a couple of months after the practical implementation of the “auction” AdWords system. The proposal came after the new CEO of the company, the notorious Eric Schmidt (Eric Schmidt), stumbled upon Varian at the Aspen Institute , where they exchanged a couple of random phrases about the Internet. Schmidt was with Larry Page, who gave a lecture on how computer algorithms and analysis are able to solve some major problems of business and science. As Varian himself recalls, then he asked himself the question: “Why did Eric bring a school friend with him?”

After a couple of days, Schmidt, whose father was an economist, invited Varian to spend a “day, or two, or a week” at Google’s office. At his arrival, Mr. Khal asked a reasonable question about what he could work on here. “Why don't you take a look at the ad auction?” Replied Mr. Eric.

At that time, the basics of AdWords were already developed, but the devil is known to be in the details. As head of the Berkeley Information School at the training center and co-author (along with Carl Shapiro) of the popular book Information Policy: A Guide to the Network Economy, Varian was already an “e-economist” with an enviable experience.

In truth, the majority of online companies at that time sold advertising the way it was done at the dawn of advertising itself. But Varian immediately noticed that Google’s advertising business was less traditional and more like a blind date. “In theory, Google was a lot like a matchmaker between an advertiser and a user,” says Varian. He also realized that there was still one old idea leading to a new approach - the work of Harvard economist Herman Leonard, dated 1983 , where he described the mechanism of using standard market tools to offer interested candidates and interested companies who are looking for new employees, great deals. This was called "two-way market coincidence." "The mathematical structure of the Google auction is exactly the same as in the theory of two-sided coincidences," said the chief Google commentator.

At the same time, Varian tried to better understand the process by applying game theories to the practical situation. "I think I was the first person in the world who tried to do something similar." After a couple of weeks on Google, Mr. Khal came to Mr. Eric: “This is great! You managed to create the perfect auction. ”

For Schmidt, who by then had only worked for a year at the company, this was the greatest relief: “It is worth noting that this was at a time when there were 200 employees in the company and no cash. And suddenly we realized that we are engaged in the auction business! "

Although shortly before this, the success and popularity of AdWords Select began to overlap its “twin service”, AdWords Premium. However, Kamangar and Vich argued for a long time on whether all advertising slots should be sold immediately. In the case of the search, already at that time, the company used the full power of computing power and complex algorithms in order to change the way people get information. With the transfer of the advertising segment on the auction basis, Google simply brought the advertising business to a completely new level, saving the process from the human factor.

However, this step was risky. The next stage, called Premium Sunset, essentially represented a rejection of the sleek Wall Street advertisers in favor of an auction for top advertising in the hope that its effectiveness and cost would increase. “We went to cut a significant chunk of the company's revenue,” says Tim Armstrong, former head of US direct sales (this year, Tim left Google and took over as CEO at AOL). “Ninety-nine percent of all companies would say: Stop! You shouldn’t make such changes. ”But we had Larry, Sergey, Eric and Khal, who said:“ We have to do it. ”

This news forced many in the sales department to drink valerian. Instead of selling really expensive advertising to corporate giants, they were invited to participate in the auction along with everyone. And despite the fact that the young company did not completely get rid of salespeople, it forced its customers to become geeks, helping large customers to create an effective advertising strategy, which was very different from the traditional “place sale”.

Jeff Levik, who was also involved in sales, recalls an interesting story about how he had to visit three large companies in order to inform them of future changes. “A guy from California just threw us out of the office and told us to fuck a horse (I apologize for using foul language, this is a quote adapted to the Russian language). A Chicago guy said, "This is the worst business move you could ever take." However, the guy from Massachusetts said: "I trust you". "

The difference is that the last client knew mathematics, whose power is in numbers. When the information was cooked into a convenient and tasty stew, the company did its best to give advertisers the necessary tools to facilitate the process of participation in the auction. And customers appreciated it.

AdWords has been so successful that Google went crazy with auctions. The company has now used them to advertise on other sites (this is already the current AdSense). “But the clearest step was to use this scheme in an IPO (first issue of shares),” says Varian. In 2004, Google used a set of different tactics, based on the “Dutch” auction model . Both Brin and Page liked the fact that they attract individual investors along with the world's largest funds.

Google has even begun to use the auction principle for some internal operations, such as hosting servers for various services. Since the transfer of any business area to a new data center does not usually have a positive effect on the work, engineers often either postpone or refuse such initiatives. Hal Varian recalls: “We used a scheme similar to how some airlines do when they have reserved more plane tickets than seats in it. The price rises and just waits for the moment when a sufficient number of customers give up seats on the plane. In our case, we offered more machines in exchange for the company moving to a new data center. Someone will do it for 50 servers, someone for 100, and someone will not move until we give them 300 ".

The transition to the auction system was huge, as it is now fashionable to say, milestone for a company that realized that its profit is not falling, but on the contrary, is increasing. And now, when “alpha” specialists are hired by Google, many of them are sent to work first on AdWords, and only after that on search or applications.

To be continued tomorrow.

PS Dear habra people, as you see the text is large, and this is only half of the full material. A big request - point me to possible errors and inaccuracies, I will be grateful to you.