Over the past few years, the European Commission has been examining the competitive environment for online commerce in the eurozone. This is due to the widely held view that e-commerce is the best way to transcend national borders and enable businesses and consumers to get the most out of the European Single Market.
E-commerce is expected to improve access to an increasingly large range of products and services for citizens and businesses located in isolated areas. For example often better meeting the needs of 'at-risk' social groups such as the elderly.
However, 10 years after the adoption of an EC Directive that explored the importance of growing e-commerce as an economic activity, e-commerce is still limited to less than 4% of total European trade. Yet even that level of activity is important to growth since 21% of the growth in GDP during the past five years is attributed to the internet economy.
Whilst barriers like investment, overheads and competition exist, as the CEO of an internet based company, which in 2005 was named as the second fastest growing website by comScore, I am concerned that the EC still fails to recognize the single most important constraint to rapidly growing trade. That impediment is the dominance of a single search engine, an overwhelmingly dominant gateway to the worldwide web of knowledge.
As a result, the entire e-commerce ecosystem is essentially under the control of a single company.
The importance of search engines - and Google specifically - to e-commerce activity cannot be overstated. Over the past three years, I have advised more than 30 e-commerce clients and have found that on average, 30 percent of all online revenues for e-commerce firms are derived from the "organic" listings of search engines. Because most users discover new firms through the search engines listings, any demotion in rankings has profound influence on sales. Firms undertake desperate activities to try to improve their organic rankings, supporting a robust and growing trade of SEO firms (search engine optimizers) whose deeper understanding of Google's algorithms presumably help their clients maintain or improve rankings, thus improving their chances of sourcing new business. Overall, it has been harder to maintain the flow of new customers from Google's organic listings as it has increasingly placed links for its growing list of services (60+ services and counting) ahead of company rankings. The result, for many companies, has been a declining number of visits from new customers.
While e-commerce firms who opened their businesses more than a decade ago recognized the critical importance of getting new customers from the organic listings of search engines, they also realized they needed to hedge their bets by purchasing search engine ads - the paid listings that appear at the top and to the right of search results. In the early years of e-commerce there were dozens of networks that placed ads on search results page like Espotting, an early leader in Europe. These ad networks operated transparent bidding systems for placement, and most showed the prices per click that each advertiser was willing to pay. Yet, as Google began to become the search engine of choice for consumers and increased its market domination, e-commerce firms had fewer and fewer advertising alternatives. AdWords became the dominant advertising network because it was the only network that could place ads on Google.
Google extended this advertising dominance to millions of other websites through its AdSense program, which placed AdWords ads on 3rd party sites and shared advertiser revenue with the website. Because Google controlled the largest variety of advertisers, AdSense squeezed out other search ad networks that offered similar services.
Most e-commerce firms now devote their entire search engine advertising budgets to Google Adwords. The typical e-commerce firm receives more than 30% of its sales from AdWords ads. One of the most frustrating aspects of AdWords for e-commerce firms is Google's determination to allow the sale of trademarked keywords. A company that declines to buy its own trademarked keywords will be forced to watch competitors buy these terms and appear at the top of the paid search results. Branded keywords are of extreme importance to e-commerce firms since most users, when looking to buy a product, will type in the name of the trademarked keyword in the search engine. Many AdWords advertisers receive up to two-thirds or more of their revenue from branded search keywords. To many e-commerce operators, having to be forced to buy ones own trademarked terms has the feel of extortion.
Another very ominous trend for e-commerce firms is that the Google's dominance has been accompanied by a lack of transparency in the AdWords bidding system and an ever increasing cost per click to attract new visitors to their website. While the early pay-per-click advertising networks showed advertisers in the order of their bids for "clicks" (highest to low), Google's AdWords has made its system increasingly opaque. Cost per clicks, for the same advertiser, can vary from $0.03 to $10.00 or more depending on the keyword and even in the absence of any competitive advertising bids.
The EC must direct further study of the adverse effects that dominance is having on the critical activity of e-commerce. Dominance and the uncertainty that results from have a single player controlling the economic landscape is not a harbinger of growth. Companies are both concerned by developments and worried at the risks of offending the monopoly power whilst entrepreneurs are reluctant to make investments that are highly uncertain. When a single player controls virtually all of the outcomes, it is unlikely that the EU will see a continued or rapid growth of this vital area of trade.
As the European Commission examines possible remedies to restoring a competitive balance in this vital area of economic activity, I'd recommend consideration of the following to address the issues at hand:
1) Requirements that online advertising systems must be open and transparent
2) That dominant search engines not abuse their power in such a way to increase cost of advertising to market participants
3) That search engines be required to follow principles of search neutrality so as not to interfere in the natural competitive balance between firms
4) That search engines not be permitted to advertise their own products and services at prices not available to other market participants
5) That a search engine be required to allow competitive ad networks to place ads on its search results page so as to increase competition and reduce cost as would be characteristic of a competitive market.