The introduction of the digital video recorder (DVR) in 1999 by TiVo allowed viewers to record programs and fast‐forward through commercials in the programs they recorded. This fast‐forwarding highlighted the fact that people were not happy about intrusive, irrelevant advertising and wanted to skip it.
About the same time that TiVo introduced the DVR, Larry Page and Sergey Brin, who were PhD candidates at Stanford University in the Computer Science department, started a company in their dorm room. The two had come up with a way to organize keyword search results on the Internet based on how many other web pages had links to the website the keyword appeared on. They called their system PageRank after Larry Page.13
Both Page and Brin knew they had to find a way to monetize their search results, but they both disliked traditional, intrusive advertising. After Google got funding from two major Silicon Valley venture capital funds, the new company’s first business plan was not written by either Page or Brin, who were both focused on the product and the user experience. The business plan articulated three streams of revenue: (1) Google would license its search technology to other websites, (2) it would sell a hardware product that would let companies search their own content very rapidly, and (3) it would sell advertising.14 Google’s first effort to sell ads was in July 1999.15 Page and Brin felt that information in advertising should be as valuable to users as the search results Google provided.
From 1999 to 2002 Google sold advertising in the traditional way to major advertisers and their agencies through salespeople who sold on the basis of a CPM pricing model. However, in October 2000, Google “launched a product catering to smaller operations that had not previously contemplated an online buy.”16 Google named the self‐service system AdWords.i
Initially, the automated system allowed advertisers to buy on a CPM basis and pay more for ads positioned at the top of the search results area on the right side of the page.17 Although the system was fairly popular, it was easy to game, and Page and Brin felt it was not scalable. Therefore, Google adopted an online auction system similar to one used by a competitor in the online search space, GoTo. The major difference between Google’s system and GoTo’s system was that the GoTo auction was a traditional auction model in which the highest bidder won. The GoTo auction model is referred to as a first‐price auction. However, Google developed a modified Vickrey second‐price auction system. In a second‐price auction, the highest bidder on a keyword won the bid, but paid only what the second‐place bidder bid plus a penny.ii This model, counterintuitively, causes people to make higher bids than in a first‐price auction, thus raising the final price because bidders know they will pay less than the price they actually bid.18
The second‐price auction was a stroke of genius because it eliminated buyer’s remorse, which often happened after a buyer won a traditional auction.19 Google made another decision that finalized the earth‐shattering effect AdWords had on marketing. Instead of charging on a CPM model, it adopted GoTo’s model of charging an advertiser only when someone clicked on an ad. It was a cost‐per‐click (CPC) model.20
The third innovation, and one that was purely Google’s was its quality score. A quality score is determined by a complex algorithm that determines how relevant a website is to users. If someone clicks on a keyword search result ad, and goes to a site that is not relevant, that site gets a lower quality score. For example, if someone searches for “jobs,” does Google put up a result about Apple founder Steve Jobs or does it put up results about employment opportunities? The beauty of the ad quality score is that “it makes the advertiser do the work to be relevant,” according to the 2002 Google head of advertising, Sheryl Sandberg, who in March, 2008, was named the COO of Facebook.21
On January 24, 2002, Google tested the new AdWords auction system and soon not only small businesses with a credit card were buying search results on a self‐help, second‐price online auction and CPC model, but also major advertisers such as P&G and Coca‐Cola were participating. The immediate, runaway success of AdWords not only led to Google’s first profitable year at the end of 2002, but it changed the entire marketing/media ecosystem and the way media would be bought and sold from that time on.
By mid‐2018 Google was the most valuable media company and the third most valuable company in the United States. It had more than twice the market capitalization of older production‐oriented companies such as General Motors and General Electric combined.iii In 2018 Google was by far the largest media company in the world, garnering an estimated $136.5 billion in revenue in 2018, 86 percent of which was from advertising. Google 2018 ad revenue was almost two‐and‐a‐half times more than the second largest media company in terms of advertising revenue, Facebook, which had an estimated $56 billion in advertising revenue. In 2018 the largest traditional media company in terms of advertising revenue was Comcast’s NBCUniversal division, which had roughly $33 billion in advertising revenue.
For the purposes of this book, we are defining media companies as those that are supported primarily by advertising and are ranking them according to the amount of advertising revenue they generate. Bloomberg BusinessWeek, other financially oriented publications, and many Wall Street analysts consider Google and Facebook to be technology companies, and both Google and Facebook’s top management also consider their companies primarily tech companies. However, for the purposes of this book, Google and Facebook, often referred to in the advertising and marketing business as “the duopoly,” are considered media companies because Google and Facebook’s incredible success as advertising platforms clearly demonstrates that the Internet became the major factor in virtually all businesses’ advertising and marketing efforts, and the duopoly dominates in digital advertising. Also, Google and Facebook might claim that they are technology companies or platforms and often deny they are media companies, but both are conduits for content that flows between advertisers and consumers – a medium as it were – and both are supported primarily by advertising, as most media companies are.
In 2007, the growth trajectory of the digital era veered in a new direction because of two innovations: (1) the iPhone and (2) programmatic buying and selling of digital ad inventory. The iPhone fueled Apple’s rise to becoming the most valuable company in the world in 2012 and almost every year since then. In mid‐2018 Apple exceeded a market valuation of $1 trillion, the first company in the world to reach that market‐cap valuation. Technology business analyst Ben Thompson, author of the Stratechery newsletter, calls the iPhone “the most successful product ever.”22 Also, the iPhone drove the phenomenal growth of smartphones and the Internet from being desktop, PC dominated to being mobile dominated, as approximately six billion global mobile phone users “have replaced the desktop and television as the dominant [advertising] platform.”23