I'm always floored when I come across a Google (NASDAQ:GOOG) investor who has never heard of AdWords. Google generates 99% of its revenue from advertising, and AdWords is the company's core paid-search platform. An owner of Google stock who does not know about AdWords is like a Boeing (NYSE:BA) investor who is at a loss to explain those newfangled flying machines.
So what is Google AdWords, exactly? Well, it's a great way for a sponsor to nail down quality leads. As it stands now, prospective advertisers pay as little as a nickel for each visitor that Google sends their way through targeted marketing campaigns.
Yes, really. If you run a small company and find that advertising on local television or the daily paper is cost-prohibitive, or if you're concerned that your specialized product or service will get lost in the general public, what are you doing in the dark? You just have to get up to speed on Google AdWords and other paid-search platforms, such as Yahoo! (NASDAQ:YHOO) Search Marketing.
Last week, Google announced that it would be tinkering with its popular AdWords product. Here is a company that is likely to rip the cover off the ball for its fourth consecutive quarterly report come Thursday, and it's about to make some serious changes to its bread and butter.
Advertisers are listening. Content publishers that serve up Google's ads through the company's AdSense program are listening. Why aren't shareholders paying more attention? They own a piece of what is now nearly an $85 billion company, and it's making some changes to the product that defines its livelihood -- and its income statement.
Google let its AdWords advertisers know on Thursday that changes were on the way. Until now, advertisers have bid on keywords, and their text ad placements have been based on how high they bid and on the clickthrough performance of that particular campaign. Poorly performing ads would get banished because, as a company that charges advertisers only after interested clicks, Google can't afford to be a liberal landlord.
In its next incarnation, AdWords won't kick out an ad that hogs impressions without a substantial number of clicks. It will just charge those virtual tenants more. On the flip side, better-performing ad campaigns may result in as little as a penny per click.
Before you begin to shudder, fearing that Google will be replacing nickels with pennies, it would be hard to believe that the company would launch this kind of pricing model if the end result wasn't more money. The key here is that the move will create a bigger inventory of ads for Google, with many ads that once ran dormant creeping back into active citizenry.
That is going to hurt the competition. Microsoft (NASDAQ:MSFT) is still ramping up its paid-search functionality, and Yahoo! is going to be hard-pressed to beef up its inventory if it sticks to its dime-bid minimums.
Either way, the advertising community's reception of Google's changes will go a long way toward either solidifying it as the market leader or providing it with its first real test.
If I were you, I would pay attention.
Read up on the Google revolution:
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Longtime Fool contributor Rick Munarriz digs Google, but he does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy .
