Google’s advertising system, Google Adwords, has a reputation for being highly targeted. For example, if you type in a keyword, Adwords will show ads that are supposedly highly related to the keyword that you put in. This form of contextual advertising is Google’s bread and butter. It makes billions of dollars every year just by simply matching keywords that people enter into its highly popular search engine to advertising text and/or graphics on the side or the top of your search results. Pretty straightforward, right? This model is actually quite old. Google (NASDAQ:GOOG) actually got this model from GoTo.com which was bought out by Yahoo.com. This is Web 1.0 technology. The problem with this technology is intent. Just because you think a keyword means something doesn’t necessarily mean that all or even the majority of people entering that keyword think it means what you think it means. There’s this guessing game between advertisers and the actual flesh-and-blood human beings that enter these keywords into Google. The problem of intent determination is the Achilles’ heel of Google’s advertising business model.
Compare this with Facebook (NASDAQ:FB), which uses many different signals; things that you clicked the “Like” button for, groups that you join, and other signals collected over time in context to pair you with ads. Also, Facebook tries to pair you with ads based on the preferences of your social network. This contextual and holistic approach to intent determination definitely seems more dynamic, at the very least, than Google’s rather ham-fisted and awkward intent-matching system. At the end of the day, it’s going to be about return of investment. That’s why it’s very interesting to see that more and more advertisers are seeing more value from Facebook than Google. If this continues, and there is an economic slowdown in the United States, where advertisers are forced to pick advertising channels that provide higher returns on investment, it may signal a greater erosion of Google’s advertising revenue.
