Andrew Walmsley on digital: Google is clouding agency probity

From time to time, Google likes to remind us that it is a technology company, rather than a media one. While it admits to being in the advertising business - 99% of Google's revenue comes from ads - chief executive Eric Schmidt says: 'That doesn't make us a media company. We don't do our own content - we get you to someone else's content faster.'

Setting aside the nonsense of this position - many broadcasters haven't produced their own content for years, but are still media companies - this outlook does manifest itself in Google's attitude to advertisers.

Quite rightly, Google's priority is its audience. Look after that, it reasons, and the ad revenue will follow. So why is the company running around in circles trying to induce agencies to spend money with it, when its model is so successful?

For 2007, Google has announced that it will continue its Best Practice Funding (BPF) scheme - a rebate paid to agencies for spending money with it. This is distributed only to agencies over a certain size, not direct advertisers, and is tiered, based on their spend with Google in a given quarter.

The official line from the company's Googleplex HQ in California is that BPF is for agencies, not clients, and that it aims to encourage the former to invest in services to support search. Second, replacing agency commission with BPF creates a level playing-field for all search advertisers.

However, most agencies are contractually obliged to pass media discounts on to their clients, so BPF doesn't reward them. For agencies that keep the rebate, meanwhile, it is an inducement to spend money on Google to generate these payments, rather than a reflection on the merit of the channel.

Creating a level playing-field in search is a worthy objective, and Google's abolition of agency commission makes sense in this respect. Agencies are paid by their clients - commission is allowed for in that agreement, anyway. But what Google has done is to replace a simple discrepancy in the market (some got 15%, others nothing) with a complex and inconsistent one. Customers now get varying percentages - and some still get nothing. So the playing-field is no more level than it was before.

This complexity has another consequence. BPF has created a forecasting headache for agencies and advertisers. Most can't predict with certainty at the beginning of the quarter what they will have spent by the end. The rebate is paid two months after the quarter has ended, so if advertisers want to reinvest it, they have two options: they can estimate the amount they will receive, and risk overspending, or wait for their rebate before making a decision. Many opt to wait, and find that their priorities have changed. Sometimes, they will reinvest in Google, but often they will spend it on something else, or keep it.

Media has, in recent years, made huge strides in creating transparency for advertisers, so BPF represents a retrograde step, as it is not only untransparent, but also anti-transparent. As agency groups aggregate their spend across Europe, a client of one in London would have to be able to audit spend on Google out of the Milan office - perhaps even of a different media network in the same group - to know that it is getting its fair share.

Nobody is suggesting that an agency group would attempt to short-change its clients. Rather, the problem is that Google has put in place a scheme that mitigates against transparency, undermining agencies' ability to demonstrate probity.

Google is set to be the fourth-biggest media company, by revenue, this year. It is an incredibly effective channel, which is why it is so perplexing that it feels the need to induce agencies to spend with it. It might not regard itself as a media company, but advertisers see it that way - and Google should face that responsibility.

- Andrew Walmsley is co-founder of i-level

30 SECONDS ON ... GOOGLE
- Google recently purchased online video-sharing site YouTube for $1.65bn (£833m).

- According to the Internet Advertising Bureau, the web accounts for more than 10% of advertising expenditure, up from 7.2% last year.

- Google is expected to overtake TV channels as the UK's biggest recipient of advertising revenue within a couple of years.

- It posted a UK revenue of £373m in the first half of 2006 and is set to generate £824m for the year, overtaking Channel 4 on £800m.

- Google is predicted to make £1.19bn in 2007 and £1.49bn in 2008.

- In comparison, ITV, the UK's biggest earner from advertising, can expect a revenue of £1.3-£1.4bn in 2007 and 2008.

- ITV1 accounted for about 90% of the group's £1.63bn advertising revenue last year. But revenues at the channel fell 8% in the first six months of 2006.

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