Google scraps agency search commissions to focus on YouTube

LONDON - Google's plan to axe ad commission will cut a swathe in search specialists' revenue.

Early next year, Google is to scrap its search advertising commission system, which is worth more than £50m a year to agencies, and offers advertisers a financial incentive to invest in search campaigns.

Launched in 2006, the Best Practice Funding (BPF) programme currently gives a payout of up to 8% to agencies running search ad campaigns with Google, based on how much is spent on behalf of advertisers. Those agencies that play fair then pass on the benefits to their clients, making search a cost-effective marketing tool.

However, all this is set to change when Google pulls the commission model in January, forcing agencies to overhaul how they work with clients, to fill the resultant hole in revenue.

The removal of BPF is a blow to search specialists, whose profitability is dependent on the income. Chris Simpson, interim managing director at The Search Works, says: 'We have been getting commissions above 6.5%. Our billings were £88m over the past year, so if 85% was Google spend, we will lose a big slice of our earnings.'

That impact will be mitigated by the growth in search, but agencies warn that the slowing of the online market means that search agencies will have to refocus on other business areas.

Alex Hoye, chief executive of search agency Latitude, says: 'We are doing things differently and pioneering performance-based pricing, which gives the changes less of an impact.'

The Search Works and Latitude both plan to agree performance-based bonuses with their clients in 2009, as well as moving into affiliates, display and SEO work.

However, as clients start to feel the pinch of rising search costs, Google's decision is expected to lead to a rash of account pitches as brands attempt to find a better deal. Julian Walker, co-founder of digital agency Steak, says the process has already started. 'We are already seeing some movement, though the reasons for putting business up for pitch might not be as clear as "we got a great deal from our agency before and now we won't". If not for the current economic situation, I think we would be seeing more pitches at the moment.'

Simpson adds that clients are not likely to be fully aware of the issue until quarterly commissions dry up. 'I expected a pitch storm in the autumn, but I assumed people knew more about BPF, which I don't think was the case,' he says.

The BPF programme aimed to drive growth in the search market through investment in better campaigns. Google's view is that agencies no longer need a subsidy, as they have reached a sufficient level of knowledge and expertise not to require further assistance.

When Google announced it was pulling the initiative last year, its UK sales director, Mark Howe, explained: 'Now is the time to create a completely level playing field for all agencies and advertisers.'

Agencies affected by the removal of the funding are quick to accuse bigger players of having abused the system, with business won due to the volume of search activity rather than quality of service.

Latitude's Hoye claims that the removal of the model is 'positive' and reflects the 'maturing of the industry'. He adds: 'Those who invest in people and technology will still be in a position to grow.'

Others suggest it is an underlying attempt by Google to refocus activity on display ads on its YouTube business following the formation of its dominant position in search.

Indeed, last week Google confirmed that it plans to drive advertising around online video through agency incentives and funding for research, and Howe describes display as 'the big push for us'.

Whatever Google's reasons for the removal of BPF, those agencies that have based their search businesses on using it to profit by now have to remodel their businesses swiftly.

'If agencies have not diversified, that will be the real issue,' says Walker 'Marketers want strength in different areas from before. If search specialists are not open to wider work, then that is where the problem will be.'

Simpson agrees: 'Our future relies on us doing a better job. We have to work harder for the same money.' Ultimately, advertisers will gravitate to those agencies that can provide more.

 Google facts

31%increase in Google's revenues for the third quarter of 2008 (ending 30 September), compared with the third quarter of 2007. Revenues for the most recent quarter were $5.54bn (£3.38bn)

34%increase in revenues generated from Google-owned sites for the third quarter of 2008, compared with the third quarter of 2007. Revenues for the most recent quarter were $3.67bn (£2.24bn)

14%of Google's revenues in the third quarter of 2008 came from the UK, totalling $776m, compared with 16% in the third quarter of 2007

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